Standard Chartered's 'deep cuts' are needed, says Citi

7th Sep 2015 13:33

(ShareCast News) - After unconfirmed news emerged that Standard Chartered may be cutting a quarter of its senior bankers, Citi maintained its 'buy' rating and 1,050p price target but highlighted that productivity metrics were poor compared to peers.Also over the weekend were reports that StanChart may face new fines for the alleged breaking of sanctions in place for dealing with Iran, with the possible involvement of a whistle-blower in the US Department of Justice's and analysts suggesting the DOJ will be looking to set an example.Shares in Standard Chartered were down more than 2% by early afternoon on Monday.On Friday afternoon, Bloomberg reported that about 250 managing director positions might be cut as part of new chief executive Bill Winters plans to reverse a two-year profit slide.The story has not been confirmed by the bank but Citi said that deep cuts were needed at the emerging markets focused bank.Citi's understanding is that STAN has its staff banded in numerical ranks that denote seniority, that is band 1, band 2 and so forth, albeit senior front office staff do use the MD title."We expect deep cost cuts to be announced by the new CEO in due course...[as] STAN's productivity metrics are poor relative to peers such as HSBC and locals."Over the past 5 years, the Asia-focused lender had similar risk-adjusted revenues per employee as HSBC Asia but costs were around 30% higher.Citi's target price is primarily based on a valuation using two approaches: a Dividend Discount Model (DDM) with 3% terminal growth and a 2018 return on investment (ROE) of 10.8%; and a sum-of-the-parts (SOTP) model based on target price/earnings ratios of peers.