Bumiputra Commerce (BUCM.KL): Buy

Transfers Held-for-Trading Bonds to Held-to-Maturity Book


What's new - BCHB has transferred about RM8bn-worth of corporate bonds from its held-for-trading (HFT) portfolio to its held-to-maturity (HTM) book. This is not new news; the reclassification was mentioned in its 3Q08 earnings briefing. Management is guiding for a "slight loss" on the reclassification, mainly attributed to the US$ bonds portfolio.

BCHB did not suspend mark-to-market accounting on HFT book in 3Q08 - The bank did not take advantage of the new central bank guidelines to effect the transfer on 1 July in its 3Q08 results. Instead, BCHB recorded a net gain of RM36m for the HFT book in 3Q08 alone, mainly due to lower government yields. The mark-to-market rule will apply right up to the date of transfer of the RM8bn book this month.

Reason for the transfer - Management's rationale for the transfer is that the RM8bn long-dated bonds provide a natural hedge for its fixed-rate liabilities (RM1.5bn subordinated debt, RM1bn innovative Tier 1 cap, savings and current deposits).

We are neutral on the reclassification - The bulk of the corporate bonds will be transferred to HTM book leaving mainly government securities in the HFT category. The reclassification in no way changes the underlying quality of the bond assets. That said, there may be a short-term positive earnings impact given the recent government bonds rally due to expectations of a lower interest rate. Accounting deterioration in the HTM book, if any, occurs if there are changes to the financial health or earnings prospects of the issuer.