Tuesday, Nov 15, 2016
CIMB Group is a non-operating financial
holding company whose key indirect banking subsidiaries are CIMB Bank Bhd (CIMB
Bank), CIMB Investment Bank Bhd (CIMB Investment) and Indonesia-based PT Bank
CIMB Niaga Tbk (CIMB Niaga). CIMB Group’s long-term rating reflects its
subordination to its banking subsidiaries. Of these, CIMB Bank remains the
group’s core operating entity, accounting for 82.0% of the group’s consolidated
assets as at end-June 2016 (end-2015: 81.5%) and more
than 90.0% of dividend income historically. As a bank holding company, CIMB Bank’s
two main subsidiaries are CIMB Islamic Bank Berhad (CIMB Islamic) and
Thailand-based CIMB Thai Bank PLC (CIMB Thai). CIMB Bank has a rating of
AAA/MARC-1/stable from MARC.
CIMB Group is Malaysia’s second-largest
and ASEAN’s fifth-largest banking group in terms of assets. For 1H2016, its
Malaysian operations contributed 75.0% of its pre-tax profit, followed by
Indonesia (13.0%) and Thailand (4.0%). Following a period of rapid expansion,
the group has recently undertaken a rationalisation exercise under which it
downsized its Malaysian, Indonesian and Australian operations to reduce
operating costs. While CIMB Group has also taken borrowings to strengthen its
investments in its banking subsidiaries in the past, the extension of Basel III
capital requirements to financial holding companies in 4Q2015 has led the
group to put in place Tier 2 subordinated debt and Additional Tier 1 (AT1)
capital securities programmes with limits of RM10.0 billion each. The proceeds
from issuances under the programmes are being invested in similar capital instruments of its
banking subsidiaries. During 1H2016, the group subscribed to CIMB Bank’s AT1
issuance of RM1.0 billion.
CIMB Group’s continued investments in
the capital instruments of its subsidiary has meant that the double leverage
ratio remains high at 140% as at end-1H2016 (2015: 141%). This ratio could face
further upward pressure as more sub-debt issuances are undertaken to invest in
its banking subsidiaries. MARC draws some comfort from the group’s strong
consolidated common equity Tier 1 (CET1) capital ratio of 10.7% as at end-June
2016, which remains higher than the regulatory requirement of 7.0%
(including capital conservation buffer of 2.5%) that will take effect in January 2019. MARC
expects CIMB Group’s capital to continue be supported by the group’s dividend
reinvestment scheme (DRS); the reinvestment rate under the DRS has been above
70.0% since the scheme’s initiation in 2013.
For 1H2016, CIMB Group registered
consolidated pre-tax profit of RM2.3 billion, an increase of 35.4% y-o-y owing
to continued loan growth in Malaysia, Singapore and Thailand as well as lower
overhead expenses following the completion of a mutual separation scheme (MSS)
exercise and a restructuring of the investment banking business in 1H2015. On
excluding the MSS and restructuring costs of RM518.4 million incurred in
1H2015, net profit would have declined by 3.1% y-o-y in 1H2016. The
cost-to-income ratio declined to 55.4% in 1H2016 from 56.7% in the previous
corresponding period (excluding the MSS and restructuring costs). Despite lower
operating expenses, MARC views that the weakening domestic and regional economic
growth could have an impact on the group’s asset quality and consequently its
earnings over the near term. The group’s impairment charges increased to RM1.17
billion in 1H2016 (1H2015: RM1.07 billion) mainly due to the weaker asset
quality of its Thai operations.
CIMB
Group’s sub-debt obligations are expected to be met by cash flows from the
capital instruments it has subscribed. In addition, MARC observes that
dividends from CIMB Bank have been stable and sufficient to support the holding
company’s debt obligations. For 1H2016, CIMB Group’s dividend income increased
to RM1.05 billion (1H2015: RM753.0 million). Of its subsidiaries, CIMB Niaga
has not distributed any dividends since 2011; the bank has continued to face a
tough operating environment that has weighed on its asset quality and financial
performance. Going forward, the phasing in of the Basel III capital framework
and potential earnings pressure on its key banking subsidiaries could affect
dividend flows to the parent.
The stable outlook reflects MARC’s expectation that the group’s overall credit profile will be maintained against a more subdued domestic and regional macroeconomic outlook. The ratings remain driven by the key performance metrics of the group’s key subsidiaries, and therefore any change in their credit profile would impact CIMB Group.
Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my,
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.