MARC has assigned a preliminary rating of A+ to Bumiputra-Commerce Holdings Berhad’s (“BCHB”) proposed RM3.0 billion Cumulative Subordinated Fixed Rate Notes Programme. At the same time MARC affirms its senior debt ratings of AA/MARC-1 and AAID/MARC-1ID on BCHB’s rated Conventional and Islamic Senior Debt issues. The ratings outlook is stable.

MARC has rated the subordinated notes (hereafter referred to as ‘hybrid’) two notches below BCHB’s long-term senior debt rating on the basis of their priority of claim in liquidation, long-dated maturity, cumulative optional interest deferral feature and replacement provisions. The hybrid will rank pari-passu with BCHB’s most junior class of preference shares, have a maturity of 50 years and are callable no earlier than 10 years from issuance date. BCHB may defer payment of interest when: (i) it reports an after-tax loss immediately before any interest payment; or (ii) when no dividends are declared or interest payments are made on securities junior to the hybrid during the 12-month period immediately preceding any interest payment date of the latter. If the hybrid is called by BCHB, it will have to be replaced by issuing another similar hybrid instrument or equity of the same size.

MARC has also given full equity credit for the entire issue amount of the hybrid, which means that 100% of the outstanding principal of the hybrid will be allocated to equity and 0% to debt in its analysis of BCHB’s debt leverage. The rating considerations for the two notch differential between the rating of BCHB’s senior debt and hybrid support also the equity treatment of the hybrid. Although the cumulative deferral feature of a hybrid would ordinarily justify a reduction in the equity credit class, MARC considers the hybrid’s optional deferral feature and the absence of any time limitation on the deferral period to be sufficient to ensure effectiveness of the hybrid’s coupon deferral mechanism as a whole. The issuance of the hybrid has been undertaken with a view to strengthen BCHB’s capital structure and equity base, and extend its debt capacity. A simulation of the pro-forma effects of an initial issuance of RM1.0 billion hybrid notes on the computation of BCHB’s double leverage ratio adjusted for full equity credit of the entire issuance suggests that the holding company’s double leverage ratio can be lowered to 110.6% based on its end-March 2009 balance sheet.

The senior debt ratings of the financial services holding company reflects strong domestic franchises and top-tier position in retail, commercial and investment banking, good recurring of earnings generation, strong strategic focus and execution, robust risk management capabilities, and incorporate the holding company’s excellent financial flexibility. Credit challenges currently facing the group include the current economic downturn and lower interest rate environment which will test asset quality and risk management capabilities, in addition to integrating its acquisitions of PT Bank Lippo Tbk and BankThai Public Company Limited (later renamed CIMB Thai Bank Public Company Limited), as well as strong competition from larger rivals in the Indonesian and Thai banking markets.

CIMB Bank Berhad (CIMB Bank) and CIMB Investment Bank Berhad (CIMB IB), the anchor operating entities of BCHB’s commercial banking and investment banking franchises, are strongly positioned in their domestic market as the second largest domestic commercial bank and investment bank respectively. The group’s regional operations are conducted through its Singapore investment banking outfit, CIMB-GK Pte Ltd (CIMB-GK) and Indonesian commercial bank, PT Bank CIMB Niaga Tbk and recently acquired CIMB Thai Bank Public Company Limited (CIMB Thai). The merger of PT Bank Niaga Tbk and PT Bank Lippo Tbk (Bank Lippo), which was completed in November 2008, and new Thai banking subsidiary provide scope for further growth and earnings diversification. Rebranded as PT Bank CIMB Niaga Tbk (CIMB Niaga), the merged entity emerged as Indonesia’s sixth largest bank with total assets of Rp103.4 trillion.

BCHB’s integrated business model continues to position the group well to weather prevailing market challenges, as indicated by its financial performance for financial year ended December 31, 2008 (FY2008). The Group registered pre-tax profit (PBT) of RM2.7 billion, lower than the previous year’s figure of RM3.7 billion. Although its consolidated pre-tax profits were negatively affected by its ongoing exposure to volatile market conditions, its consumer banking operations continue to generate considerable recurring earnings. For the first quarter of FY2009, BCHB’s group revenues and net profit saw increases of 24.6% and 14.8% respectively, compared to 1QFY2008. The results, which reflect full consolidation of Bank Lippo and CIMB Thai, incorporate the latter’s maiden contribution of an RM18 million loss excluding merger and acquisitions related charges. CIMB Niaga’s PBT contribution expanded 55.1% to RM152 million post-merger with Lippo Bank, accounting for 19% of overall PBT (1QFY2008: 13%).

The stable ratings outlook reflects our expectations that while the current operating environment would exert pressure on the profitability of BCHB and increase the likelihood of interest deferral on the hybrid, this is somewhat mitigated by the group’s increasingly diversified earnings. Further, the group’s relatively strong operating performance in 1QFY2009 confirms the Group’s earnings resilience under more difficult market conditions.

Contacts:
Milly Leong, 03-2090 2288/ milly@marc.com.my;
Taufiq Kamal, 03-2090 2251/ taufiq@marc.com.my