CIMB Bank Bhd - 2011

MARC has affirmed its long- and short-term financial institutions ratings of CIMB Bank Berhad (CIMB Bank) at AAA/MARC-1, reflecting the bank’s established franchise in Malaysia and strong credit profile, which is well supported by sound capital and liquidity management and resilient earnings streams. Considering the size as well as the bank’s systemic importance to the domestic financial system (11% of systemic deposits as at end-2010), MARC opines that regulatory support is high and accordingly factors it into the rating. At the same time, MARC has also affirmed the ratings of all corporate debt issuances by the bank: a full list of these issuances is given at the end of this section. The outlook on the ratings is stable.

With an asset base of RM181 billion, CIMB Bank is the third largest commercial bank in Malaysia. The ultimate holding company, CIMB Group Holding Berhad, is the second largest financial service group in Malaysia and the fifth largest in Southeast Asia by asset size. The group has expanded at a fast pace in recent years, especially through several acquisitions, including those of Bumiputra Commerce Bank in 2005 and Southern Bank in 2006. The group subsequently facilitated its regional expansion plan through acquisitions or mergers in Indonesia and Thailand with the aim of becoming a leading regional universal banking group. While MARC notes the increasing contribution from the group’s presence in developing markets, especially Indonesia, the rating agency is also of the view that such expansion also poses increased exposures to economies with higher country risk profiles than Malaysia.  As at end-2010, earnings from overseas accounted for 48% of group profits (FY2009: 25%), with PT Bank CIMB Niaga Tbk (CIMB Niaga), the group’s commercial banking arm in Indonesia, being the main overseas contributor. MARC opines that continued aggressive expansion in developing markets may impact the group’s consolidated credit profile over time.  

CIMB Bank, being the core entity within the group, has a smaller overseas exposure (compared with other group entities) and it benefits from strong systemic support as Malaysia’s third largest commercial bank. As at end-1H2011, the bank’s loan book remained concentrated on property loans, which accounted for 42.7% of loans (2010: 41.7%; 2009: 38.7%), followed by working capital financing (1H2011: 22.1%; 2010: 22.5%). MARC understands that the business from Singapore, although still small, has grown at a fast pace since the launch of the retail banking business in 2009.

On a separate note, the bank saw its impaired loan ratio increasing to 4.3% at end-1H2011 from the reported  gross non-performing loan ratio of 2.6% at  end-2009 with the adoption of  FRS 139 with more stringent impairment recognition rules; the Malaysian banking sector average at end-June 2011 was 2.9%. The construction sector and working capital financing appeared to be weaker in quality, accounting for 63.6% of total impaired loans as at end-1H2011. While MARC notes the subjectivity involved in the classification of impaired loans under the current regulatory framework, the rating agency also notes that there could be an increase in impaired loans going forward considering the rather clouded economic outlook. Meanwhile, loss reserves for impaired loans stood at 77.6% at end-1H2011 (2010: 84.8%), which was still lower than the Malaysian banking sector average of 94.8% at end-June 2011 (2010: 88.4%). 

CIMB Bank reported a 30% increase in its net profits in 2010 supported by an expansion of its loan book. Consequently the bank’s return on assets improved to 1.16% in 2010 from 0.96% in 2009. The net interest margin was sustained at 2.6% because competition-driven pressure on lending rates was offset by lower funding costs. At the same time, write-back of impairment charges for investments as well as higher foreign exchange gains contributed to higher revenue for the bank. Meanwhile, loan loss provisioning charges declined by 31% in 2010 despite higher impaired loans as a result of the adoption of FRS139. Moving into 1H2011, the bank posted a very significant increase in profitability which resulted in a return on assets and return on equity of 1.88% and 20.2% respectively. MARC notes that this was enabled by higher dividends from its subsidiaries and lower loan loss reserves. 

CIMB Bank’s capitalisation is strong with a capital adequacy ratio of 14.6% as at end-1H2011, which was comparable to the banking sector average of 14.8% in the same period. The bank has always been prudent with its capital management and maintains a comfortable buffer against the minimum regulatory requirement of 8%. In addition, the bank’s migration in 2010 to the Internal Rating-based approach for credit risk has enhanced the bank’s internal capital management as the model allows management to have greater understanding of the risk drivers behind the bank’s business strategies. Meanwhile, CIMB Bank’s funding position has been stable as reflected by the loan-deposit ratio of 75.4% as at end-1H2011 (2010: 77.5%). Aggressive promotional activities during the year have resulted in the growth of the bank’s customer deposits by 6.2% in 2010 and an even sharper 12.3% during 1H2011. Low-cost deposits now account for 34.5% of total customer deposits (2010: 33.4%; 2009: 31.8%).

The stable outlook on the ratings reflects MARC’s expectations that CIMB Bank’s fundamental credit profile will remain strong supported by its adequate capitalisation as well as improved risk management, which should enable it to comfortably face most normal risks in the current volatile environment.

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+/AA+IS
• 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+

Major Rating Factors

Strengths

Challenges