The corporate debt rating of Bumiputra-Commerce Holdings Berhad (BCHB), formerly known as Commerce Asset-Holding Berhad, has been affirmed at A+ following the combination of CIMB and Bumiputra-Commerce Bank (BCB). BCHB is the ultimate parent of the combined entity.

Concurrently, MARC has upgraded the Financial Institution Rating of BCB from AA-/MARC-1 to AA/MARC-1. MARC has also upgraded the rating on the detachable coupons of RM667 million nominal value irredeemable convertible unsecured loan stocks (ICULS) from A+ to AA-. The ratings outlook is stable.
 
The rating actions follow the announcement that the necessary acquisitions to effect the merger of the operations of BCHB’s two main bank operating entities, BCB and CIMB Berhad (CIMBB), had taken place in January 2006. The group’s aim is to integrate BCB and CIMB along the lines of a common brand and ‘one-bank’ structure, while increasing cooperation between the distinct businesses, sharing common functions and building on the group’s strengths, to achieve higher revenue growth and cost savings.

The upgraded ratings of BCB reflect MARC’s view that both the operational performance and the competitive position of BCB have been strengthened by the merger. In addition, BCB’s rating also takes into consideration the scale of the combined entity post- Southern Bank Berhad (SBB)’s acquisition. MARC believes that the universal bank now falls within the "too important to fail" category from a systemic perspective.

MARC views CIMB’s investment banking operations as a cornerstone of the universal bank’s franchise, and its excellent financial fundamentals as a core strength. However, revenue generation may become more of a challenge for the bank in its wholesale operations, going forward, in an increasingly competitive operating environment. Viewed in this context, MARC believes that the recent acquisitions of the stockbroking businesses of GK Goh Holdings and SBB, present a step in the right direction. Also, MARC views positively BCHB’s move to create a more defensible retail and wealth management franchises with the acquisition of SBB. MARC expects the Group will fully leverage SBB’s successful business model for retail banking, its resources and franchises in its pursuit to build a sufficiently strong retail franchise. The universal bank appears well positioned now to develop a balanced business portfolio founded on the three main pillars of investment banking, retail and commercial banking and wealth management.

The integration of SBB is expected to pose some operational challenges as well as efforts to foster greater cooperation among their respective businesses and managers in order to realize anticipated synergies and cross-selling potential.

Meanwhile, factors taken into consideration in affirming the rating of BCHB group include the probability of successful execution of its operating plans, the enhanced market position and diversity of the combined business profile of its core banking operations, and prospects for improved operating performance given the CIMB-BCB-SBB combination as well as its strong financial flexibility. Offsetting these positives are the immediate strain on holding-company (BCHB) cash flow, rise in holding company financial leverage, and the impact of other operating entities upon the shared credit profile of the group's operating entities as a whole, and the effect of consolidating financial services sector and evolving regulatory environment.

MARC foresees that the banking entities including PT Bank Niaga Tbk (Bank Niaga) will remain the significant contributors of dividend income to BCHB. The life, general and takaful insurance units are more likely than the other group member companies to retain the bulk of profits to fund their own expansion and may need to draw on long-term funding from BCHB as additional capital for growth. The Group has announced the setting up of a new insurance holding company, Commerce International Group Bhd (CIGB) which among others, will chart the overall strategic direction for the insurance units.

Looking at the group's performance, managing down non-performing loans has been a key area of focus in recent years, principally at BCB. In relation to the cost base of the universal bank, the unification of business lines and process centralization is expected to facilitate the realization of cost savings from the removal of duplicating support functions as well as of cross-business synergies. Further, structural enhancements to the overall risk control and management framework as well as an overall shift in risk culture and appetite at the ‘old’ BCB is viewed positively in relation to the ‘universal’ bank's risk metrics. Following the completion of the CIMB-BCB merger, the universal bank has also unveiled a number of strategies that are aimed at improving customer-centricity and cross-selling in order to achieve increased margins and win rates, increased share of wallet or deal size, and improved customer retention.

The ratings assume that the SBB acquisition would be structured such that the credit metrics of rated entities do not weaken. MARC continues to view financial flexibility as a key source of strength for BCHB, at both holding company and subsidiary levels. Financial flexibility has been demonstrated by successful capital market activities in recent years including equity raising and debt issuance.

Though our near-term Rating Outlook is Stable, BCB’s Financial Institution Rating would benefit from improving profitability, efficiency and greater diversification of credit risk while MARC would expect BCHB to experience positive momentum in its ratings should its financial leverage trend downwards substantially. Conversely, the ratings may come under downward pressure in the event the bank fails to deliver on its retail and business banking strategies, BCHB face a widening of cash flow shortfalls, or signs that financial flexibility is waning.