MARC has upgraded the long term senior debt rating of Bumiputra-Commerce Holdings Berhad’s (BCHB) RM6.0 billion Conventional and Islamic CP/MTN Programme to AA and AAID from AA- and AA-ID whilst affirming its short term senior debt rating of MARC-1 and MARC-1ID. The upgrade recognises the continued earnings strength and robust internal capital generation of its banking operations, in particular that of its universal bank, which provides a very substantial part of the consolidated recurring earnings of the bank holding company. CIMB Bank Berhad (CIMB Bank), the commercial banking entity within BCHB’s universal banking group of CIMB Group Sdn Bhd, was recently upgraded by MARC to AA+ from AA in respect of its financial institution rating to reflect prospects for continued improvement in its competitive position, its significantly improved asset quality in addition to its sound capital management and well-managed liquidity.

CIMB Bank’s assigned ratings and the implied ratings of the universal bank are aligned while BCHB is rated one notch lower than the universal bank on account of structural subordination as a result of systemic support considerations at the bank level. Also underpinning BCHB’s ratings are the strong domestic commercial and investment banking franchises of its universal bank, its balanced mix of commercial and investment banking businesses, robust risk management capabilities, good prospects for regional growth and the holding company’s excellent financial flexibility. Moderating these strengths is its holding company double leverage ratio of above 110% which is unlikely to see further meaningful reduction given its on-going share repurchase programme and the increasingly competitive domestic banking environment. The ratings outlook is stable.

BCHB’s core entities are its commercial bank, CIMB Bank and its investment bank, CIMB Investment Bank Berhad (CIMB IB). CIMB Bank is the second largest domestic commercial bank in the country while CIMB IB maintains a top-tier position in investment banking in the domestic market. The group’s regional operations are conducted through its Singapore investment banking outfit, CIMB-GK Pte Ltd and Indonesian commercial bank, PT Bank Niaga Tbk. CIMB-GK Pte Ltd has a growing regional presence in stock-broking and corporate advisory services. Meanwhile, PT Bank Niaga Tbk, the second largest mortgage lender in Indonesia, possesses a strong consumer franchise. The announced merger of PT Bank Niaga Tbk and PT Bank Lippo Tbk is expected to strengthen the group’s presence in Indonesia and contribute positively to the group’s earnings in the medium term.

BCHB’s strategy for raising returns on equity has, in addition to bolstering operational efficiency and profitability at its banking subsidiaries, involved share buy backs. The group achieved a 15.2% return on equity (ROE), excluding one-off gains in 2007, and targets to achieve 18% for FY2008. BCHB is conducting a share buy back which could potentially cost it up to RM1 billion. From January this year to June 6, 2008, BCHB had acquired 30.6 million of its ordinary shares from the open market for over RM270 million. The pressure of the share buy back on BCHB’s double leverage is offset somewhat by the strong earnings generation capacity of its subsidiaries.

Total assets of the group grew 16.5% from a year earlier to RM182.8 billion as at December 2007. BCHB reported a pre-tax profit of RM3.7 billion in FY2007 which was 84.1% higher than the previous financial year. The sharp increase (excluding a one-off gain from the sale of its insurance subsidiaries) was largely attributed to a 46.6% increase in non-interest income to RM3.9 billion driven by much stronger performances by its investment banking and treasury operations. Net interest income increased 21.3% to RM4.4 billion, boosted by the first full year consolidation of Southern Bank Berhad’s operations into CIMB Bank.

The first quarter figures for FY2008 showed a 9.3% or RM76.8 million decrease in pre-tax profit, lower than the period a year ago mainly due to trading and foreign exchange losses which was partially offset by gains arising from derivative financial instruments. The group’s total assets, meanwhile, grew 1.8% year-on-year to RM186.5 billion as at March 31, 2008.
 
MARC is of the view that while competition across the group’s main activities will likely increase, the established franchises and strong market positions of its main subsidiaries will enable BCHB to maintain metrics supportive of its assigned ratings in the near to intermediate term.