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Ameriprise Reaffirmed at Neutral

AMP BAC

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We are maintaining our Neutral recommendation on Ameriprise Financial Inc. (AMP - Analyst Report) as we believe that the risk-reward profile of the company is currently balanced. Our decision is based on the company’s consistent capital deployment activities and strong fundamentals. However, we remain wary of the persistent low interest rate environment and rising operating expenses.

Ameriprise is an asset for yield-seeking investors. In April 2012, the company increased its quarterly cash dividend by 25% to 35 cents per share and has maintained that level since then. This was the sixth dividend rise for the company since 2005.

Also, the company continues to repurchase shares. Overall, during the second quarter of 2012, Ameriprise returned $492 million to its shareholders in the form of share repurchases and dividends.

Further, Ameriprise operates a well-diversified portfolio compared with its industry peers. The company takes care of molding its product and service offering capacity to keep pace with the ever-changing market needs and to channelize its revenue growth.

Therefore, the company’s net investment income, Auto & Home premiums and growth in policy counts continues to improve. Also, product introduction remained impressive during the last few years. Going forward, new products with the existing portfolio will assist in revenue growth.

Ameriprise has grown inorganically and restructured its portfolio from time to time through acquisitions, sales and spin-offs to serve the changing market demands. In May 2010, the company acquired the long-term asset management business of Columbia Management from Bank of America Corporation (BAC - Analyst Report), which uplifted the performance of its retail mutual fund and institutional management businesses. Additionally in November 2011, Ameriprise completed the divestiture of Securities America Financial Corp.

We believe such efforts will help Ameriprise to enhance its profitability in the long run. Yet we remain concerned about the company’s escalating operating expenses.

Higher distribution expenses, general and administrative expenses as well as elevated interest and debt expense have resulted in the higher-than-expected expenses in 2011. Further, the conversion of its bank subsidiary to a national trust bank this year, will add up to a total of $20 million in operating expenses in the subsequent quarters. Though the advertising campaign and technology upgrades will be beneficial for the company in the long run, swelling expenses may thwart its profitability.

Although Ameriprise is reducing its deferred and acquisition costs (DAC) through re-engineering initiatives, its fixed interest costs and claims continue to rise. Over the last several quarters, interest credited to fixed accounts is increasing, reflecting higher annuity fixed account balances and higher average crediting rates.

Ameriprise is working on increasing advisor productivity by tightening productivity standards and improving technology available to advisors, but we believe more efforts should be given to offset continued pressure on fee and asset growth, higher DAC, amortization and hedging.

Ameriprise operates in a competitive financial services industry where brand integrity and market sentiments play an important role in sales, net inflows and managed assets leverage. The current sluggish economic recovery factors, low interest rate environment, and the European debt crisis can lead to sudden outflows, reducing demand and management fee revenues and impeding benefits from economies of scale.

Ameriprise is expected to announce its third-quarter results on October 24. The Zacks Consensus Estimate for the quarter is $1.38 on revenue expectation of $2.6 billion. The company’s second quarter 2012 earnings significantly lagged the Zacks Consensus Estimate.

Ameriprise shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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