CREDIT ANALYSIS REPORT

CIMB Bank Bhd - 2013

Report ID 4590 Popularity 2112 views 75 downloads 
Report Date Aug 2013 Product  
Company / Issuer CIMB Bank Bhd Sector Finance - Financial Institution
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Rationale

MARC has assigned a final rating of AA+ to CIMB Bank Berhad’s (CIMB Bank) RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme (Subordinated Debt Programme). Concurrently, MARC has also affirmed the long-term and short-term financial institution (FI) ratings on CIMB Bank at AAA/MARC-1 and the ratings of all corporate debt issuances by the bank; the full list of these issuances is given at the end of this section. The outlook on the ratings is stable.

The new programme is rated one notch below the bank’s long-term FI rating which mirrors MARC’s standard notching practice for bank-subordinated debt with no coupon deferral mechanism issued by a AAA-rated bank, in spite of its loss absorption feature. The rating principally reflects MARC’s assessment of the bank’s propensity to default on the rated obligation, which the rating agency considers to be the same for a non-Basel III compliant subordinated instrument at the bank’s current level of financial strength. The subordinated debt issued under the programme are expected to be eligible for Tier 2 capital treatment under Bank Negara Malaysia’s (BNM) Basel III framework and are structured to fully absorb losses at the time the bank becomes non-viable. More specifically, the instruments have a provision that requires such instruments, at the option of the regulator, to be written off when it is determined that without the write-off of the subordinated debt or a public sector injection of capital, the bank would become non-viable.

All of CIMB Bank’s existing subordinated debt and hybrid securities are also notched down from the bank’s FI rating in accordance with MARC’s general notching policy (please refer to MARC’s Analytical Insights “Recent Developments in Rating of Hybrid Securities”, published on May 12, 2010 in www.marc.com.my). The affirmed FI ratings reflect CIMB Bank’s strong market position in the domestic banking sector, robust earnings generation, sound risk management, strong capital adequacy and systemic importance in the domestic banking sector. The bank’s franchise linkages with other entities within CIMB Group Holdings Berhad’s (CIMB Group Holdings) universal bank are also factored in CIMB Bank’s ratings.

CIMB Bank, the parent and operating entity of CIMB Bank Group, is the second largest commercial bank group in Malaysia based on assets. The bank’s strong and sustainable domestic franchise in retail and commercial banking is supported by its extensive nationwide branch network and evidenced by sizeable market shares in residential mortgages and deposits. CIMB Bank’s efforts to broaden its franchise regionally and to become a leading regional consumer and commercial bank have  seen the bank expand rapidly through organic and inorganic growth. MARC acknowledges the group’s solid track record of  integrating the acquired institutions and accordingly expects further regional expansion to be managed prudently such that there is no material deterioration in its key credit metrics such as profitability and cost efficiency, asset quality and regulatory capital ratios.

CIMB Bank’s gross impaired loans ratio declined to 3.33% in 2012 (2011: 3.95%) mainly due to lower new impaired loans as opposed to write-backs, write-offs and reclassification of loans as non-impaired. MARC notes that the bank’s loan loss coverage ratio of 78.7% as at end-2012 is lower than the banking sector’s 100.4% as of comparable date while the bank’s gross impaired loans ratio is higher than the banking sector’s 2.0%. The bank’s loan growth in 2012 was similar to 2011’s level at 8.4% (2011: 8.6%) on account of resilient demand for residential and non-residential mortgages. The rating agency expects residual risks around CIMB Bank’s asset quality to remain manageable, given the broadly supportive domestic economic conditions, no apparent change in the bank’s credit risk appetite, as well as its proactive monitoring. The bank’s funding profile remains healthy with deposit growth mostly keeping pace with credit growth, as reflected by its loan to deposit ratio of 78.2% as at-end 2012 (2011: 77.7%).

CIMB Bank Group’s pre-tax profit rose by 14.2% to RM3.9 billion in 2012, mainly on the back of higher earnings from its corporate banking, treasury and markets segment. MARC notes that income from treasury operations account for an increasing share of the group’s earnings which poses the potential for greater earnings volatility to the group’s consolidated results. At the bank level, CIMB Bank posted lower pre-tax profit and net profit of RM3.1 billion and RM2.5 billion respectively for 2012, reflecting lower dividend income from subsidiaries and some net interest margin (NIM) compression. The bank also posted higher operating expenses which contributed to a rise in its cost-to-income ratio to 51%, which signals short-term pressure on its cost efficiency. The decline in the bank’s pre-provision pre-tax profit to RM3.1 billion in 2012 from RM3.5 billion in the previous year, however, was moderated by lower allowances for credit losses.

CIMB’s capitalisation remains strong on account of the bank’s sound internal capital generation. As at end-March 2013, the bank’s Common Equity Tier 1, Tier 1 and total capital ratios stood at 9.6%, 11.7% and 12.6% respectively. MARC’s expectation for further improvement in the bank’s capital adequacy level is supported by reinvestment of the excess cash dividend from CIMB Group Holdings into CIMB Bank pursuant to the parent entity’s dividend reinvestment scheme. The bank’s issuance of this Basel III-compliant debt is expected to bolster its capital adequacy further.

The stable outlook on the ratings reflects MARC’s expectations that CIMB Bank will sustain its strong capitalisation and market position, reduce its gross impaired loan level and maintain its profitability amidst anticipated lower NIM in 2013.

The full list of CIMB Bank’s corporate debt issuances, rated and affirmed by MARC with a stable outlook is as follows:

  • RM5.0 billion Subordinated Debt & 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

Major Rating Factors

Strengths

  • Strong retail and commercial banking franchise in the domestic market;
  • Internal capital generation supported by stable and recurring earnings;
  • Improving asset quality and prudent loan growth;
  • Strong capital ratios and sound funding profile; and
  • Systemic importance in Malaysia.

Challenges

  • Increasing competition within a relatively saturated home market; and
  • Establishing itself as a leading regional universal banking group.
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