Bumiputra-Commerce Holdings - Upside surprise

Strong 2Q performance, well supported by:

a) Resilient net-interest income, backed by a larger loans base. Based on the mortgage applications and approvals in the pipeline, management is comfortable of achieving its mortgage growth target of 12%. But we think there is a upside bias with the improved property sales momentum.

b) Higher non-interest income with more vibrant capital markets and fees from treasury products. More treasury fees to expect from its enlarged presence in Indonesia and also from Bank Thai. This is proven by its recent breakthrough in Thailand in co-managing the placement of Toyota Leasing’s bonds. Although the financial impact is marginal, it is definitely a good start for its regional presence.

c) Lower operating cost with the bank’s ongoing branch rationalisation exercise. Potential upside could come from better property sales and continued robust activities in the capital and debt markets.

Strong 1H09 performance could lead to upward revision of profit target. The strong 1Q09 net profit (+14.8% yoy, +92.5% qoq) and expected strong 2Q performance would likely lead to an upward revision of its profit target for 2009. After raising our earnings forecasts, we now expect ROE of 13.3% for 2009, higher than the 12.5% guided by management in early-09.

Management may raise its ROE target in the upcoming 2Q results announcement in Aug 09.

We raise our EPS forecasts by 7% to 64.5sen for 2009, by 11% to 76.6sen for 2010 and by 7% to 88.5sen for 2011, to reflect the upward revisions to non-interest income and lower operating costs.

Maintain HOLD with higher fair price of RM8.35. Our revised fair price of RM8.35 (from RM8.00), which implies a target P/B of 1.61x, is derived from the Gordon Growth Model (ROE: 15%, required return: 10% and sustainable growth rate: 6%). Besides the strong earnings performance, BCHB will also benefit from FBM30, which make it the largest market cap index stocks. Its latest foreign shareholding was 32.4% as at end-May 09 (end-Apr 09: 31.6%).