CIMB GROUP HOLDINGS BERHAD - 2017

MARC has affirmed its long-term and short-term corporate credit ratings of AA+/MARC-1 on CIMB Group Holdings Berhad (CIMB Group) and accordingly affirmed its issue rating of AA on the group’s RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme. The outlook on the ratings is stable. The one-notch rating differential between CIMB Group’s long-term corporate credit rating and its Sub-Debt Programme is in accordance with MARC’s methodology.

Bursa Malaysia-listed CIMB Group is a non-operating financial holding company of CIMB Bank Bhd (CIMB Bank), CIMB Investment Bank Bhd and Indonesia-based PT Bank CIMB Niaga Tbk, all of which are held through 100%-owned CIMB Group Sdn Bhd. CIMB Group’s long-term rating of AA+ reflects its subordination to its banking subsidiaries, of which CIMB Bank remains the core operating entity, accounting for 82% of total consolidated assets as at end-June 2017 and more than 90% of dividend income historically. CIMB Bank, which is an operating bank holding company with two main subsidiaries, CIMB Islamic Bank Berhad and Thailand-based CIMB Thai Bank PLC, carries a AAA/Stable rating from MARC.

CIMB Group is Malaysia’s second-largest and ASEAN’s fifth-largest banking group with total assets of RM500.9 billion as at end-June 2017. Its domestic loans accounted for 57% of total consolidated loans, followed by Indonesia at 20%, as well as Singapore and Thailand at 9% each. For 1H2017, domestic loan growth remained strong at 8.1% y-o-y but the pace of credit expansion in Indonesia, Singapore and Thailand was subdued. As a result, CIMB Group’s consolidated loans grew slower by 5.5% y-o-y on excluding the effects of foreign exchange. The slower growth was partly due to the group’s realignment of its lending strategy including reducing exposure to the automotive and microfinance segments in Indonesia, and focusing on growing the consumer segment in Thailand and other key markets.

MARC notes that asset quality risk for CIMB Group has stabilised, as reflected by a marginal decline in the gross impaired loans (GIL) ratio to 3.21% (2016: 3.29%). The growth in any new impairments over the near term is expected to be tempered by improving economic conditions in Thailand and Indonesia. In addition, its Indonesian loan portfolio has benefitted from multiple cuts in the benchmark interest rate from 7.5% as at end-2015 to 4.5% to date.

As at end-June 2017, CIMB group’s consolidated CET1 capital ratio increased slightly to 11.9%, lower than its peers. The group’s capital position is expected to continue to be supported by its active management of risk-weighted assets which includes the recent proposed divestment of its stake in Bank of Yingkou Co Ltd as well as other non-core assets. Additionally, the group’s dividend reinvestment scheme will continue to support its capital as it has been in the past. For 1H2017, the group’s net profit rose by 37.7% y-o-y to RM2.3 billion, supported by a higher net interest income and steady impairment charges.

At the holding company level, CIMB Group’s dividend income increased by 25.4% y-o-y to RM2.0 billion in 2016 with higher dividends of RM1.8 billion from CIMB Bank. Dividend payments from CIMB Bank have remained sufficient to meet the holding company’s debt obligations. As at end-June 2017, the holding company’s debt-to-equity ratio remained unchanged at 0.43x, although total borrowings have been on a rising trend since 2015, largely due to issuances of Basel III-compliant sub-debt issuances. However, given that these issuances are invested in similar capital instruments issued by its banking subsidiaries, the debt servicing costs under the issuances have been met by cash flows from its subsidiaries. Additionally, the holding company’s debt maturity profile has remained well spread, which reduces refinancing risks.

The stable outlook reflects MARC’s expectation that the group’s overall credit profile will be maintained against a moderate domestic and regional macroeconomic outlook. The ratings remain driven by the performance metrics of the group’s key subsidiaries, and therefore any change in their credit profile would impact CIMB Group.

Major Rating Factors

Strengths

• Well-established domestic banking subsidiaries; and
• Steady track record of dividend flow from key subsidiary CIMB Bank.

Challenges/Risks

• Interest margin pressures on banking subsidiaries; and
• Strengthening regional operations.