CIMB Bank Bhd - 2008

MARC has assigned a rating of AA- to CIMB Bank Berhad’s (CIMB Bank) up to RM4.0 billion Nominal Value Non-Innovative Tier 1 Stapled Securities (Stapled Securities) Programme. The rating carries a stable outlook. The funding programme entails issuance of Stapled Securities comprising non-cumulative perpetual capital securities (Capital Securities) issued by CIMB Bank stapled to an equivalent amount of subordinated notes issued by wholly-owned CIMB Bank subsidiary, Commerce Returns Berhad (Commerce Returns). The Capital Securities are callable no earlier than five years from the date of issuance with approval from Bank Negara Malaysia (BNM) and qualify as Non-Innovative Tier-1 (Non-IT1) capital. Proceeds from the issue of the subordinated notes by Commerce Returns will be on-lent to CIMB Bank for its working capital and general banking purposes pursuant to inter-company subordinated loan, which mirrors the terms and conditions of the subordinated notes. Proceeds from the issuance of Capital Securities, meanwhile, will be used to acquire from subordinated noteholders, the right to require assignment of the subordinated notes to the bank (Note Assignment Right) upon the occurrence of an Assignment Event under a Note Assignment Agreement.

The rating of the Stapled Securities is two notches lower than MARC’s Financial Institution Rating on CIMB Bank of AA+. The Stapled Securities share the same characteristics as preference shares, with no fixed maturity, and similar loss-absorbing characteristics and ranking in winding-up proceedings. Upon occurrence of an Assignment Event, the Stapled Securities can be ‘unstapled’, leaving the holder with only the Capital Securities. Assignment Events listed under the terms and conditions of the issuance include breach of minimum regulatory capital requirements by CIMB Bank; the appointment of an administrator to the bank in connection with a restructuring and the commencement of proceedings to wind-up the bank or Commerce Returns.

The assigned rating reflects the Stapled Securities’ subordinated position relative to unsecured senior debt and subordinated debt obligations of the bank and equal ranking with CIMB Bank’s existing Innovative Tier-1 (IT1) capital securities (rated AA-) in winding-up proceedings. The rating also incorporates the bank’s strong market standing in its domestic market, sound asset quality, robust capital adequacy as well as strong ability to mobilize deposits and access capital market funding. The rating also incorporates the prospect of regulatory support given the bank’s importance to the domestic financial system.

CIMB Bank is 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.

CIMB Bank’s sustainable earnings base has been boosted by its broad domestic franchise backed by its extensive nationwide distribution network of 367 branches as well as improved and integrated processes and systems. The bank recorded a net profit of RM1.3 billion for the nine months ending September 30, 2008, up from RM753.8 million for the corresponding nine-month period a year earlier. Profitability of the bank was driven by several factors: increased interest income, higher fee income, lower loan loss provisioning and improved cost efficiencies arising from various efficiency-generating initiatives.

The bank has strengthened its credit culture and credit risk management infrastructure in recent years. Although it has a higher level of non-performing loans (NPLs) relative to the banking system as a consequence of earlier legacy asset quality problems, CIMB Bank continues to demonstrate improvement in its asset quality and progress in NPL resolution. Gross and net NPL ratios declined to 7.5% and 3.4% respectively as at end-September 2008 from 8.6% and 4.3% respectively as at end of 2007. New NPLs have been contained at RM3.7 billion for FY2007 and RM2.3 billion for the nine months ended September 2008. The bank has made adequate provisions for problem accounts and continues to actively pursue collection of NPLs in addition to disposing off the NPLs. Capital adequacy ratios of CIMB Bank continue to be maintained within its internal targets of 8% and 12% for its core capital and risk-weighted capital ratios respectively. The bank has been increasing the Innovative and Non-Innovative components of its Tier-1 capital. MARC is of the view that the integrity of the bank’s Tier-1 capital will be preserved by the BNM-imposed limits of 35% and 15% of total eligible Tier-1 capital for Non-IT1 and IT1, respectively. The bank’s relatively low appetite for credit and market risks provides assurance that its capital levels will remain strong in the context of weaker anticipated economic and financial conditions in coming quarters.

The stable outlook for the rating reflects MARC’s view that although conditions in the wider economy will weigh heavily on the bank’s financial performance and/or asset quality, the quality of the bank’s franchise, improved earnings capacity and its effective management of credit and market risks should position it well to cope with the more challenging operating environment ahead.

Strengths

• Leading banking franchise supported by a comprehensive branch network;
• Consistent profitability;
• Effective management of credit and market risks; and
• Well managed liquidity and capital structure.

Challenges

• Establishing itself as a regional universal banking group; and
• Risks associated with its fairly active acquisition strategy.