MARC has affirmed its financial institution (FI) ratings on CIMB Bank Berhad (CIMB Bank) at AAA/MARC-1 with a stable outlook. Concurrently, it has affirmed its corporate debt ratings on CIMB Bank’s existing subordinated debt and hybrid securities, which have been notched down from the bank’s FI rating by one or two notches based on their relative loss severity risk profiles. The full list 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

CIMB Bank’s high systemic importance as a key domestic bank, its well-established banking franchise and its strong domestic market position remain key rating drivers. CIMB Bank is the third largest domestic bank with a total asset size of RM299.1 billion as at end-June 2016; its domestic market share of deposits and loans has remained steady at 12.0% and 11.9% respectively.

Loan growth slowed to 6.5% y-o-y in 1H2016 (2015: 12.8%) amid a weakening economic outlook and tighter lending standards. Segments that registered growth included the residential and non-residential property loan segments, which grew 13.3% y-o-y and 8.8% y-o-y respectively (2015: 13.0%; 25.4%). Loan growth at its Singapore branch experienced the highest slowdown, contracting by 4.0% y-o-y (in local currency) during 1H2016 (2015: 2.2%; 2014: 14.5%), underscoring the challenging economic conditions in the region.

CIMB Bank’s gross impaired loans (GIL) ratio rose to 1.91% as at end-June 2016 from 1.80% at end-2015, with the increase contributed largely by its Singapore branch which recorded a GIL ratio of 0.84%, up from 0.33%. The bank’s loan loss coverage declined further to 78.7% from 84.9% over the same period. MARC notes that the bank’s GIL ratio and loan loss coverage remain weaker than the domestic industry average of 1.65% and 89.8% respectively. As with many of its banking peers, CIMB Bank’s largest loan exposure is to the property sector, making up about 42.4% of its loan portfolio in 1H2016. While a sharp slowdown in the property industry could lead to an uptick in impaired loans, the exposure to the property sector is mitigated by the low average loan-to-value ratio of below 50% for the sector.

CIMB Bank’s capital position remained adequate despite a marginal decline from 2015 levels due largely to scheduled phase-in of regulatory deductions and phase-out of non-qualifying capital instruments. Its common equity Tier 1 (CET1) capital ratio stood at 11.1% as at end-June 2016, persistently lower than the domestic banking industry average which stood at 13.1% in the same period. MARC notes that, relative to its peers, the bank’s non-Basel III-compliant instruments remained significant at about 20% of the total capital base or about RM5.0 billion as at end-March 2016, indicating that further capital issuances would be required. In this regard, MARC does not envisage any challenges for CIMB Bank to comply with the Basel III requirement schedule. The bank’s capital position has been supported by its parent CIMB Group Berhad’s dividend reinvestment scheme (DRS) which has had a reinvestment rate of above 70.0% since initiation of the scheme in 2013; the group reinvested cash dividend surplus of RM1.83 billion under the DRS into the bank via a rights issue in 2015.

MARC is also of the view that the recent amended terms of CIMB Bank’s existing RM10.0 billion Tier 2 Subordinated Debt Programme to include a point of non-viability (PONV) trigger event linked to CIMB Group and its subsidiaries for issuances has had no rating impact on the subordinated debt programme. This is in line with MARC’s approach of not incorporating additional notching for capital instruments with group-level loss absorbency triggers issued by banks which are members of well-capitalised financial groups. However, MARC will consider widening the notching between the FI rating and the instrument rating in the event of meaningful deterioration in the banking group’s capital strength.

For 1H2016, the bank registered reduced net interest margin (NIM) and lower non-interest income. NIM fell to 1.98% on an annualised basis (1H2015: 2.13%), reflecting mainly the prevailing stiff competition in the domestic banking sector. Non-interest income declined by 15.6% y-o-y, partly due to lower fee income on loans and advances in line with slower loan growth. For 1H2016, the bank registered higher pre-tax pre-provision profit of 7.4% y-o-y to RM1.76 billion, supported by lower overhead expenses on completion of the mutual separation scheme. Nonetheless, the increase in impairment charges to RM147.5 million (1H2015: RM117.2 million) contributed to a flat profit after tax of RM1.26 billion. MARC views that the bank’s earnings over the near term will be weighed down by the impact from slower loan growth and higher impairment charges; in addition, stiff competition for deposits will put pressure on NIM.

CIMB Bank’s funding and liquidity profile remains healthy as reflected by its sound Basel III liquidity coverage ratio which is currently well above the minimum requirement of 100%. At the group level, CIMB Bank’s consolidated net profit grew by 12.3% y-o-y to RM1.69 billion, driven by lower impairment charges on its domestic loans/financing and higher earnings from its Islamic subsidiary CIMB Islamic. However, the weaker profitability of CIMB Thai, whose net profit fell by 5.7% y-o-y to THB798.3 million for 9M2016 due to higher impairment charges, remains a concern. The Thai banking subsidiary continued to demonstrate weaker asset quality metrics relative to its domestic peers; its non-performing loan ratio rose to 4.2% as at end-September 2016 (2015: 3.2%), which was above the Thai banking industry average of 2.9%.

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.

Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my,
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.