CIMB ISLAMIC BANK BERHAD - 2017

MARC has assigned a final rating of AAA_IS to CIMB Islamic Bank Berhad’s (CIMB Islamic) proposed RM10.0 billion senior Sukuk Wakalah Programme (Sukuk Wakalah). The rating outlook is stable. The rating on the Sukuk Wakalah reflects its seniority and is equalised to CIMB Islamic’s financial institution (FI) ratings which MARC has recently affirmed at AAA/MARC-1/Stable. The Sukuk Wakalah will provide an additional platform to raise liquidity for the bank should it need to strengthen its funding base.

Wholly owned by CIMB Bank Berhad (CIMB Bank), CIMB Islamic is the Islamic banking arm of its parent bank with which is closely integrated operationally. Accordingly, the FI ratings on CIMB Islamic have been equalised with that of its parent CIMB Bank (AAA/Stable). As at end-September 2017, CIMB Islamic accounted for 20.2% of its parent’s consolidated loans and contributed 15.1% to CIMB Bank’s consolidated pre-tax profit. With total assets of RM77.2 billion, CIMB Islamic accounted for 12.3% of Malaysia’s Islamic banking system assets as at end-September 2017.

For 9M2017, the bank registered a financing growth of 13.6%, outpacing the industry average of 7.6%. Financing growth during the period was largely driven by the retail and SME segments which was in line with the group’s strategic direction. Gross impaired financing (GIF) ratio declined to 0.70% as at end-September 2017 from 0.98% as at end-2016, largely owing to write-offs and write-backs. The decline in GIF led to an improved financing loss allowance coverage ratio of 75.9% from 62.4% at end-2016.

For 9M2017, net financial margin (NFM) declined to 1.73% largely due to stiff competition for financings and deposits. MARC views the prevailing intense competition among Islamic banks would continue to weigh on the bank’s NFM going forward. MARC expects CIMB Islamic to be able to maintain stable earnings in 2018 through growing its net financing income as seen in 9M2017. The impact of the lower NFM was more than offset by higher asset volumes in 9M2017. Still, the credit profile of the underlying financing portfolio economic conditions will remain important drivers of the bank’s earnings trajectory in the context of a potential hike in the benchmark overnight policy rate (OPR) and the country’s present high level of household indebtedness. CIMB Islamic’s funding and liquidity profile remained sound, with a financing-to-fund ratio of 79.2% as at end-September 2017 (2016: 81.4%).

CIMB Islamic’s Common Equity Tier 1 capital ratio declined to 13.0% as at end-September 2017 (end-2016: 14.7%), mainly due to higher risk-weighted assets (RWA) on financing expansion. Nonetheless, MARC expects CIMB Islamic’s capital position to remain sound, supported by internal capital generation and a restricted profit sharing investment account (RPSIA) with its parent as it has historically been the case. As at end-September 2017, total RWA for credit risk absorbed by the parent increased to RM4.7 billion (2016: RM3.2 billion). Additionally, the bank would be able to utilise its existing Basel III Tier-2 Junior Sukuk Programme to support its capital position when required.

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

CIMB Islamic’s existing sukuk issuances, rated and affirmed by MARC with a stable outlook are as follows:

• RM5.0 billion Tier 2 Junior Sukuk programme at AA+_IS
• RM2.0 billion Tier 2 Junior Sukuk programme at AA+_IS

Major Rating Factors

Strengths

• Well-established franchise in the domestic Islamic banking industry; and
• Ability to leverage on its parent CIMB Bank’s infrastructure and resources.

Challenges/Risks

• Competitive domestic banking environment.