Bumiputra-Commerce Holdings - The Ultimate Performer

· BCHB’s 1HFY10 net profit of RM1,277m was inline with our net profit estimate of RM2,537m and that of consensus’ RM2,303m at 50% and 55% respectively. Strong 2Q investment and equity related revenues of RM403m (16.8% QoQ) were the basis of strong earning growth. BCHB's Investment bank posted record quarterly revenues of RM775m driven by very strong treasury and investment divisions’ performance. Top line growth combined with a stable cost income ratio (53%) produced a solid 14.5% ROE for the quarter. Asset quality still benign with low net NPL ratio of 2.4%. YTD loan increased by 4.5% are on track to achieve its year end target of 8%.

· Net profit in the second quarter was RM663mn or 18.8 sen a share – the best quarter since 2007, when it was hammered by the financial crisis. We have expected strong earnings, but were surprised by the exuberance performance. The primary earnings driver was prime brokerage and forex trading. Going forward, earning momentum remain strong with the recovery of bond market i.e. the propose USD1.5bn Emas Dollar Sukuk Bond and highly likely RM3-4bn listing of Maxis.

· We see the company showing greater resilience than its peers. Given that the bank has been less severely impacted than its global peers, we believe the market is pricing in its strong performance. But investors should not lose sight of the fact that key operating and financial trends appear to be more resilient in 2QFY09 and further room to grow with expectations of a strong capital market, volatility in forex market and low interest environment.

· BCHB’s shares is undemanding on FY10 ROE of 16% - The combination of BCHB’s strong investment banking business, coupled with its growing Indonesian presence in Rupiah lending business, positioned it very favourably to deliver above-average earnings growth and an ROE 14% by FY09 and 16% by FY10. We look at a few alternative valuation methodologies and conclude that BCHB remains undervalued and reiterate our Buy rating (see report dated 14th July 2009 titled ‘Buy Maintained’ for details).

· Maintaining BUY Recommendation with target price of RM11.60 –Upward rerating catalyst would be the securing of large IB deals which will yield significant non-interest income. BCHB is trading at 1.6x FY10 P/BV which is below our price/book versus regression model that is consistent with BCHB achieving the upper end of management’s goals of 12-16% ROE goal for 2009-10.

Bumiputra-Commerce Holdings – 1Q09 in line on the back of renew catalysts

Price: RM8.85
Target Price: RM10.30
Recommendation: BUY

· BCHB reported 1Q09 net profit of RM614m which was inline with our estimate of RM2250 (27%) and above consensus of RM1897m (32%). Exceptionally strong 1Q treasury & investment revenues of RM464m drove the majority of the beat to consensus. BCHB's Investment bank posted record quarterly revenues of RM809m driven by very strong treasury and investment divisions’ performance. Top line growth combined with a lower cost income ratio (53%) and smaller provisioning (RM352m) produced a solid 14% ROE for the quarter.

· We believe consumer banking continues provide stability to group earning. BCHB’s asset quality improved over the quarter which is heartening. Group NPL coverage increased to 84% with net NPL at a lowly 2.3%. Guidance on credit cost of 80bps was largely inline with our expectations.

· In several key aspects, we see the company showing greater resilience than its peers. Given that the bank has been less severely impacted than its global peers, we believe the market has priced in its weaker performance (after several earnings downgrade and profit warnings for the whole 2008). But investors should not lose sight of the fact that key operating and financial trends appear to be more resilient in 2QFY09, thanks to the strong capital market, volatility in forex market and steep yield curve environment.

· This also echo our view that non-interest income has bottomed out in 4QFY08 (see our report dated 24 Feb 2009 titled “Non-interest income bottoming out!”). Equities performance should remain robust providing for revival in BCHB corporate advisory and primary bond market activities.

· We raise our target price to RM10.30 and reiterate our BUY recommendation using a higher 1.8x P/BV multiple on FY10 BV of RM5.70, which premium to industry average of 1.4x. We believe that the premium over the industry P/BV average is justified due to BCHB’s earning visibility which has improved significantly over the past 6 months. In addition, renewed earnings momentun on forex trading, prime brokering and primary bond market could lift earnings above market consensus.

