CREDIT ANALYSIS REPORT

CIMB ISLAMIC BANK BERHAD - 2021

Report ID 605389036 Popularity 116 views 6 downloads 
Report Date Aug 2021 Product  
Company / Issuer CIMB Islamic Bank Bhd Sector Finance - Financial Institution
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Rationale
Rating Action     
MARC has affirmed CIMB Islamic Bank Berhad’s (CIMB Islamic) financial institution (FI) ratings of AAA/MARC-1. The ratings outlook is stable. Concurrently, the rating agency has also affirmed the ratings on CIMB Islamic’s sukuk issuances as follows:

  • RM10.0 billion senior Sukuk Wakalah programme (Sukuk Wakalah) at AAAIS/stable
  • RM5.0 billion Tier 2 Junior Sukuk programme at AA+IS/stable
The rating on the Tier 2 Junior Sukuk programme reflects its subordination to the senior Sukuk Wakalah programme which has been equalised to the bank's long-term FI rating.

Rationale     
CIMB Islamic’s FI ratings are equalised to parent CIMB Bank Berhad’s (CIMB Bank) FI ratings of    AAA/MARC-1 based on its strategic importance to its parent in the domestic Islamic banking market, underpinned by the close operational integration between them.

For 2020, CIMB Islamic registered a significant decline in earnings largely due to higher impairment charges made as a pre-emptive measure as well as the undertaking of one-off modification losses exercise in view of the impact from the pandemic. The bank undertook a cost reduction exercise to counter the challenging operating climate that led to operating expenses decreasing by 5.1% y-o-y (or RM49.2 million) to RM911.1 million. CIMB Islamic’s strong capital position and healthy liquidity helped mitigate some pressure from the pandemic and provide some headroom to cushion the bank from the challenges ahead.

Against the challenging backdrop, its financing growth decelerated 8.1% y-o-y to RM85.9 billion of total gross financing. Growth was largely driven by residential property and transport vehicle financing. Business and consumer sentiment and, by extension, financing appetite, will remain muted given that the pandemic has not abated and will weigh on economic growth, posing further challenges to the bank as evidenced by its small financing growth in 1Q2021 to RM86.8 billion.

Gross impaired financing (GIF) grew to RM1.5 billion as at end-2020 (2019: RM1.2 billion), largely from the working capital and residential property segments. This culminated in a higher GIF ratio of 1.74% for the same period (2019: 1.56%), well above the Malaysian Islamic banking sector of 1.33%. Asset quality concerns continued to persist going into 1Q2021 as GIF ratio remained high at 1.42%, above the industry average of 1.34% and could further weakened underscored by the challenging economic conditions. 

As at end-2020, the bank’s pre-tax profit declined sharply by 43.1% to RM632.7 million (2019: RM1,112.4 million) largely due to higher provisions made pre-emptively to the tune of RM580.5 million (2019: RM49.3 million) along with one-off modification losses of RM185.8 million. The decline in earnings resulted in lower returns on asset (ROA) and return on equity (ROE) of 0.44% and 7.39% for the same period. CIMB Islamic recorded an increase in pre-tax profit in 1Q2021 to RM319.1 million (1Q2020: RM255.5 million) benefitting from lower financing expenses on the back of a sharp decline in the overnight policy rate (OPR).

CIMB Islamic’s capitalisation remained healthy with its Common Equity Tier 1 (CET1) and total capital ratios at 13.3% and 16.8% as at end-2020 (2019: 13.4% and 17.0%), providing some buffer to absorb potential asset quality weakening. The bank’s capital position is also supported by internal capital generation and the parent bank, CIMB Bank, through the Restricted Profit-Sharing Investment Account (RPSIA).

While customer deposits grew 13.0% to RM96.3 billion driven by term deposits, CIMB Islamic remains exposed to some degree of depositor concentration as its top three depositors accounted for 23.0% of total deposits as at end-2020. However, it’s liquidity position is deemed to be sound as liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) stood well above the regulatory requirement (LCR: 137.2%; NSFR: 109.6%).

Rating outlook     
The stable outlook assumes that CIMB Islamic would remain an integral member within CIMB Group, with support readily available when required.

Rating trajectory

Downside scenario     
The rating will come under pressure if there is any change in the rating of the core entity, CIMB Bank which would impact CIMB Islamic’s rating and its instruments.

Key strengths
  • Well-established domestic Islamic banking franchise
  • Ability to leverage on its parent CIMB Bank’s infrastructure and resources 
Key risk
  • Asset quality issues and earnings challenges from the impact of the pandemic


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