Friday, May 25, 2001
MARC has assigned a rating of A (Single A) to the Detachable Coupons of Bumiputra-Commerce Bank Berhad’s (BCB) RM667.0 million 10-year Irredeemable Convertible Unsecured Loan Stocks.
The rating reflects the subordinated characteristic of the detachable coupons, which were rated below the Financial Institution rating of BCB. BCB’s Financial Institution rating of A+ (Single A plus) reflects the bank’s strong market positioning and its importance to the economy. MARC believes that operational synergies are achieved in this merger through the complementary nature of the different skill sets of both banks. The availability of the Put option also insulates BCB’s profitability from the residual NPLs of Bank Bumiputra (BBMB). These factors are moderated by the continued high overheads of the merged bank which will take time to ease, and the challenge of meshing the distinct corporate cultures of the two banks.
Upon completion of the merger on 1 October 1999, BCB ranked second amongst the commercial banks in Malaysia with an 11.4% market share of loans, a combined asset size of RM58.2 billion and the largest ATM network in the country. The post-merger loan portfolio reflects the combined strengths of both banks: Bank of Commerce’s traditional niche in manufacturing loans and BBMB’s retail dominance. The bank is focusing on trade finance and mortgages as the areas of loan growth in the short to medium term.
Prior to the completion of the Share Exchange Agreement in August 1999, a large proportion of BBMB’s corporate NPLs had already been taken over by Danaharta Urus (DUSB). BCB’s net NPL ratio of 4.7% as at December 2000 was marginally lower than the commercial banking industry, but highest amongst its peers. The ratio may still be overstated by the inclusion of putable BBMB loans. As at the financial year end, the balance of gross loans putable to DUSB totalled RM6.8 billion. MARC believes that the 23-month grace period under the Put Option gives adequate allowance for BCB to assess the performance of the inherited BBMB loans. The bank’s NPL ratio is set to improve nearing the expiration of the put option period in July 2001.
Loan loss reserves (LLR) provided 49% coverage of NPLs, considerably lower than its peers. Its general provisioning policy of 1.5% of net loans is again below the industry average of 1.8%. Even after taking into account the Danaharta guarantee for the remaining putable balance of NPLs, the LLR cover remains below its peers.
Capital adequacy is comparatively weaker when compared to its peers due to its above average loan growth. Nonetheless, MARC assesses the risk weighted capital ratio of 11.8% as adequate, albeit lower than the industry’s 12.2%. The stated ratios however ignore the availability of the remaining putable loans, which if imputed at zero risk weights, would improve the bank’s RWCR by 2.4%. BCB’s average risk weight of total assets and off-balance sheet commitments at 60% (second lowest amongst its peers) reflects the clean-up exercise of its bad loans, which have been exchanged for lower risk and liquefiable DUSB and Danaharta bonds.
The bank retains a strong liquidity position following the replacement of credit impaired assets with Danaharta’s papers. The acquired BBMB’s extensive retail network has enlarged the bank’s market share of total customer deposits to 12.4% in December 2000. The merger has also resulted in the proportion of low-cost and relatively stable savings and demand deposits doubling to 31%, thus significantly improving interest spreads.
A weak link for the bank is its high overhead expenses arising from the need to run parallel systems until the successful implementation of a common platform, which is scheduled for June 2001. The reduction in overheads typically derived from eliminating duplicate resources will not be immediate in this merger as BCB continues to maintain a heavy staff strength of almost 10,000. With ongoing integration initiatives to achieve greater operational efficiency, management has targeted the cost-to-income ratio to fall below 40% over the next two financial years from the 47.9% recorded in December 2000.
The rating reflects the subordinated characteristic of the detachable coupons, which were rated below the Financial Institution rating of BCB. BCB’s Financial Institution rating of A+ (Single A plus) reflects the bank’s strong market positioning and its importance to the economy. MARC believes that operational synergies are achieved in this merger through the complementary nature of the different skill sets of both banks. The availability of the Put option also insulates BCB’s profitability from the residual NPLs of Bank Bumiputra (BBMB). These factors are moderated by the continued high overheads of the merged bank which will take time to ease, and the challenge of meshing the distinct corporate cultures of the two banks.
Upon completion of the merger on 1 October 1999, BCB ranked second amongst the commercial banks in Malaysia with an 11.4% market share of loans, a combined asset size of RM58.2 billion and the largest ATM network in the country. The post-merger loan portfolio reflects the combined strengths of both banks: Bank of Commerce’s traditional niche in manufacturing loans and BBMB’s retail dominance. The bank is focusing on trade finance and mortgages as the areas of loan growth in the short to medium term.
Prior to the completion of the Share Exchange Agreement in August 1999, a large proportion of BBMB’s corporate NPLs had already been taken over by Danaharta Urus (DUSB). BCB’s net NPL ratio of 4.7% as at December 2000 was marginally lower than the commercial banking industry, but highest amongst its peers. The ratio may still be overstated by the inclusion of putable BBMB loans. As at the financial year end, the balance of gross loans putable to DUSB totalled RM6.8 billion. MARC believes that the 23-month grace period under the Put Option gives adequate allowance for BCB to assess the performance of the inherited BBMB loans. The bank’s NPL ratio is set to improve nearing the expiration of the put option period in July 2001.
Loan loss reserves (LLR) provided 49% coverage of NPLs, considerably lower than its peers. Its general provisioning policy of 1.5% of net loans is again below the industry average of 1.8%. Even after taking into account the Danaharta guarantee for the remaining putable balance of NPLs, the LLR cover remains below its peers.
Capital adequacy is comparatively weaker when compared to its peers due to its above average loan growth. Nonetheless, MARC assesses the risk weighted capital ratio of 11.8% as adequate, albeit lower than the industry’s 12.2%. The stated ratios however ignore the availability of the remaining putable loans, which if imputed at zero risk weights, would improve the bank’s RWCR by 2.4%. BCB’s average risk weight of total assets and off-balance sheet commitments at 60% (second lowest amongst its peers) reflects the clean-up exercise of its bad loans, which have been exchanged for lower risk and liquefiable DUSB and Danaharta bonds.
The bank retains a strong liquidity position following the replacement of credit impaired assets with Danaharta’s papers. The acquired BBMB’s extensive retail network has enlarged the bank’s market share of total customer deposits to 12.4% in December 2000. The merger has also resulted in the proportion of low-cost and relatively stable savings and demand deposits doubling to 31%, thus significantly improving interest spreads.
A weak link for the bank is its high overhead expenses arising from the need to run parallel systems until the successful implementation of a common platform, which is scheduled for June 2001. The reduction in overheads typically derived from eliminating duplicate resources will not be immediate in this merger as BCB continues to maintain a heavy staff strength of almost 10,000. With ongoing integration initiatives to achieve greater operational efficiency, management has targeted the cost-to-income ratio to fall below 40% over the next two financial years from the 47.9% recorded in December 2000.