View Credit Analysis Report (605241)

SubcategoryFinance - Financial Holding Company
Date Article2020-08-27 00:00:00
MARC has affirmed its long-term and short-term corporate credit ratings of AA+/MARC-1 on CIMB Group Holdings Berhad (CIMB Group) and its issue rating of AA on the group’s RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme. The ratings outlook is stable. The one-notch rating differential between CIMB Group’s long-term corporate credit rating and its subordinated debt programme is in accordance with MARC’s methodology. 

CIMB Group is a non-operating financial holding company whose key operating entities domestically are CIMB Bank Berhad, CIMB Islamic Bank Bhd, CIMB Investment Bank Bhd, and regionally Thailand-based CIMB Thai Bank Public Company Ltd (CIMB Thai) and Indonesia-based PT Bank CIMB Niaga Tbk (CIMB Niaga). The group is the country’s second-largest and ASEAN’s fifth-largest banking group with total assets of RM585.8 billion as at end-March 2020. CIMB Bank remains its core operating entity, accounting for 87% of total consolidated assets as at end-March 2020 and historically provides a substantial portion of dividend income to CIMB Group. CIMB Group’s long-term rating of AA+ reflects ithe subordination of the holding company’s financial obligations to that of CIMB Bank’s (AAA/Stable). 

CIMB Group’s importance to the domestic banking system is underscored by its designation as a domestically systemically important bank (D-SIB) by Bank Negara Malaysia (BNM) early this year. Under the D-SIB framework, CIMB Group is required to maintain additional capital buffers including a higher loss absorbency. This requirement has no impact on the group at this juncture given that CIMB Group’s capital ratios are already in compliance. Its Common Equity Tier 1 (CET1) and total capital ratios stood at 12.5% and 16.1% as at end-March 2020. Notwithstanding this, the weakening domestic and global economies in the wake of the COVID-19 pandemic and measures implemented to combat the crisis will impact its key banking subsidiaries, which could lead to an erosion in its capital buffer from the increasing likelihood of higher credit impairments.

The group’s overall loan growth moderated to 3.8% y-o-y as at end-March 2020 (Dec 2019: 6.7%). Domestic loans accounted for about 61% of its loan book, followed by Indonesia (15%), Thailand (10%) and Singapore (8%). CIMB Group’s gross impaired loans (GIL) ratio increased to 3.43% in 1Q2020 as a result of the higher GIL from Indonesia and Singapore that is mainly due to a significant loan impairment in the oil and gas sector. Domestically, the GIL ratio increased to 2.20% in 1Q2020 (industry average: 1.59%). Over the near term, the impact on the group’s asset quality would hinge on the length of the moratorium that is in place and the severity of the economic crisis. 

In 1Q2020, CIMB Group reported lower pre-tax profit of RM714.0 million (1Q2019: RM1.6 billion) due to higher provisions and lower non-interest income. Its profitability would come under further pressure from higher credit cost on the back of increased provisions due to a high likelihood of further impairments and potential defaults. In addition, recent cuts in the overnight policy rate would narrow its banking subsidiaries’ interest margins during the year while incurring additional expenses on the waiver of additional interest on hire purchase loans during the moratorium period.

MARC views CIMB Group’s liquidity position would be able to withstand the six-month moratorium period. Its loans-to-funds ratio stood at 84.0% while the current and savings account (CASA) ratio was strong at 37.3%. The liquidity coverage ratios (LCR) of its key subsidiaries stood well above the central bank’s required level.  CIMB Group’s sub-debt obligations are expected to be met by cash flows from the capital instruments it has subscribed. MARC views that dividends from CIMB Bank would continue to be sufficient to support the holding company’s debt obligations. The group’s capital is also supported by its dividend reinvestment scheme (DRS) with the latest take-up rate at about 67%. 

The stable outlook reflects MARC’s expectation that CIMB Group’s overall profile will be broadly maintained in the current tough operating environment. Its ratings are driven by the rating of its core entity CIMB Bank. Any change in the rating of the subsidiary would impact the group’s ratings and its subordinated instruments.

Major Rating Factors

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

Increased pressure on asset quality and earnings of banking subsidiaries in the wake of the COVID-19 pandemic

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