MARC has affirmed the long-term and short-term financial institution (FI) ratings on CIMB Bank Berhad (CIMB Bank) at AAA/MARC-1 and accordingly affirmed the ratings on all its corporate debt issuances. In accordance with MARC’s general notching policy, the ratings on CIMB Bank’s existing subordinated debt and hybrid securities are notched down from the bank’s FI rating by one or two notches based on their relative loss severity risk profiles. The outlook on the ratings is stable.

The full list of MARC’s rating actions on CIMB Bank’s corporate debt issuances is 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
3. RM4.0 billion Perpetual Non-Innovative Tier 1 Stapled Capital Securities affirmed at AA/stable
4. RM1.0 billion Innovative Tier 1 Capital Securities affirmed at AA/stable

MARC’s affirmation of CIMB Bank’s FI ratings considers the bank’s systemic importance in the domestic banking sector as the third-largest bank in Malaysia in terms of assets, its well-established banking franchise and its strong market position. The bank’s domestic banking franchise is supported by an extensive branch network, through which it has established a sizeable share of 11.8% and 10.8% of the domestic banking industry’s loans and deposits respectively as at end-June 2015. Strong branding and operational linkages with other entities within the CIMB group have continued to support the bank’s overall growth. For the half year ended June 30, 2015 (1HFY2015), it registered a 16.9% year-on-year (y-o-y) growth that was mostly driven by its Singapore branch operations. The bank’s loans in Malaysia grew slower at 10.1% y-o-y, which was slightly higher than the domestic banking industry’s average loan growth rate of 9.1% during the same period. The slower domestic growth is partly due to the impact from the stricter regulatory lending policy and weaker economic growth.

MARC expects the current challenging environment for the domestic and regional economies to weigh on the bank’s asset quality metrics over the near term. For 1HFY2015, CIMB Bank’s gross impaired loan ratio rose to 2.2%, higher than the banking industry’s average of 1.6%. The increase is due mainly to weaknesses in the property and working capital loan segments; as with its domestic peers, its largest loan book exposure is to the property segment at about 29% of total loans followed by the working capital loans segment at around 24%. New impairments rose sharply by 64.4% y-o-y to RM1.6 billion (1HFY2014: RM960 million) but was moderated by amounts reclassified as non-impaired, written back and written-off of RM1.1 billion. MARC observes that the bank’s loan loss provisions experienced a decline to 77.5% (FY2014: 92.7%), and remains well below the banking industry’s average of 97.5%.

CIMB Bank’s capital position remains comfortably above the minimum regulatory requirements with Common Equity Tier 1, Tier 1 and total capital adequacy ratio (CAR) standing at 10.1%, 11.3% and 13.4% respectively as at end-June, 2015. Nonetheless, the capital ratios remain lower than the domestic banking industry average of 12.3%, 13.1% and 15.2% during the same period. CIMB Bank’s capital position benefitted from a private placement and dividend reinvestments totalling RM3.2 billion in 2014. This was moderated by the phasing out of non-Basel III-compliant instruments, which remained significant at 28.9% of the total capital base (end-December 2014: 31.8%). In addition, risk-weighted assets rose by 8.5% to RM165.1 billion as at end-June 2015 (end-2014: RM152.1 billion). These factors notwithstanding, MARC believes that CIMB Bank is on track to meet the higher minimum Basel III regulatory requirements. Since the setup of its RM10.0 billion Basel III-compliant Tier II subordinated debt issuance programme on August 1, 2013, the bank has made two issuances totalling RM1.05 billion.

During 1HFY2015, the bank’s net interest/financing margins narrowed further to 2.1% (FY2014: 2.3%) due to competitive pressures. Pre-tax pre-provision profits declined slightly by 3.7% y-o-y to RM1.7 billion on higher operating costs from one-off costs associated with the Mutual Separation Scheme (MSS). This was only partially offset by higher non-interest income as net interest income remained relatively flat. The bank’s pre-tax profit declined by 5.4% y-o-y to RM1.6 billion (1H2014: RM1.7 billion), mainly on higher impairment charges of RM113.2 million (1H2014: RM79.8 million). Going forward, CIMB Bank’s profitability could be weighed down by slower loan growth, impairment charges as well as slower capital market activities which would negatively impact non-interest income. CIMB Bank’s funding and liquidity profile has remained healthy, with a fairly stable gross loans-to-deposit ratio of 90.7% as at end-1H2015 (2014: 88.1%). The bank has good access to capital markets and cheaper funding sources; its current account-savings account (CASA) deposit ratio of 33.9% as at end-June 2015 is well above the banking industry’s average of 26.1%.

At the CIMB Bank group level, the performance is supported by two key subsidiaries, namely CIMB Islamic Bank Berhad (CIMB Islamic) and CIMB Thai Bank Public Company Limited (CIMB Thai) whose net contribution to the group remains below 5%. For 1H2015, CIMB Bank group’s net profit declined 9.3% y-o-y to RM1.5 billion, mainly due to the weakening performance of its domestic operations which were partially affected by MSS-related costs. CIMB Thai’s performance, in particular, has been affected by the tough operating climate contributed by political uncertainty and slowing economic growth. As a result, its loan growth remained flat at 10.2% y-o-y in 1H2015 (2014: 11.0% y-o-y), and at the same time, gross non-performing loans (NPL) rose higher to 4.1% (2014: 3.3%). At the bank group level, Common Equity Tier 1, Tier 1 and total CAR stood at 9.6%, 10.5% and 13.4% respectively as at end-June 2015.

The stable outlook on the ratings reflects the rating agency’s expectation that CIMB Bank’s financial profile will remain commensurate with its ratings in the next 12 to 18 months.

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