CIMB Islamic Bank Bhd - 2014

MARC has affirmed CIMB Islamic Bank Berhad’s (CIMB Islamic or the bank) financial institution (FI) ratings at AAA / MARC-1/Stable and concurrently affirmed its rating on CIMB Islamic’s RM2.0 billion Tier 2 Junior Sukuk (Junior Sukuk) programme at AA+IS /Stable. The one-notch rating differential between the long-term FI rating of CIMB Islamic and the Junior Sukuk programmes reflects the subordination of the programmes to the bank’s deposits and other senior unsecured debt.

CIMB Islamic’s FI ratings are equalised to its parent CIMB Bank’s ratings premised on MARC’s view of the Islamic bank’s status as a core operating subsidiary of CIMB Bank. MARC has rated CIMB Bank’s FI ratings at AAA/MARC-1/Stable based on the bank’s strong market position and systemic importance in the domestic banking sector as well as sustained earnings generation and sound risk management. CIMB Bank will become an enlarged banking entity should the ongoing merger process of CIMB Bank’s parent CIMB Group Holdings Berhad (CIMB Group), RHB Capital Berhad and Malaysian Building Society Berhad (MBSB) be completed. The proposed merger is subject to the completion of due diligence by the parties involved, as well as regulators’ and shareholders’ approvals.

In respect of the ratings on CIMB Islamic, MARC views favourably the Islamic bank’s strategic fit with the overall banking activities of CIMB Bank and the high degree of operational integration between them. With shared branding, CIMB Islamic leverages on the resources and infrastructure of its parent by utilising its parent bank’s wide branch network to run its operations. CIMB Islamic is the second-largest Islamic bank in Malaysia in terms of assets and mortgage financing; it accounts for 11% of the Islamic banking system’s assets and 13% of the mortgage financing market as at end-September 2014. CIMB Islamic has a strong position in bringing domestic and global sukuk issuances to the market through its close alliance with related entity CIMB Investment Bank Berhad. MARC also expects the continued strengthening of CIMB Group’s universal banking platform in the region to further increase the bank’s franchise value and regional presence. 

CIMB Islamic posted higher net profit by 16.3% year-on-year in 9M2014, supported by higher non-financing income and moderated operating expenses. Non-financing income increased to RM67.9 million (9M2013: RM39.8 million) due to improved Islamic capital market activities. Meanwhile, operating expenses declined, as reflected by the lower cost-to-income ratio of 43.7% (9M2013: 50.0%), attributed to the lower personnel costs following the group-wide downsizing exercise in 2013. Nonetheless, the bank’s returns on asset and equity measures have not materially strengthened, standing at 0.8% and 13.6% respectively on an annualised basis (9M2013: 0.7%; 13.8%).

MARC also observed that the bank’s impairment charges rose to RM65.1 million in 9M2014 (9M2013: RM47.1 million) and could increase further should the bank undertake measures to strengthen its allowance coverage ratio. CIMB Islamic’s allowance coverage ratio declined to 94.5% while the gross impaired financing ratio rose slightly to 1.2% as at end-September 2014 (end-December 2013: 131.1%; 0.9%). The potentially higher impairment charges and slower financing growth could continue to weigh on profitability.

CIMB Islamic’s gross financing contracted by a marginal 1.1% to RM35.0 billion as at end-September 2014 from year-end 2013. MARC expects the bank’s financing growth to remain weak for 2014 due to the impact from tightening household financing measures and monetary policy imposed by Bank Negara Malaysia. The contracted financing portfolio resulted in a decline in the bank’s gross financing-to-customer deposit ratio to 84.0% as at end-September 2014 (end-December 2013: 92.1%). CIMB Islamic’s funding profile is also supported by its good access to the interbank market as well as funds from its parent bank via the restricted profit sharing investment account (RPSIA), which has an outstanding amount of RM1.9 billion as at end-September 2014. The bank’s capital ratios remain higher than regulatory requirements: common equity Tier 1 (CET1), Tier 1 and total capital ratios stood at 10.4%, 11.3% and 14.6% respectively.

The ratings and stable outlook on CIMB Islamic are underpinned by the ratings and stable outlook on its parent bank. Any adjustments to the ratings and outlook are susceptible to changes in the parent bank’s willingness and capacity to provide support.

Major Rating Factors

Strengths

• Core subsidiary of CIMB Bank;
• Strong market position in the domestic Islamic banking sector; and
• Ability to leverage on CIMB group’s franchise value, extensive network and centralised risk governance.

Challenges

• Competitive domestic banking environment; and
• Sustained pressure on profitability metrics.