MARC Ratings has assigned a final rating of MARC-1 to CGS-CIMB Securities Sdn Bhd’s (CGS-CIMB) Commercial Papers (CP) Programme of up to RM1.0 billion in nominal value. Concurrently, the rating agency has assigned a non-bank financial institution (NBFI) rating of AA to CGS-CIMB with a stable outlook.

CGS-CIMB’s growing business profile in the domestic stockbroking industry as well as its strong financial and managerial resources underpin the ratings. Additional resources may also be extended, if required, by China Galaxy Securities Co., Ltd. (CGS) via its subsidiary, CGS International Holdings Limited (CGI) (formerly known as China Galaxy International Financial Holdings Limited) whose 75% indirect stake in CGS-CIMB currently would increase to 100% in the near term pending regulatory clearance. CGS, a Chinese government–owned entity, is a key brokerage firm in China with an asset size of RMB690.5 billion (about RM443.3 billion) as at end-June 2023. 

MARC Ratings views parental support would be forthcoming to CGS-CIMB as the stockbroker strengthens its franchise domestically as well as in the region. The MARC-1 rating has also factored in the improving liquidity and funding position of CGS-CIMB which has available banking lines standing at RM1.4 billion as at end-June 2023. These strengths notwithstanding, the susceptibility of CGS-CIMB’s performance to the volatility of stock market conditions remains a key moderating factor. 

CGS-CIMB, which commenced operations in July 2019, has a branch network of 30 currently and commands one of the largest market shares among stockbroking firms at 11.7% of Bursa Malaysia’s total trading value as at end-June 2023. The growth has been supported by investments in infrastructure and human resources with a rapid growth in the number of personnel to 900 including remisiers. However, stockbrokers are reliant on the relationships between key personnel and investors to generate business flow, particularly for the institutional segment. In this regard, the rating agency opines that CGS-CIMB has the wherewithal to cultivate new as well as maintain existing relationships with institutional investors.

MARC Ratings understands that CGS-CIMB is emulating its parent’s business strategy to expand into fund and wealth management (through its subsidiary, CGS-CIMB Wealth Management Sdn Bhd), among others, by way of cross-listing exchange-traded funds and launching unlisted funds that would provide mitigation to the volatility of trading activities. The stockbroker also plans to offer investment banking services in 2024 after obtaining a corporate finance licence (subject to regulatory approval), expand its Shariah-compliant products and widen its expertise in environmental, social, and governance advisory work both locally and regionally.

For 1H2023, total revenue increased by 5.2% y-o-y to RM144.0 million which led to higher pre-tax profit of RM35.1 million (1H2022: RM27.1 million). In terms of revenue contribution, margin financing has steadily grown in recent years, accounting for 35.0% in 1H2023 (1H2022: 23.2%). The improvement in the cost-to-income ratio, which stood at 71.5% (2022: 88.3%), reflects more diversified revenue streams. Capital adequacy ratio stood at 21.7x as at end-June 2023, offering headroom for business growth. The expected initial drawdown of up to RM300.0 million under the CP programme will be utilised for working capital purposes. 

Any upgrade of the NBFI rating would factor in a seasoned operating track record, substantial improvement in revenue composition that mitigates earnings volatility and strengthening of key parameters.