The corporate debt rating of Bumiputra-Commerce Holdings Berhad (“BCHB”), formerly known as Commerce Asset-Holding Berhad, has been upgraded from A+ to AA- following the merger of CIMB Bank Berhad, formerly known as Bumiputra-Commerce Bank (“BCB”), and Southern Bank Berhad (“SBB”). BCHB is the ultimate parent of the merged entity branded as CIMB Bank Berhad (“CIMB Bank”).  The rating outlook is Stable. Concurrently, MARC has reaffirmed the Financial Institution Rating of CIMB Bank at AA/MARC-1. MARC has also reaffirmed the rating on the RM667 million nominal value irredeemable convertible unsecured loan stocks (ICULS) with detachable coupons at AA-. The ratings outlook is Positive.

The rating upgrade on BCHB follows the successful vesting of SBB into CIMB Bank on 1 November 2006. BCHB acquired SBB in June 2006 and results reported for the quarter ended 30/9/06 indicate that merger integration efforts are progressing as scheduled. CIMB Bank funded the acquisition of RM6.7 billion 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 Hybrid Tier 1 Capital expected to be issued by September 2007. Given that recent sale of its insurance arms for an aggregate RM990 million, RM500 million capital reduction exercise from CIMB Investment Bank Berhad and the proposed sale of new BCHB shares to Bank of Tokyo-Mitsubishi UFJ totaling RM1.33 billion, MARC anticipates BCHB’s debt requirement to be in the region of between RM500 to RM600 million. Consequently, MARC anticipates that leverage ratios are manageable with pro-forma Debt to Equity ratio at 0.10 times and double leverage at 1.04 times. The upgrade also takes into consideration BCHB’s strong financial flexibility and recent appetite for its debt.

The takeover of SBB is aimed at completing BCHB’s overall franchise as a veritable universal bank with leading market positions in retail and investment banking backed by CIMB Bank’s sprawling branch footprint and huge balance sheet. Management is explicit about its focus on the on-going integration of SBB and transformation at BCHB. Whilst the integration of the banks’ operations is progressing as scheduled, targeted to complete in April 2007, integrating the cultures and transforming the group will take a little longer.  As a Group, BCHB now has scale economy, critical mass and distribution clout. Its business model is to operate as a seamless bank with a mentality to cross-sell. Management’s commitments frequently articulated to the stakeholders, and hitherto delivery on its promises as well as a move to a more performance based system, merit a view that the group is now attempting to build a new corporate image and mentality. Whilst stemming customer and employee attrition remains key, threats of this happening on a massive scale are not visible as evidenced by its ability to retain key management from SBB and the price premiums BCHB was able to negotiate for its insurance arms (seen largely due to access to CIMB Bank’s distribution network). 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 rating upgrade for BCHB reflects expectations that the transition will evolve as various frameworks are in place to grow the earnings profiles of the respective entities. The recent sale of its equity interests in Commerce Life Assurance Berhad, Commerce Assurance Berhad and Commerce Takaful Berhad at premium valuations is viewed positively. It not only unlocks the values of these assets and enables value-added deployment of funds, it effectively sealed strong partnerships whereby BCHB may boost its fee income at minimal incremental costs with the ensuing distribution contracts. 

MARC’s ratings for CIMB Bank and BCHB encompass their systemic importance in Malaysia, reflecting their collective leading positions in the domestic banking system.

MARC’s reaffirmation on CIMB Bank is also based on the competitive position that the bank commands, expectations of improvement in resources and a proactive management team with an emphasis on synergy extraction. CIMB Bank is also a beneficiary of the group’s strong investment banking franchise.

Managing down CIMB Bank’s NPL portfolio remains an area of challenge as well as opportunity. Gross and net NPLs at CIMBG including SBB, amounting to RM13.3 billion and RM5.3 billion (the bulk of it at CIMB Bank), have collateral with collective FSV worth circa RM9 billion. With a systematic approach in place for managing NPLs and loans under stress, this presents an opportunity for write-backs. CIMB Bank’s acquisition of SBB on 1 November 2006 will see goodwill in excess of RM4 billion on its books at FYE2006 thereby weakening its capitalization. This weakening is mitigated partially by the equity issuance of RM3.3 billion, potential issuance of Hybrid Tier 1 Capital of circa RM1.3 billion and sale of non-core assets.