The corporate debt rating of Bumiputra-Commerce Holdings Berhad (BCHB), formerly known as Commerce Asset-Holding Berhad, has been upgraded from A+ to AA- based on the encouraging pace of the integration process of BCHB’s two main bank units, Bumiputra-Commerce Bank Berhad (BCB) (now known as CIMB Bank Berhad) and Commerce International Merchant Bankers Berhad (now known as CIMB Investment Bank Berhad), and the successful vesting of Southern Bank Berhad (SBB) into CIMB Bank Berhad (CIMB Bank) on 1 November 2006. BCHB is currently the second largest banking group in Malaysia and has a strong presence in its domestic market in the investment banking, retail and commercial banking and wealth management sectors. The acquisition of SBB will enhance CIMB Bank’s retail banking abilities, expand its customer base and more importantly, enable the Group to reshape its retail banking franchise. That merger integration efforts are progressing as scheduled has moderated our earlier view of the significant execution challenges associated with the post-merger integration process of BCB, Commerce International Merchant Bankers Berhad, and more recently, SBB. The higher financial leverage at BCHB to support the acquisition of SBB had also previously tempered MARC’s view of the financial holding company’s ratings. Nonetheless, BCHB has been able to deleverage its balance sheet ahead of schedule. The lower financial leverage at BCHB and the Group’s achievements of target synergies to date has provided the basis for the rating differential between the consolidated strength of the universal bank (at CIMB Group Sdn Bhd) and the holding company rating to be tightened to one notch. The stable ratings outlook reflects MARC’s view that BCHB will continue to exhibit financial metrics within the levels required to maintain the ratings in the near to intermediate term.

CIMB Bank funded the RM6.7 billion acquisition of SBB with RM2.1 billion in cash, RM3.3 billion in equity issuance and RM1.3 billion in redeemable preference shares (RPS) to BCHB. The RPS will be replaced by the impending issuance of Hybrid Tier 1 Capital. The recent sale of its insurance arms for an aggregate RM990 million and the sale of new BCHB shares to Bank of Tokyo-Mitsubishi UFJ totaling RM1.33 billion, has presented BCHB with an opportunity to pare down its debt. Double leverage at BCHB fell significantly from 191% as at end Q3 2006 to 150% as at end Q4 2006, and is at currently within BCHB’s target ratio of 120%. BCHB’s capacity to undertake acquisitions without affecting the ratings, is now more constrained in light of the group’s commitment to stay well within target ratios.

MARC has concurrently affirmed the Financial Institution Rating of CIMB Bank at AA/MARC-1 and the rating on the bank’s RM667 million nominal value irredeemable convertible unsecured loan stocks (ICULS) with detachable coupons at AA-. CIMB Bank’s senior unsecured debt is rated one notch lower than its financial institution rating. The financial institution rating for CIMB Bank reflects its status as a core entity of the universal bank comprising CIMB Bank, CIMB Investment Bank Berhad (CIMB IB) and CIMB-GK Pte Ltd (CIMB-GK), and is hence rated at the same level as the universal bank. The core entities of the universal bank are managed under a single strategy but operate under two brands. CIMB Bank’s acquisition of SBB created goodwill of approximately RM4 billion, thereby pressuring its capitalization. This weakening is mitigated partially by the equity issuance of RM3.3 billion, potential issuance of Hybrid Tier 1 Capital and sale of non-core assets (Southern Investment Bank Berhad and SBB Securities Sdn Bhd). Annual synergies to be achieved from the merger with SBB are estimated at RM200 million p.a. in profit before tax for the next three years. Whilst the integration of the banks’ operating platforms was completed in March 2007, integrating the cultures and transforming the group will take a little longer. Key drivers to future profitability will depend on its degree of success in transitioning to a customer-centric mentality and a strong credit culture. The ratings outlook for the bank is positive.

Finally, MARC’s ratings for CIMB Bank and BCHB encompass their systemic importance in the Malaysian domestic banking system.