CIMB ISLAMIC BANK BERHAD - 2016

MARC has affirmed CIMB Islamic Bank Berhad’s (CIMB Islamic) financial institution (FI) rating at AAA / MARC-1. Concurrently, the rating agency has affirmed its rating of AA+_IS on CIMB Islamic’s RM5.0 billion Basel III-compliant Tier 2 Junior Sukuk programme and RM2.0 billion Tier 2 Junior Sukuk programme. The one-notch rating differential between the two ratings reflects the subordination of the programmes to the bank’s deposits and other senior unsecured debt. The outlook on the ratings is stable.

CIMB Islamic is a wholly-owned subsidiary of CIMB Bank Berhad and serves as its parent’s Islamic banking arm, supported by shared infrastructure and branding. Based on these factors, MARC has equalised CIMB Islamic’s FI ratings to those of CIMB Bank Berhad, which carries FI ratings of AAA/MARC-1/Stable. As at end-June 2016 (1HFY2016), CIMB Islamic accounted for 16.5% and 15.8% of CIMB Bank’s consolidated earnings and total consolidated assets of RM1.7 billion and RM383.8 billion respectively.

CIMB Islamic has maintained its position as the second-largest domestic Islamic bank, with a 10.9% market share of Islamic banking assets as at end-June 2016. Its financing growth has weakened slightly to 10.2% y-o-y (2015: 10.8%). Given weakening economic conditions, financing growth could slow down further over the near term. MARC notes the bank’s financing growth has continued to lag the domestic Islamic banking industry’s average of 12.2%, implying a more cautious stance to lending. As at end-June 2016, the bank’s gross impaired financing ratio rose to 1.22% from 1.05% at end-2015, with the uptick due largely to a troubled single large corporate account. The higher impairment coupled with lower allowance resulted in the bank’s financing loss allowance coverage declining sharply to 59.9% as at end-June 2016 from 84.9% in FY2015 (Islamic industry average: 85.0%).

CIMB Islamic maintains a strong regulatory capital position that provides some buffer against increased credit risks. As at end-June 2016, the bank’s common equity Tier 1 (CET1) capital adequacy ratio (CAR) and total CAR stood at 13.6% and 16.8% respectively (2015: 12.7%; 16.3%). The bank’s improved total CAR ratio was mainly on the back of a 3.7% increase in the total capital base, supported by internal capital generation. The bank’s capital adequacy is supported by its parent CIMB Bank through the Restricted Profit Sharing Investment Account (RPSIA) which absorbs credit risk. MARC considers CIMB Bank to be able to provide support to its Islamic bank subsidiary’s capital given the parent’s strong total capital ratio of 15.9% as at end-June 2016.

For 1HFY2016, the bank’s pre-tax pre provision profits increased by 17.2% y-o-y to RM361.7 million (1HFY2015: RM308.5 million), due mainly to higher net financing and non-financing income as well as a decline in operating expenses. MARC also notes that the bank’s funding costs during the period remained relatively unchanged, resulting in a sustained net financing margin of 1.9% (FY2015: 2.0%). Net profit was registered at RM278.2 million (1HFY2015: RM189.6 million). The bank’s profitability has also been supported by a write-back of RM6.2 million compared to impairment charges of RM51.2 million in 1HFY2015.

CIMB Islamic’s funding profile has been supported mainly by customer deposits which made up 94.8% of total deposits as at end-June 2016 (2015: 97.9%). Customer deposits rose by 5.2% to RM46.5 billion from RM44.2 billion as at end-December 2015. Consequently, the financing-to-customer deposit ratio slightly improved to 84.0% as at end-June 2016 (end-FY2015: 85.0%). Additionally, the bank’s funding was also supported by its parent through the RPSIA which increased to RM3.3 billion from RM2.7 billion in 2015.

The ratings on CIMB Islamic and its programmes reflect the credit strength of its parent CIMB Bank given the nature of the parent-subsidiary relationship. Any revision in MARC’s assessment of this relationship could lead to a change in the bank and its programmes’ ratings.

Major Rating Factors

Strengths

• Major player in the domestic Islamic banking sector; and
• Benefits as a key subsidiary of CIMB Bank and its franchise value and risk governance.

Challenges

• Competitive domestic banking environment.