MARC has affirmed CIMB Islamic Bank Berhad’s (CIMB Islamic) financial institution (FI) and RM2.0 billion Tier 2 Junior Sukuk (Junior Sukuk) programme ratings at AAA/MARC-1 and AA+_IS respectively. Concurrently, MARC has assigned a final rating of AA+_IS to CIMB Islamic’s proposed RM5.0 billion Basel III-compliant Tier 2 Junior Sukuk (proposed Junior Sukuk) programme. The outlook on all ratings is stable.

CIMB Islamic’s FI ratings are equalised to that of its parent CIMB Bank premised on MARC’s assessment that the Islamic bank is a core operating subsidiary of its parent. The rating agency has rated CIMB Bank’s FI ratings at AAA/MARC-1/stable based on the bank’s systemic importance in the domestic banking sector, underpinned by its strong market position, sustained earnings generation and sound risk management. The Junior Sukuk programmes are rated one notch lower than the long-term FI rating of CIMB Islamic, in line with their subordination to the bank’s deposits and other senior unsecured debt.

CIMB Islamic is the second-largest Islamic bank in Malaysia in terms of assets and mortgage financing, accounting for 10.5% of the Islamic banking system’s assets and 12.2% of the mortgage financing market as at end-June 2015. It holds significant market shares in key Islamic banking retail segments such as home financing (12.2%), auto financing (7.2%) and deposits (9.7%). The strong domestic positions are due largely to CIMB Islamic’s ability to leverage on the resources and infrastructure of its parent CIMB Bank, given that the Islamic bank has a strategic fit in the overall banking activities of the group. Nonetheless, as with its domestic peers, CIMB Islamic’s margins remain under pressure due to strong competition in the Islamic banking industry while an uptick in impairment charges has dragged its profits. For 1HFY2015, the Islamic bank’s net profit declined by 9.0% y-o-y to RM189.6 million (1HFY2014: RM208.2 million) on the back of a lower net financing margin, higher impairment charges and higher forex losses. These were partially moderated by higher non-financing income from increased fee and commission income.

As of end-June 2015, CIMB Islamic’s gross impaired financing remains elevated at RM440.1 million (FY2014: RM457.9 million), attributable to higher impairments in the construction, property and transport vehicle segments in FY2014, resulting in a higher gross impaired financing ratio of 1.25% (FY2013: 0.88%). Concurrently, the bank’s financing loss allowance coverage declined sharply to 85.3% in FY2014 from 131.1% in FY2013 (Islamic industry average: 101.2%). MARC notes that for 1HFY2015, the gross impaired financing ratio moderated to 1.14% due in part to stronger financing growth.

CIMB Islamic’s gross financing portfolio increased by 5.7% during 1HFY2015, or 11.4% on an annualised basis, after two years of slower financing growth (2014: 3.4%; 2013: 6.6%). However, the financing growth for 1HFY2015 and FY2014 were both significantly below the corresponding Islamic banking industry averages of 19.8% y-o-y and 18.4% y-o-y respectively. This notwithstanding, MARC believes that Islamic banking’s financing growth could come under pressure over the near term as the tight regulatory policy on consumer lending and the current challenging business environment weigh on business and consumer sentiments.

CIMB Islamic’s capital positions are higher than regulatory requirements with the Common Equity Tier 1, Tier 1 and total capital adequacy ratio (CAR) standing at 11.5%, 12.3% and 15.0% respectively as at end-1HFY2015. Nonetheless, its total capital adequacy ratio has declined slightly on stronger risk-weighted asset growth against a marginal 2.9% growth in capital base to RM3.66 billion (FY2014: RM3.55 billion), constrained by the phasing out of non-Basel III capital instruments and lower net profit generation. The Islamic bank’s financing-to-customer deposit ratio increased slightly to 89.1% in 1HFY2015 (FY2014: 88.6%) and its funding profile remains supported by funds from its parent bank via the restricted profit sharing investment account (RPSIA). Under the RPSIA, the Islamic bank has an outstanding amount of RM2.5 billion as at end-June 2015 (FY2014: RM2.1 billion).

The ratings and stable outlook on CIMB Islamic and Junior Sukuk programmes are underpinned by the ratings and stable outlook on its parent bank. Any changes in the ratings and outlook would hinge on MARC’s assessment of the parent-subsidiary relationship, in particular the parent bank’s willingness and capacity to lend support to its Islamic bank subsidiary.

Contact:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.