Bumiputra-Commerce Holdings - ROE to hit 18% by 2011

ROE to hit 18% by 2011. Bumiputra-Commerce Holdings’ (BCHB) 2009 upgrade is very much within ours and market expectation, but the surprise is the 18% ROE target for 2011, which is well over the target for 2009. We think this is achievable given the combination of strong earnings growth and capital management. As at end-Jun 09, CIMB Bank’s CAR was 12.7% and RWCR was 13.8%.

Loan growth on track. Ytd, loan growth reached 11.6%. Excluding CIMB Thai, total loan book grew about 4.5%, slightly ahead of management’s fullyear target of 8%. We expect a 10% growth (excluding CIMB Thai) for 2009. Management highlighted that CIMB Niaga’s loan growth will make a U-Turn from a contraction of 2.2% in 1H09 to a low-teen growth by end-09. Coupled with the strong approvals for mortgages, BCHB’s full-year loan growth is ontrack to meet our expectation. Strong pipeline of deals should ensure noninterest income contribution from investment and treasury operations.

Losing deposit to recent aggressive government unit trust launches. Deposit growth is likely to be behind target due to the aggressive launch of higher-yielding national unit trust funds.
CIMB Niaga to perform better in 2H09. Despite the strong 20% jump in earnings in 1H09, management expects 2H09 to be better for CIMB Niaga, with growth supported by a) much stronger loan growth with stable margin, b) synergistic benefit from the merged entity, and c) streamlining of the investment and treasury system and operation to boost non-interest income (now only at 20% of total income vs group of 40%). In 1H09, CIMB Niaga contributes about 18% of group profit before tax.

Maintain BUY with a target price of RM12.00 based on 2.3x P/BV, which is more in line with BCHB’s historical 1-year forward PE of 13.9x (based on a 10-year average). BCHB is an excellent proxy to a rising market given its higher weightage in FBM30 of 10.69% (from 5.47% previously), and its high beta.