Bumiputra-Commerce Holdings - BUY - 12 May 2008

Bumiputra-Commerce Holdings - 1Q08 above expectations (Results Note)
Price: RM9.90

Target Price: RM12.60

Recommendation: BUY


· 1Q08 net profit of RM535.3m was 21% lower than our forecast and consensus of RM2,710.6m and RM2,723.0m respectively. The net profit was below largely due to weaker IB and Treasury contribution given the weaker than expected capital market and equity market conditions. Consumer banking performed surprising very strong with 22% of pretax profit compared to 14% in 4Q07.

· YoY, 1Q08 net profit fell 13% as 1Q07 net profit included RM86.8m of exceptional gain from the sale of asset management and unit trust companies. Excluding the gain, 1Q08 was 1.3% higher where the sharp improvement in consumer banking compensated for the lower contributions from IB and treasury.

· QoQ, 1Q08 net profit 10.2% higher as 4Q07 income tax rate was 32% compared with 24% in 1Q08. 4Q07 higher income tax expenses came from non-deductible expenses. At PBT level, 1Q08 pretax profit was 1.4% higher on the back of RM70m gain from sale of 7m Sime Darby shares.

· Possible sale of another 21m Sime Darby shares to bolster any shortfall in net profit. Management is positive that the equity and capital market will pick up for the rest of the year. Already more foreign companies are looking to raise bonds in Malaysia despite US Fed fund rate being cut to 2.0%, availability of funds is limited as banks are still hurting from write downs on sub-prime losses.

· Efforts on consumer banking paying off. YoY, gross consumer loans was up 6.2% with mortgages growing at a staggering 23.2%. Deliberate winding down of HP saw it fall by 13.2% YoY but strong growth in credit cards at about 130,000 to 170,000 cards per month for 1Q08 also resulted in 32.1% growth in credit cards debt outstanding. Growing retail deposit 20% YoY is the right move o lower borrowing cost. Cost to income ratio was lower at 52.7%.

· Management expect 2H08 to be better. 2H08 is expected to deliver 60% while 1H08 to contribute 40%. We are maintaining our forecast. Maintain BUY with target price to RM12.60 using 2.8x P/BV.





KENANGA INVESTMENT BANK BERHAD (15678-H)

FW: DBS Vickers (M'sia): Bumiputra-Commerce, Maintain Buy

Bumiputra-Commerce

Moving into China with Yingkou

-Story: BCHB bought a 19.99% stake in Yingkou Bank, China for a total consideration of US$49m (RM156m), making it the single largest shareholder.

This is equivalent to 1.6x adjusted book value. We think the price is fair compared to Hong Leong Bank's Chengdu Bank that was acquired at 2.5x enlarged NTA.

-Point: This is in line with BCHB's regional expansion plans. We see the Yingkou Bank acquisition as neutral to BCHB in the immediate term. But as business opportunities grow, this acquisition should be gradually earnings accretive.

-Relevance: Buy call maintained with a target price of RM12.90 (from RM13.00), derived from the Gordon Growth Model. We rolled over our valuation to CY09 book value, and lowered our long term growth rate assumption to 5% from 6% previously. Other parameters i.e. sustainable ROE of 18% and cost of equity of 11% are unchanged. We also lowered our FY09F estimates by 4% afterimputing lower non-interest income growth.

