View Credit Analysis Report (605240)

SubcategoryFinancial Institution
Date Article2020-08-27 00:00:00
MARC has affirmed its financial institution (FI) ratings on CIMB Bank Berhad at AAA/ MARC-1 with a stable outlook. Concurrently, the rating agency has affirmed its ratings on the bank’s existing subordinated debt programmes as follows: 

1. RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme affirmed          at AA+/Stable
2. RM5.0 billion Subordinated Debt and Junior Sukuk Programmes affirmed at                  AA+/AA+IS /Stable 

These ratings are notched down from the bank’s long-term FI ratings based on the relative loss severity risk profiles of the subordinated debts. CIMB Bank’s long-term FI ratings and stable outlook continue to incorporate its high systemic importance in the domestic banking industry as is evident from Bank Negara Malaysia’s (BNM) designation of its parent CIMB Group Holdings Berhad as a domestically systemically important bank (D-SIB) in February 2020. CIMB Bank remains the core operating entity of its parent. It is also the second-largest domestic bank by asset size and has a well-established banking franchise with an extensive network of 234 domestic branches and a growing presence in the ASEAN region. Its strong domestic market position is reflected in the 17.1% and 17.3% share of total domestic loans and deposits as at end-March 2020. 

MARC views the significant impact from the COVID-19 pandemic on global and domestic economies will weigh on the banking sector though the severity is being mitigated by the measures implemented by BNM. In the near term, CIMB Bank’s strong capital and liquidity position will provide a buffer to the potentially higher credit impairments arising from the economic crisis. Over the longer term, the impact on CIMB Bank’s asset quality will hinge largely on the success of the measures taken to shore up consumer and business confidence, and the timing of the economic recovery. 

CIMB Bank’s consolidated Common Equity Tier 1 (CET1) and total capital ratios stood at 12.2% and 16.7% as at end-March 2020, well above the minimum regulatory requirements of 7.0% and 10.5% (including a capital conservation buffer of 2.5%). Its capital has been, and is expected to continue to be, supported by the dividend reinvestment scheme (DRS). Liquidity is sufficient to weather the six-month loan moratorium period; its liquidity coverage ratio (LCR) stood at 138% as at end-March 2020. Over the longer term, the central bank’s accommodative stance to allow banks to operate below the 100% LCR threshold and its reduction of the regulatory reserves, among other liquidity enhancing measures, will ease pressure on the bank’s liquidity in the event of any extension on the loan moratorium.  

CIMB Bank’s overall asset quality has weakened, with the gross impaired loans (GIL) ratio rising to 2.67% at end-1Q2020, even before the impact from the pandemic was felt (industry average: 1.59%). This spike was largely contributed by the impairment on an oil and gas-related account in its Singapore branch, which is expected to see another sizeable impairment in the same sector in the near term. Coupled with the current tough economic conditions from the effect of the pandemic, CIMB Bank’s asset quality metrics are likely to be under pressure in the foreseeable future. Its loan loss coverage including regulatory reserves reduced to 65.4% in 1Q2020 from 91.8% in 2019. 

Against this backdrop, MARC expects the bank’s loan growth to be in the low single digit for the full year 2020; in 1Q2020 it registered loan growth of 5.6% y-o-y, driven by its domestic market which grew 5.1% y-o-y, Thailand (8.7%) and Singapore (7.7%). CIMB Bank reported lower pre-tax profit of RM451.0 million (1Q2019: RM1.3 billion), mainly due to higher provisions made on an impaired loan in Singapore as well as on its domestic loans in anticipation of an increase in impairments. The recent interest rate cuts will further compress margins, while earnings will be weighed down by additional expenses on the waiver of additional interest on hire purchase loans during the deferment period.

Major Rating Factors

High systemic importance to the domestic banking system; and
Well-established banking franchise. 

Increased pressure on asset quality and earnings from the impact from the 

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