CIMB Bank Bhd - 2009

MARC has affirmed its AA+/ MARC-1 financial institution ratings on CIMB Bank Bhd (CIMB Bank) with a stable outlook. At the same time, MARC has also affirmed all corporate debt ratings assigned to CIMB Bank with a stable outlook. The full list of the affirmed corporate debt ratings are given at the end of this section. CIMB Bank’s ratings reflect its adequate capitalisation, stable earning streams and strong business franchise as the third largest commercial bank (by assets) in Malaysia. However, the ratings remains constrained by CIMB Bank’s satisfactory but below peer asset quality, evolving track record in its current form following its domestic acquisitions and the uncertainties associated with its regional expansion into higher risk countries. The prospect of regulatory support is deemed to be high considering the bank’s importance to the domestic financial system and is also factored into the ratings.

CIMB Bank is essentially a consumer bank, with individuals accounting for 50% of loans and 29% of deposits as at September 2009 (nine months ending September 2009; 9MFY2009). The bank is 99.99% owned by CIMB Group Sdn Bhd (CIMB Group S/B), which in turn is a wholly owned subsidiary of CIMB Group Holdings Bhd (CIMB Group; formerly known as Bumiputra-Commerce Holdings Bhd). Accounting for 58% of CIMB Group’s pre-tax profits in 9MFY2009, CIMB Bank is the core entity within the CIMB Group, which has a strong presence in its domestic market in the investment banking, retail and commercial banking, and wealth management sectors. CIMB Group was formed after a series of mergers and acquisitions, which notably included acquisitions involving the erstwhile Bumiputra-Commerce Bank (BCB) in 2005 and Southern Bank in 2006. Although CIMB Group has since rationalised several operations, including an overlapping branch network, and strengthened its risk management capabilities, MARC opines that the track record of CIMB Group, which was built as a universal bank largely on acquisitions, is still evolving.

Meanwhile, the CIMB Group has also directly and through CIMB Bank increased its regional presence in recent years. As a result, the group has operations in 10 countries, including sizable operations in Indonesia, Thailand and Singapore. In Thailand, operations are conducted through CIMB Thai Bank Public Company Limited (formerly Bank Thai Public Company Limited), in which CIMB Bank has increased its initial stake of 42.13% acquired in November 2008 to 93.15% by March 2009. Additionally, CIMB Bank also acquired a 19.99% stake in China-based Bank of Yingkou in 2009. While MARC notes that these ambitious overseas expansions have enabled CIMB Bank to overcome growth limitations in its domestic market and diversify its earnings base, it has also inevitably increased its exposure to relatively risky economies and entities with relatively weak financial profiles.

CIMB Bank’s gross NPL ratio of 5.7% at end-9MFY2009, although much improved compared to the ratio of 10.2% at end-2006, remains high relative to its peers and in the local context, largely on account of legacy NPLs from BCB and domestic acquisitions. On November 25, 2009, CIMB Group announced its intention to hive off RM928 million (net book value) of legacy NPLs at CIMB Bank to a ‘regional bad bank SPV’, which is to be initially owned by CIMB Group. Although this would not have an impact on CIMB Group level financials, CIMB Bank estimates its gross NPL ratio would improve to 2.8% from the reported 5.7% at end-9MFY2009 after the transfer of the legacy NPLs. Going forward, MARC believes that the risk of renewed pressure on asset quality remains significant given the challenging operating environment. However, CIMB Bank’s stable earnings stream should enable it to manage the resulting increase in credit costs.

While CIMB Bank’s earnings base has been sustained by its broad domestic operations, its recent overseas acquisitions have yet to contribute meaningfully. The bank recorded an improved post-tax ROA of 1.17% in FY2008 (FY2007: 0.89%) on the back of a sharp gain from foreign exchange transactions and a one-off gain from capital repayment by a subsidiary. However, its earnings came under pressure during 9MFY2009 (annualised ROA of 1.06%) amid a challenging operating environment and an increase in personnel expenses to pre-2008 crises levels. With macro interest rates likely to remain at their current level into mid-2010 and the credit growth outlook still subdued, net interest income is unlikely to offer any significant boost to profitability. Improvements in CIMB Bank’s ROA would more likely depend on its ability to contain credit and operating costs.

Accounting for 73% of liabilities and equity at end-9MFY2009, deposits remain the main source of funding for the bank. Low cost deposits have remained stable at 30% of customer deposits over the past few years. Meanwhile, MARC considers the bank’s core and risk-weighted capital ratios of 13.5% and 14.0% respectively at end-9MFY2009 (FY2008: 10.9% and 14.0%, respectively) to be adequate to cushion against most normal risks.

The stable outlook on the ratings reflects MARC’s view that CIMB Bank is likely to negotiate the challenges still inherent in its operating environment, supported by its stable earnings streams, adequate capitalisation and strong franchise. An upward rating movement will likely be driven by meaningful and sustained improvements in the bank’s financial indicators, particularly asset quality and earnings performance, while maintaining its capitalisation at levels consistent with the risk profile of its business.

The full list of rated corporate debt issues affirmed with a stable outlook is as follows:

• RM5.0 billion Subordinated Debt and Junior Sukuk Programmes affirmed at AA/AAIS 
• RM4.0 billion Perpetual Non-Innovative Tier 1 Stapled Capital Securities affirmed at AA - 
• RM1.0 billion Innovative Tier 1 Capital Securities affirmed at AA -
• RM1.5 billion Subordinated Bonds affirmed at AA