CIMB Bank Berhad - 2008

MARC has assigned a rating of AA- to CIMB Bank Berhad’s (CIMB Bank) Innovative Tier 1 Capital Securities (IT-1 Securities) with nominal value of up to RM1.0 billion. The rating, which is two notches lower than CIMB Bank’s Financial Institution Rating of AA+, reflects the subordination of the IT-1 Securities relative to unsecured senior debt and subordinated debt obligations of the bank in liquidation, and the potential greater severity loss in the event of liquidation, and non-cumulative suspension of coupons in certain situations. Unless MARC’s view of relative differences among the various debt and Tier 1 security classes in default probability and recovery prospects in a liquidation scenario changes, the rating of the hybrid capital securities will stay two notches below that of the Financial Institution rating.  The rating outlook is stable.

The Financial Institution Rating of CIMB Bank, which has a total asset size of RM141.3 billion as at end-June 2008, recognizes its status as a core entity of CIMB Group Sdn Bhd (CIMB Group), the universal banking entity encompassing investment banking, consumer banking, asset management and private banking. CIMB Group ranks among the top three banking groups in Malaysia and has a strong presence in its domestic market in the investment banking, retail and commercial banking and wealth management sectors. The Financial Institution Rating is also supported by CIMB Bank’s significant domestic franchise, nationwide distribution network of 367 branches, increasing integration with the operations of the other core entities of the universal bank, the sustained improvement in the bank’s financial fundamentals, and focused management strategies.

CIMB Bank’s sustainable earnings base has been boosted by its enlarged and strengthened consumer banking franchise, extensive domestic distribution network, backed by improved and integrated processes and systems. The bank recorded a net profit of RM1.0 billion for the six month period ended June 30, 2008 (1HFY2008) (1HFY2007: RM372.3 million). Profitability of the bank was driven by several factors: increased interest income, higher fee income, lower loan loss provisioning and improved cost efficiencies. MARC also notes that its unrealized loss on its trading securities portfolio of RM344 million in 1HFY2008 was offset by an unrealised gain of RM542 million arising from its holdings of derivative financial instruments used to hedge against interest rate risk in its trading portfolio.

The strengthening of the bank’s credit risk management infrastructure in 2007 should lead to improvements in the bank’s asset quality measures. Gross and net non-performing loans (NPL) ratios declined to 7.9% and 3.6% respectively as at June 2008 from 8.6% and 4.3% respectively as at end of 2007. New NPLs have been contained at RM3.7 billion in FY2007 and RM1.6 billion in 1HFY2008. This has been complemented by vigilant debt recovery efforts with higher reclassifications of loans back to the performing category over the same periods. Recovery efforts have been intensified with NPLs in arrears 12-months or longer falling under the purview of a dedicated recovery division set up in 2007. The bank’s proposed sale of approximately RM1.1 billion of 202 NPLs to Sinesinga Sdn Bhd, a special purpose vehicle ultimately owned by the Standard Bank Group of South Africa, is expected to reduce its gross NPL ratio to approximately 6.6% by year end.

In June 2008, CIMB Group entered into a Share Purchase Agreement to acquire a 42.1% stake in BankThai Public Company Limited (BankThai). The acquisition and planned recapitalization of BankThai which could cost CIMB Bank up to RM2.0 billion would be funded by a combination of internally generated funds and new issuances of hybrid capital instruments including the proposed RM1 billion IT-1 Securities. Post-acquisition capital adequacy ratios of CIMB Bank are projected to remain robust and within its internal targets of 8% and 12.5% for its core capital and risk-weighted capital ratios respectively.

Slower domestic economic growth, reduced real household income, heightened inflation and dampened consumer sentiment will weigh on the growth of the bank’s loans and potentially impact asset quality in the bank’s consumer and business segments. Downward pressure on CIMB Bank’s financial institution and debt ratings could emerge if the bank were to exhibit a significant weakening in its financial performance and/or asset quality.

MARC is comforted by the fact that CIMB Bank has no direct exposure to the global financial market turmoil arising from the failures of several large American financial institutions.

Strengths

• 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

• Establishing itself as a regional universal banking group; and
• Execution and operational risks associated with the proposed acquisition of BankThai and the potential need for further capital support from CIMB Bank.