CIMB Bank Bhd - 2010

MARC has upgraded its long-term financial institution rating on CIMB Bank Bhd (CIMB Bank) to AAA from AA+, reflecting the bank’s resilient earning streams, improved asset quality, adequate capitalisation and strong business franchise in Malaysia. MARC had earlier placed the long term financial institution rating of CIMB Bank on MARCWatch Positive on April 20, 2010 on expectation that the bank was likely to report sustained improvements in its financial performance despite the downturn in the Malaysian economy over the last two years. Meanwhile MARC has also affirmed CIMB Bank’s short-term financial institution rating at MARC-1. MARC opines that the prospect of regulatory support for CIMB Bank is deemed to be high considering the bank’s importance to the domestic financial system and is factored into its ratings. Further to the upgrade of CIMB Bank’s long-term financial institution rating, corporate debt issuances by the bank have also been upgraded; a full list of such issuances is given at the end of this section. The outlook on the ratings is stable.

CIMB Bank is the third largest commercial bank in Malaysia by asset size. The bank has a significant retail franchise with individuals accounting for 52% of bank loans and 31% of deposits as at end-FY2009. CIMB 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. Accounting for 51% of CIMB Group’s pre-tax profits in FY2009, CIMB Bank is the core entity within the CIMB Group, which has a strong presence in its domestic market in investment banking, retail and commercial banking, and wealth management. 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. CIMB Bank has since rationalised several operations, including an overlapping branch network, and strengthened its risk management capabilities. The initial integration risks of the domestic acquisitions appear to have been well managed, as evident by the bank’s improving financial performance.  The successful acquisitions have also had a positive impact on the bank’s franchise value and operational efficiencies.

With an aim of becoming a universal banking group in Southeast Asia, CIMB Group has directly and through CIMB Bank increased its regional presence in recent years. During FY2009, CIMB Bank acquired a 19.99% stake in China-based Bank of Yingkou and completed the acquisition of CIMB Thai Bank Public Company Limited; CIMB Bank currently holds 93.15% of the latter’s equity stake. While MARC notes that these ambitious overseas expansions have heightened the risks profile of CIMB Bank at the consolidated level,  MARC  opines  that  overseas  investments  at  CIMB Bank level is relatively  small compared to its balance sheet size. In any case, MARC understands that internal reorganisation is likely to result in the separation of overseas acquisitions from CIMB Bank, a foreseeable impact of which would be a Malaysia-centered geographic operating profile with reduced exposure to other banking markets.

CIMB Bank’s earnings came under pressure in FY2009 amid the slowdown in the domestic economy, with net profits declining by 12.5% to RM1.5 billion resulting in a drop of ROA to 0.96% from 1.17% in FY2008. The weaker, albeit better than expected, financial performance was mainly attributable to the bank’s escalating operating costs to support its business expansion, and the absence of a one-off capital repayment from a subsidiary of RM249 million in FY2008. Net of the one-off gain in FY2008, its ROA would have been lower at 1.00%.

Meanwhile, sharper improvements were evident in CIMB Bank’s asset quality following the disposal of RM925 million (net book value) legacy NPLs to Southeast Asia Special Asset Management Berhad, a subsidiary under CIMB Group Holdings Berhad. This resulted in the bank’s NPL ratio improving to 2.6% at end-FY2009 from 5.8% at end-FY2008. In addition, the bank’s loan loss reserves coverage stood at an improved 126.4% (2008: 89.2%). This coupled with its adequate capitalisation, as reflected by the bank’s total capital ratio of 15.1%, is expected to absorb most normal risks, in the unlikely event of a late spike in delinquencies as a result of the economic downturn. MARC expects CIMB Bank’s performance to further improve on the back of its leading and defensible competitive position and improved risk management abilities.

Overseas investments parked at CIMB Bank are yet to make any meaningful contributions towards the bank’s profits. The bank’s main overseas subsidiary CIMB Thai reported a small profit of THB54.9 million (approximately RM6 million) in FY2009 thanks to higher gains from disposal of investments, after incurring losses for the past three years. While CIMB Thai’s asset quality remains a concern due to its legacy asset quality problems (NPL ratio: 14.9% at end-2009), CIMB’s expertise in credit risk management should enable some improvements over the medium term.

The stable outlook on the ratings reflects MARC’s expectations 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.

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

1. RM5.0 billion Subordinated Debt and Junior Sukuk Programmes upgraded to AA+/AA+IS from AA/AAIS
2. RM4.0 billion Perpetual Non-Innovative Tier 1 Stapled Capital Securities upgraded to AA  from AA-
3. RM1.0 billion Innovative Tier 1 Capital Securities upgraded to AA from AA-
4. RM1.5 billion Subordinated Bonds upgraded to AA+ from AA 

Major Rating Factors

Strengths

Challenges