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Standard Chartered hacks at costs

Standard is supporting cost-cutting plans by closing its cash equities business, but the savings won't ease the lender's nearer-term pressures
January 9, 2015

What's new:

■ Closing the cash equities unit

■ On track to deliver 2015 cost savings

■ Rumours persist that more capital is needed

IC TIP: Buy at 944p

Asia-focused lender Standard Chartered (STAN) is to close its loss-making institutional cash equities operation, a move that should generate around $100m (£66m) of cost savings from 2016 onwards. The lender is also on track to deliver the targeted $400m of cost savings for 2015 announced by management at the end of October. That will be achieved by closing 80-100 branches and cutting around 4,000 jobs.

But cost-cutting measures will take time to bolster earnings, and shorter-term headwinds - such as weak investment banking markets, slower emerging market growth and credit quality issues - are likely to remain at the forefront of investors’ minds. Rumours also persist that Standard may yet need to raise fresh capital. These reflect fears that the bank could be facing heavy losses on commodity loans as the price of oil and iron ore slumps.

Reputational worries are also weighing on sentiment. Last month, for instance, a deferred prosecution agreement relating to the 2012 discovery by US regulators of sanctions violations involving Iran was extended for three years. That means the lender could still face prosecution for its compliance failings. A notice was also filed in a Washington federal court just prior to the extension suggesting that Standard may have committed sanctions violations beyond those covered by the 2012 agreement.

 

Investec Securities says...

Buy. Standard’s announcement regarding the closure of the cash equities business and cost-cutting progress is not transformational, but it is, we think, incrementally positive. We are encouraged by further evidence of the breadth of initiatives underway and the statement also offers a brief reminder of a raft of rationalisation measures in the pipeline - including disposals across China, Hong Kong, Germany, Korea, Lebanon, Taiwan, Pakistan and the United Arab Emirates. We continue to believe the shares - trading on just 0.8 times our 2015 forecast for tangible net assets (of 1,778¢ as share) - are materially mispriced. Expect full-year pre-tax profit of $5.9bn, giving EPS of 162¢.

 

Canaccord Genuity says

Sell. While the closure will help refocus the bank on its core lending activities, it doesn’t in itself fix the issues facing Standard Chartered in 2015. The year is likely to be transformational as the bank retrenches from riskier businesses, and that’s likely to deliver reduced earnings and dividend growth in the very near term. We also remain unconvinced that impairments have stabilised at the levels seen at the half-year stage. In fact, impairments are likely to be a feature of the 2015 full-year results, and cost-cutting measures announced to date will have no impact on near-term profitability. While the shares are cheaply rated compared to peers and the historic rating, near-term book value growth looks constrained.