Prudential facing 'significant' Asia slowdown and US headwinds, says SocGen

Societe Generale has downgraded Prudential to a 'hold' rating from its previous 'buy' due to pressure on the investment and savings group's earnings from tougher conditions in Asia and the US.

Cutting its 12-month price target to 1,400p from 1,900p, SocGen said Pru's US franchise is under increasing pressure in its annuity market.

Firstly, as most of its variable annuity (VA) products carry equity return guarantees of around 5-6%, these are being uncovered by weak equity markets.

Giving an example of the growing risk, SocGen noted that the net amount at risk (NAR) for these products reported in SEC returns tripled to £8.6bn in 2015 - 75% of tangible book value - from £2.6bn in 2014.

"This isn't an immediate threat to earnings or solvency since only some 7% of these guarantees can be cashed in annually, but if US equities continue to underperform, this could quickly become a serious challenge."

Furthermore, sales across the whole VA market are expected to come under pressure from the Department of Labor's (DOL) Fiduciary Rule, which changes how financial advisers can counsel clients on retirement assets.

In Asia, SocGen expects Pru's booming sales in Hong Kong to slow as the inflows from mainland Chinese moderate.

"Given the dull sales growth currently being experienced in Prus other key Asian territories, this means that there is likely to be a significant overall slowdown in Asian growth."

As a result analysts cut their IFRS earnings growth forecasts by 3% to 118p in 2016, by 8% to 126p in 2017, and by 12% to 134p in 2018, reducing growth to single-digits over the next five years.

"We regard this as optimistic and emphasise that earnings risks remain to the downside if US equity markets underperform."