RETAIL BANKING | Staff Reporter, Hong Kong

This is Standard Chartered's $1b cost saving opportunity

It could drive medium-term returns higher.

According to Barclays, although the company has become more confident on credit quality and the earnings outlook in recent weeks both are still vulnerable to uncertain global economic conditions.

Here's more from Barclays:

However, we also identify a significant cost saving opportunity, particularly in Consumer where Standard Chartered's cost efficiency is notably weaker than local peers. Although this would mark a significant cultural change at Standard Chartered and management tends to talk about cost control rather than cost cutting, it would support earnings momentum and could add 1%-2% to our Group RoTE estimates.

We maintain an Overweight rating and raise price target by 2% to HK$200. We see further potential upside if cost savings are targeted or the company moves closer to its historical sum of the parts premium to peers.

The $1bn cost saving opportunity: Standard Chartered's cost:income ratio has persistently been higher than its local peers, which is down to Consumer Banking where the cost:income differential is 10%.

Closing this gap could save $1.3bn or 12% of the Group cost base although, given the need for ongoing investment, half of this level might be more realistic. With management not yet indicating any change in strategy, our forecasts remain for controlled cost growth rather than cost cutting, although we see this as an opportunity which would both help to support near-term earnings and drive medium-term returns higher.

Credit quality pressure remains: Despite more supportive recent data we continue to expect a normalisation of Wholesale NPLs in most of Standard Chartered's geographies over time and also expect to see an increase in the level of provision reserves in the near term. Along with a continued shift towards higher risk unsecured lending in Consumer, we see continued upward pressure on impairments.

Valuation supportive: We retain an Overweight rating and raise price target by 2% to HK$200. However, the cost saving opportunity that we highlight could add 1%-2% to Group RoTE or HK$14-28 to the valuation in our estimates. A re-rating towards the sum of the parts premium that Standard Chartered has historically enjoyed would also generate further upside.

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