MARC has upgraded CIMB Islamic Bank Berhad’s (CIMB Islamic) long-term financial institution rating to AAA from AA+. At the same time, MARC has also upgraded its rating on CIMB Islamic’s Tier 2 Junior Sukuk Programme to AA+IS from AAIS. The rating upgrades conclude a rating review for possible upgrade that was initiated by MARC on April 20, 2010 on CIMB Islamic and its parent, CIMB Bank Berhad (CIMB Bank). The rating actions on the bank and its parent reflect MARC’s expectation that the financial performance and credit metrics of both entities will continue to trend favourably, supported by the improving domestic operating environment. Anandakumar Jegarasasingam, MARC’s Head of Financial Institution Ratings, said that CIMB Bank’s strong performance throughout the recent economic downturn supports the rating agency’s belief that the bank’s robust banking model and its management’s focused strategic plan would sustain further improvement in performance over time and that its earning base is capable of accommodating variability from economic cycles.

CIMB Islamic’s financial institution rating is equalised to that of its parent, CIMB Bank, due to the strong support provided by the latter and the high degree of operational integration between the two banks and other entities operating under the CIMB Group, which adopts a universal banking concept. CIMB Islamic’s Junior Sukuk is rated one notch below its financial institution rating to reflect the subordinated nature of the facility to the bank’s deposits and any other senior unsecured debt. The outlook on the ratings is stable.

CIMB Islamic’s gross financing continued to grow at a rapid rate of 154% in FY2009, following the 135% growth rate reported in FY2008, albeit from a low base relative to its commercial banking parent. The bigger financing asset base resulted in the bank’s gross non-performing financing (NPF) ratio improving to 1.5% (FY2008: 3.1%), well below the gross NPF ratio of 4.2% reported by the Islamic banking industry. However, MARC notes that absolute NPF increased by 19.5% during FY2009, with residential property and working capital financing accounting for the bulk of the new delinquencies.

Although CIMB Islamic’s customer deposits grew by 28% during FY2009 (FY2008: 82%), the much higher rate of expansion in financing assets resulted in an increase of the bank’s financing-to-customer deposit ratio to 94% as at end-FY2009 (FY2008: 47%). However, the expansion in financing activities was well supported by a 110% increase in inter-bank deposits. Deposits from CIMB Bank in restricted profit sharing investment accounts (RPSIA) accounted for a 48% increase in inter-bank deposits during the year. CIMB Bank’s RPSIA deposits account for 19% of CIMB Islamic’s total funding base as at end-2009, further underlying the nature of support available from the parent. 

For FY2009, the bank reported a net profit of RM123.7 million (FY2008: RM73.3 million) on the back of its expanding portfolio of financial assets. However, the bank’s return on assets remained flat at 0.54% in FY2009 (FY2008: 0.53%), while return on equity improved to 15.3% compared to 10.3% a year earlier as a result of the bank’s low equity base. The expansion in earnings was tempered by higher loss impairments on financing, absorption of unrealised derivative losses and increase in overheads in line with business growth.

Meanwhile, the rapid expansion in assets resulted in lower capital adequacy ratios, with the bank’s core capital ratio and risk weighted capital ratio registering lower at 6.8% (FY2008: 10.4%) and 11.3% (FY2008: 11.7%) compared to the Islamic banking sector average of 12.3% and 14.8% respectively in 2009. At the same time, MARC also notes that the bank’s absolute equity in relation to its assets size was low at 3.2% in FY2009 (Islamic banking sector: 8.0%). MARC understands that a number of capital rising schemes are available for CIMB Islamic to strengthen its capital base including equity injection from CIMB Bank, further drawdown from the existing Junior Sukuk Programme and issuance of hybrid Tier 1 securities.

The stable outlook on CIMB Islamic is underpinned by the outlook of its parent, due to the extreme degree of credit linkage between the two banks.

Contacts:
Anandakumar Jegarasasingam, 03-2090 2250/ kumar@marc.com.my;
Taufiq Kamal, 03-2090 2251/ taufiq@marc.com.my ;
Lim Kok Seng, 03-2090 2272/ kokseng@marc.com.my