Friday, May 18, 2001
MARC has assigned a rating of A (Single A) to Commerce Asset-Holding Berhad’s (CAHB) RM500.0 million 5-year and 7-year Redeemable Unsecured Bonds.
The rating reflects the strong market positioning of CAHB’s major operating units, the employment of sound risk management practices, solid capital levels and the majority government shareholding. These positives are moderated by the erratic performance of the merchant banking and stockbroking outfits, the continued high overheads at the merged bank and shrinking brokerage margins going forward arising from the revision in commission rates.
Upon completion of the merger on 1 October 1999, Bumiputra Commerce Bank (BCB) ranked second amongst the commercial banks in Malaysia with approximately 11.4% market share of loans 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 Bank Bumiputra’s (BBMB) retail dominance. BCB’s net NPL ratio of 4.7% as at 31 December 2000 was marginally lower than the commercial banking industry. The ratio may still be overstated by the inclusion of putable BBMB loans. Under a Put Option arrangement with Danaharta Urus, BCB is insulated from the weak loan quality of BBMB. The bank’s NPL ratio should improve significantly nearing the expiration of the put option period in July 2001.
A relatively weak point 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 meshing of corporate cultures of the two banks may also prove to be challenging given their distinct management styles.
CIMB has a strong foothold in corporate finance and capital market operations in the local merchant banking industry. The bank remains amongst only a handful of Malaysian banks that have progressed to implement comprehensive risk management techniques across all its business activities. Capitalization is superior and is expected to remain high following its adherence of prudent Capital-At-Risk limits. Going forward, MARC expects competition to intensify as foreign banks encroach into the financial advisory business.
CIMB Securities (CIMBS) ranks amongst the top five stockbroking companies in Malaysia with a 6.4% market share of volume traded in the KLSE as at end December 2000. Historically, the bulk of CIMBS’ gross brokerage income was derived from institutional clients, which contributed more than half of gross brokerage income. However, arising from the imposition of exchange controls, foreign institutional trades declined sharply, eroding CIMBS’ market share. Going forward, MARC expects competition to intensify with the emergence of Universal Brokers and their widened scope of services, and for prospective margins to be squeezed by the liberalisation of brokerage commissions.
Contributions from CIMB and CIMBS have subjected consolidated earnings to wide swings due to their high mark-to-market risk exposures. As at 31 December 2000, CAHB posted consolidated pre-tax profit of RM830.0 million, 86% higher than the previous year due largely to the incorporation of the full year’s results of the BBMB group.
The cash flow coverage ratios at the parent holding company are very strong. The parent company’s asset mix, apart from long term investments in subsidiaries, also included shorter-term investments in quoted securities and cash balances. This structure has contributed to a fair income balance between net dividends and interest income. Coupled with low gearing levels, total cash sources covered outlays by 4.1 times in FY2000, with CFO interest coverage at very strong levels.
CAHB’s net dividend income stablized at RM113.5 million in FY2000 (FY99: RM111.6 million), but was double the amount in FY98 of RM55.8 million due to a higher dividend rate on the expanded share capital base of BCB. Bumiputra-Commerce (L)’s preference share dividends constitute a stable source of income given the predetermined rate and the cumulative basis, but the actual dividend flow is still subject to the operating performance of the offshore banking unit. BCB’s dividend payout ratio has historically been high, reaching 127% in FY98. With the full year’s earnings of the merged bank in FY2000, the dividend payout ratio retreated to a more comfortable level of 44% in FY2000. The corresponding ratio for CIMB at 8% provides ample flexibility for the bank to upstream additional dividends to CAHB.
Strong capital levels are a distinct strength. The parent company’s capital structure is conservative with low usage of double leverage. The group is professionally managed with a strong commercial orientation, supported by the 31.5% government ownership. It enjoys a good historical track record and lists amongst the more resilient financial groups even through the recent difficult economic environment.
The rating reflects the strong market positioning of CAHB’s major operating units, the employment of sound risk management practices, solid capital levels and the majority government shareholding. These positives are moderated by the erratic performance of the merchant banking and stockbroking outfits, the continued high overheads at the merged bank and shrinking brokerage margins going forward arising from the revision in commission rates.
Upon completion of the merger on 1 October 1999, Bumiputra Commerce Bank (BCB) ranked second amongst the commercial banks in Malaysia with approximately 11.4% market share of loans 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 Bank Bumiputra’s (BBMB) retail dominance. BCB’s net NPL ratio of 4.7% as at 31 December 2000 was marginally lower than the commercial banking industry. The ratio may still be overstated by the inclusion of putable BBMB loans. Under a Put Option arrangement with Danaharta Urus, BCB is insulated from the weak loan quality of BBMB. The bank’s NPL ratio should improve significantly nearing the expiration of the put option period in July 2001.
A relatively weak point 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 meshing of corporate cultures of the two banks may also prove to be challenging given their distinct management styles.
CIMB has a strong foothold in corporate finance and capital market operations in the local merchant banking industry. The bank remains amongst only a handful of Malaysian banks that have progressed to implement comprehensive risk management techniques across all its business activities. Capitalization is superior and is expected to remain high following its adherence of prudent Capital-At-Risk limits. Going forward, MARC expects competition to intensify as foreign banks encroach into the financial advisory business.
CIMB Securities (CIMBS) ranks amongst the top five stockbroking companies in Malaysia with a 6.4% market share of volume traded in the KLSE as at end December 2000. Historically, the bulk of CIMBS’ gross brokerage income was derived from institutional clients, which contributed more than half of gross brokerage income. However, arising from the imposition of exchange controls, foreign institutional trades declined sharply, eroding CIMBS’ market share. Going forward, MARC expects competition to intensify with the emergence of Universal Brokers and their widened scope of services, and for prospective margins to be squeezed by the liberalisation of brokerage commissions.
Contributions from CIMB and CIMBS have subjected consolidated earnings to wide swings due to their high mark-to-market risk exposures. As at 31 December 2000, CAHB posted consolidated pre-tax profit of RM830.0 million, 86% higher than the previous year due largely to the incorporation of the full year’s results of the BBMB group.
The cash flow coverage ratios at the parent holding company are very strong. The parent company’s asset mix, apart from long term investments in subsidiaries, also included shorter-term investments in quoted securities and cash balances. This structure has contributed to a fair income balance between net dividends and interest income. Coupled with low gearing levels, total cash sources covered outlays by 4.1 times in FY2000, with CFO interest coverage at very strong levels.
CAHB’s net dividend income stablized at RM113.5 million in FY2000 (FY99: RM111.6 million), but was double the amount in FY98 of RM55.8 million due to a higher dividend rate on the expanded share capital base of BCB. Bumiputra-Commerce (L)’s preference share dividends constitute a stable source of income given the predetermined rate and the cumulative basis, but the actual dividend flow is still subject to the operating performance of the offshore banking unit. BCB’s dividend payout ratio has historically been high, reaching 127% in FY98. With the full year’s earnings of the merged bank in FY2000, the dividend payout ratio retreated to a more comfortable level of 44% in FY2000. The corresponding ratio for CIMB at 8% provides ample flexibility for the bank to upstream additional dividends to CAHB.
Strong capital levels are a distinct strength. The parent company’s capital structure is conservative with low usage of double leverage. The group is professionally managed with a strong commercial orientation, supported by the 31.5% government ownership. It enjoys a good historical track record and lists amongst the more resilient financial groups even through the recent difficult economic environment.