BCHB - Takes a 19.99% stake in Bank of Yingkou

BCHB’s unit, CIMB Group, has entered into a share subscription agreement with Bank of Yingkou Co., Ltd. of China, to buy 141.2m new shares for RMB348.8m (RM156.2m) cash. The new shares represent a 19.99% equity interest, and on completion, CIMB Group will be the bank’s single largest shareholder.
About Bank of Yingkou:
 Largest commercial bank in Yingkou city, which has a population of 2.24m, and is located in Liaoning Province in north-east China.
 Was a city commercial bank until recently, when it received approval to operate as a regional bank, giving it a potential customer base of 42m people.
 Incorporated in Apr 1997, from the amalgamation of 13 credit cooperatives.
 Recognised by the China Banking Regulatory Commission as one of the best national financial institutions in providing loans to SMEs.
 Has a total asset of RMB13.9b (RM6.2b) as at 31 Dec 2007 and reported a net profit of RMB198.1m (RM88.7m) in FY07.
(Source: Bursa Malaysia Announcement)

Comments:
A baby-step for BCHB in venturing into the humongous Chinese market. BCHB’s acquisition is valued at approximately 1.58x the adjusted book value of Bank of Yingkou – a fair price in our view.
Overall, we view this new investment as short-term neutral but long-term positive for BCHB. Bank of Yingkou is said to be looking to expand to Shenyang, the city in Liaoning province earmarked to be an Islamic finance hub of China, where BCHB’s Islamic financing niche could be put to good use.
We are not sure whether BCHB will be able to equity account for its investment in the Bank of Yingkou, but assuming it can, at a similar net profit of RM89m from Bank of Yingkou in FY08, and a financing cost of 7% p.a. by BCHB, we estimate the new investment in Bank of Yingkou could net a small bottomline enhancement of RM7m for BCHB in FY08, assuming a full year impact.
We maintain our earnings forecasts and Hold call on BCHB. Our target price, which is based on 14x PER on FY09 earnings is under review

Affin: BCHB 13 March 2008

CIMB keen in Chinese commercial bank
CIMB may buy up to 10% in Bank of Yingkou
BCHB yesterday confirmed that the CIMB Group is following Hong Leong Bank’s
move to expand into China. According to the announcement on Bursa, CIMB is
currently in discussions to acquire a strategic stake (of up to 10%) in the Bank of
Yingkou. Briefly, Bank of Yingkou is a small to medium-sized commercial bank
operating in the Liaoning province (located in the southern part of China's
Northeast) with total assets and shareholders' funds size of RMB13,915.1m
(RM6,217.6m) and RMB783.4m (RM350.0m) respectively.

Expansion into China will augur well for BCHB’s overseas operations
Details of this potential acquisition remain sketchy at this juncture. CIMB’s
intention to expand into the fast-moving China market will augur well for the
Group’s overseas operations – by allowing CIMB to tap onto Bank of Yingkou’s
network. Nevertheless, we believe this acquisition – if it materialises – will not
significantly impact the Group’s earnings due to Bank of Yingkou’s smallish asset
size vis-à-vis BCHB’s total assets of RM183.5bn as at Dec 2007. BCHB’s
overseas operations charted a 15% growth last year with contributions
accounting for 13% and 11% of FY07 operating revenue and PBT.
Hot on an M&A trail
News of this potential acquisition does not come as a surprise. Management had
earlier indicated that they are keen to expand into China and India. In addition to
the Bank of Yingkou, BCHB is also in the midst of conducting feasibility studies
to merge Bank Niaga with Khazanah’s Bank Lippo to create Indonesia’s 6th
largest bank. Taking together BCHB’s active management policies – to buy back
and cancel up to RM1bn worth of BCHB shares and potential dividends
amounting to RM826m - we believe the Group remains well capitalised to finance
the Bank of Yingkou’s purchase.

Buy maintained; target price RM13.35
More details on the potential acquisition of Bank of Yingkou are expected next
week. Meanwhile, we are maintaining our FY08 estimates. Core net profit is
estimated to grow by 26% in FY08, anchored by (i) stronger consumer banking
operations, (ii) loans growth of 7.3% (below management’s guidance of 12%), (ii)
higher contribution from NII, (iii) cost savings from CIMB-SBB and CIMB-PT
Bank Niaga synergy programmes, (iv) lower LLP and (v) decline in loan charge.
Maintain BUY on BCHB with a target price of RM13.35.