Morningstar urges Challenger to embed in wealth ecosystem

Challenger Limited should continue embedding itself in the Australian wealth management ecosystem rather than pursuing banking, according to the latest analysis from research and ratings house, Morningstar.

The analysis, released on the back of Challenger’s full-year results and the announcement it is reviewing the future of Challenger Bank, said Morningstar assumed “Challenger Bank will be sold”.

“We were never too bullish on Challenger Bank to begin with,” the Morningstar analysis said. “While it brings some margin benefits (as term deposits have lower funding costs than annuities), it could also cannibalise Challenger’s annuity sales.”

“We’d prefer management grow Challenger’s core Life and funds management businesses. Efforts to broaden distribution and launch new annuity products align with Challenger’s objective to further embed itself within the wealth management ecosystem,” it said.

The Morningstar analysis said the negative headlines attaching to the full-year results announcement had masked the fact the company was making progress at its core.

“Challenger Bank is immaterial to our fair value, so there shouldn’t be meaningful loss of value if the bank was to eventually be sold,” the analysis said.