CIMB Bank Bhd - 2008

MARC has upgraded its long-term Financial Institution rating of CIMB Bank Berhad (CIMB Bank) to AA+ from AA and its RM667 million Irredeemable Convertible Unsecured Loan Stocks’ (ICULS) rating to AA from AA-. The upgrade reflects MARC’s expectation of continued improvement in CIMB Bank’s competitive position following the successful integration of CIMB Bank and Southern Bank Berhad (SBB) post-merger completion. Its ability to leverage on its size and scale, together with its product innovation and customer service focus will allow the bank to achieve strong organic growth, going forward. The upgrade also takes into consideration the bank’s significantly improved asset quality and its tightened approval and underwriting processes which MARC believes will be instrumental in the continuing improvement in its asset quality.

Concurrently, MARC has assigned a AA rating to the bank’s proposed issuance of up to RM1.5 billion subordinated bonds. This rating is one notch lower than its Financial Institution rating, reflecting its junior position relative to deposits and senior debt. Underpinning the ratings are the commercial bank’s leading franchise, its very strong earnings capacity, its sound capital management, and well-managed liquidity. The ratings carry a stable outlook.

CIMB Bank is the commercial banking entity within the universal banking group of CIMB Group Sdn Bhd (CIMBG), and an important component entity of Bumiputra-Commerce Holdings Berhad (BCHB), Malaysia’s second largest financial services group. CIMB Bank’s merger with SBB in November 2006 has provided the bank with a stronger and enlarged balance sheet. SBB’s niche in consumer banking, notably credit cards, complements CIMB Bank’s foothold in SME banking.

The bank’s asset quality measures have shown persistent and considerable improvement in recent years with its net non-performing loans (NPL) ratio declining from 6.3% as at end FY2006 to 4.3% as at end FY2007, edging closer to the industry average of 3.2%. The higher reserving as measured by loan loss reserves coverage ratio of 69.5% (FY2006: 56.2%) as at end FY2007 has boosted the bank’s resilience to lower than anticipated debt recoveries. CIMB Bank has also been proactive at managing its NPLs and in mid-2007 the bank created a special unit to manage NPLs which are in arrears for more than twelve months. Management’s initiatives to address asset quality concerns and credit processes prior to resuming loan growth are viewed favourably by MARC. Debt recovery has since been intensified, as reflected in improved overall asset quality metrics.

The bank recorded strong post-merger results in FY2007 with pre-tax profit increasing by 47.2% to RM1.77 billion. The higher reported net interest income and non-interest income reflect SBB’s full year consolidation into the bank as well as RM227.6 million of synergies reaped thus far from the CIMB-SBB merger. CIMB Bank also shows positive earnings trend in its consumer banking portfolio with income steadily increasing quarter-on-quarter. Having completed its integration with SBB, the bank is set to leverage on its size and scale to achieve higher growth, productivity, and hence profitability.

The bank’s capitalization is expected to be sustained by strong earnings and sound capital management. The bank’s core capital ratio and CAR for FY2007 stood at 9.3% and 12.5% respectively vis-à-vis its target capital ratios of 8.0% for Tier 1 and 12.5% for its risk weighted capital ratio. The quality of its capital is high, as reflected in the modest proportion of hybrid capital in the bank’s Tier 1 capital composition. The new issuance of RM1.5 billion subordinated bonds is with the objective of replenishing the bank’s Tier 2 capital.

Strengths

• Strong earnings momentum set to continue;
• Significantly improved asset quality measures;
• Capitalization to be sustained by strong earnings and sound capital management;
• Leading banking franchise supported by a comprehensive branch network; and
• Excellent track record of management in implementing value creation synergies.

Challenges

• To establish itself as a regional universal banking group.