MARC has upgraded its long-term financial institution rating on CIMB Bank Bhd (CIMB Bank) to AAA from AA+, reflecting the bank’s resilient earning streams, improved asset quality, adequate capitalisation and strong business franchise in Malaysia. MARC had earlier placed the long-term financial institution rating of CIMB Bank on MARCWatch Positive on April 20, 2010 on the expectation that the bank was likely to report sustained improvements in its financial performance despite the downturn in the Malaysian economy over the last two years. Meanwhile, MARC has also affirmed CIMB Bank’s short-term financial institution rating at MARC-1. MARC opines that the prospect of regulatory support for CIMB Bank is deemed to be high considering the bank’s importance to the domestic financial system and is factored into its ratings. Further to the upgrade of CIMB Bank’s long-term financial institution rating, corporate debt issuances by the bank have also been upgraded; a full list of such issuances is given at the end of this release. The outlook on the ratings is stable.

CIMB Bank is the third largest commercial bank in Malaysia by asset size. The bank has a significant retail franchise, with individuals accounting for 52% of bank loans and 31% of deposits as at end-FY2009. Accounting for 51% of CIMB Group’s pre-tax profits in FY2009, CIMB Bank is the core entity within the CIMB Group, which has a strong presence in its domestic market in investment banking, retail and commercial banking and wealth management. CIMB Group was formed after a series of mergers and acquisitions, which notably included acquisitions involving the erstwhile Bumiputra-Commerce Bank (BCB) in 2005 and Southern Bank in 2006.

Anandakumar Jegarasasingam, MARC’s Head of Financial Institution Ratings, notes that CIMB Bank has since rationalised several operations, including an overlapping branch network, and strengthened its risk management capabilities. Anandakumar adds that the initial integration risks of the domestic acquisitions appear to have been well managed, as evident by the bank’s improving financial performance.  The successful acquisitions have also had a positive impact on the bank’s franchise value and operational efficiencies.

With an aim of becoming a universal banking group in Southeast Asia, CIMB Group has directly and through CIMB Bank increased its regional presence in recent years, which includes a 19.99% stake in China-based Bank of Yingkou and a 93.15% stake in CIMB Thai Bank Public Company Limited. While MARC notes that these ambitious overseas expansions have heightened the risk profile of CIMB Bank at the consolidated level, MARC opines that overseas investments at CIMB Bank level is relatively small compared to its balance sheet size. In any case, MARC understands that internal reorganisation is likely to result in the separation of overseas acquisitions from CIMB Bank, a foreseeable impact of which would be a Malaysia-centered geographic operating profile with reduced exposure to other banking markets.

CIMB Bank’s earnings came under pressure in FY2009 amid the slowdown in the domestic economy, with the bank’s return on assets (ROA) declining to 0.96% from 1.17% in FY2008. The weaker, albeit better than expected, financial performance was mainly attributable to the bank’s escalating operating costs to support its business expansion and the absence of a one-off gain in 2008; net of which the bank’s ROA would have been 1.00% in 2008.

Meanwhile, sharper improvements were evident in CIMB Bank’s asset quality following the disposal of RM925 million (net book value) legacy non-performing loans (NPL) to Southeast Asia Special Asset Management Berhad, a subsidiary under CIMB Group Holdings Berhad. This resulted in the bank’s NPL ratio improving to 2.6% at end-FY2009 from 5.8% at end-FY2008. In addition, the bank’s loan loss reserves coverage stood at an improved 126.4% (2008: 89.2%). This, coupled with its adequate capitalisation as reflected by the bank’s total capital ratio of 15.1%, is expected to absorb most normal risks in the unlikely event of a late spike in delinquencies as a result of the economic downturn. MARC expects CIMB Bank’s performance to further improve on the back of its leading and defensible competitive position and improved risk management abilities.

The stable outlook on the ratings reflects MARC’s view that CIMB Bank is likely to negotiate the challenges still inherent in its operating environment, supported by its stable earnings base, adequate capitalisation and strong franchise.

The full list of rated corporate debt issues upgraded with a stable outlook is as follows:

• RM5.0 billion Subordinated Debt and Junior Sukuk Programmes upgraded to AA+/AA+IS from AA/AAIS
• RM4.0 billion Perpetual Non-Innovative Tier 1 Stapled Capital Securities upgraded to AA  from AA-
• RM1.0 billion Innovative Tier 1 Capital Securities upgraded to AA from AA-
• RM1.5 billion Subordinated Bonds upgraded to AA+ from AA.

Contacts:
Anandakumar Jegarasasingam +603-2090 2250/ kumar@marc.com.my;
Lim Kok Seng +603-2090 2272 / kokseng@marc.com.my