DBRS Comments on Aberdeen Asset Management PLC’s FY12 Results, at BBB (high), Trend Stable

DBRS, Inc. (DBRS) today has commented on Aberdeen Asset Management PLC’s (Aberdeen or the Company) financial results for the year ending 30 September 2012 (FY12). DBRS rates Aberdeen’s Issuer and Senior Unsecured Debt at BBB (high). The trend on all ratings is Stable. For FY12, Aberdeen reported a statutory after-tax profit of GBP 223.6 million, 22% higher than FY11.

In a period of heightened global uncertainty and challenging conditions for financial markets, DBRS views Aberdeen’s robust fiscal year results as demonstrating the sound and resilient earnings generation ability of the franchise. Results benefitted from solid revenue growth from an improved mix of assets under management (AuM) and a well-managed cost base. Nevertheless, DBRS remains concerned that the difficult operating environment for global markets will present a notable headwind for growth of AuM, and thereby earnings into FY13. However, DBRS sees Aberdeen’s broad range of products, capabilities and good geographic coverage as affording the Company the ability to navigate the current difficult environment while maintaining a solid level of earnings.

Underlying profitability, before amortisation and impairment of intangible items and taxation, totalled GBP 347.8 million, a solid 15% improvement year-on-year. Revenues were 11% higher year-on-year at GBP 869.2 million reflecting good growth in management fees complemented by higher performance fee income. Management fees, which are recurring in nature and thus add a level of predictability to income accounted for circa 94% of total FY12 revenues, and were 10% higher YoY at GBP 813.5 million. DBRS notes that the average management fee rate improved to 45 bps from 41 bps a year ago supported by improvement in all asset classes with the exception of money market. Operating costs were 9% higher YoY at GBP 516.5 million, reflecting a modest increase in headcount to support distribution as well as continued investment in the promotion of the Aberdeen brand and positioning the Company’s product range to meet expected investor trends. Solid cost containment and continuing good flows of new business into the higher margin products supported margin expansion. To this end, operating margins were 40.6%, up from 39.5% a year ago. DBRS views positively Aberdeen’s ability to strengthen operating margins in a tough operating environment while continuing to invest in growing the business.

DBRS sees Aberdeen’s diversification across asset classes and geography as better positioning the Company to withstand potential weakness in any one market. The benefits of this diversity were illustrated in FY12, which despite continued uncertainties regarding the strength of the global economy and the crisis in Europe, new business flows totalled a very solid GBP 36.0 billion. New business inflows were driven by strong demand for the Company’s global emerging markets, global equities and Asia Pacific products. For the third consecutive year, inflows from the Americas increased YoY demonstrating that the benefits of the Company’s investment in strengthening distribution and brand awareness in this important market are being captured. Further, the Company’s effort to change the shape of AuM continues to support earnings. Indeed, FY12 represented the second consecutive year new business flows were more weighted towards higher-margin pooled funds than segregated funds. Despite gross new business volumes being lower than FY11, Aberdeen reported a 10% YoY increase in AuM to GBP 187.2 billion at 30 September 2012. The growth in AuM primarily reflects good market performance particularly in equities, fixed income, and funds of funds. Although DBRS views Aberdeen’s broad product offering as benefiting the Company, DBRS, nonetheless, sees generating growth in new business flows given the slowing global economy as a challenge over the near-term.

Aberdeen continues to strengthen its already sound financial risk profile. At 30 September 2012, Aberdeen was in a net cash position of GBP 266.4 million compared to GBP 127.5 million at the prior fiscal year end, and substantially improved from the net gearing position held prior to the financial crisis. Outstanding debt totalled GBP 81.5 million, consisting entirely of convertible bonds due in 2014. In October 2012, Aberdeen announced that it would redeem any outstanding convertible bonds on 3 January 2013. To date, approximately GBP 65 million of convertible bond holders have elected to convert their holdings to ordinary shares improving Aberdeen’s regulatory capital position. Regulatory capital at the end of FY12 stood at GBP 253 million close to the Company’s estimated regulatory capital requirement (including Pillar 2 requirements) of GBP 275 million. However, on a pro-forma basis, assuming all of the convertible bonds convert to ordinary shares, regulatory capital would be GBP 341 million exceeding the requirement. As such, Aberdeen anticipates meeting regulatory requirements by the end of 2012 without the benefit of the consolidation waiver under the FSA’s Capital Requirement Directive (CRD), which allows it not to deduct goodwill from the capital base when calculating regulatory capital.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Rating Asset Management Companies, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 1 May 2007
Most Recent Rating Update: 9 May 2012

For additional information on this rating, please refer to the linking document under Related Research.