MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on CIMB Islamic Bank Berhad (CIMB Islamic). The FI ratings on CIMB Islamic are equalised to that of its parent CIMB Bank Berhad (CIMB Bank) (rated AAA/Stable), given the bank’s strategic importance as the latter’s Islamic banking arm, their shared branding and close operational integration. Concurrently, MARC has also affirmed its ratings on the bank’s sukuk issuances as follows:

• RM10.0 billion senior Sukuk Wakalah programme (Sukuk Wakalah) at AAA_IS ;
• RM5.0 billion Tier 2 Junior Sukuk programme at AA+_IS ; and
• RM2.0 billion Tier 2 Junior Sukuk programme at AA+_IS .

The outlook on the ratings is stable. The affirmed ratings and stable outlook on CIMB Islamic and its programmes reflect the credit strength of its parent CIMB Bank given the strength of the parent-subsidiary relationship. Any revision in MARC’s assessment of this relationship and/or change in CIMB Bank’s ratings could lead to a change in the Islamic bank’s ratings. The rating on the Sukuk Wakalah reflects its seniority and is equalised to the bank’s FI ratings. The ratings on both Junior Sukuk programmes were notched down from CIMB Islamic’s FI ratings reflecting the subordination of the sukuk to the bank’s senior obligation.

CIMB Islamic has maintained its position as the second-largest Islamic bank in Malaysia, with total assets of RM91.9 billion that accounted for 13.5% of Malaysia’s Islamic banking system assets as at end-June 2018. Financing growth was strong at 30.9% y-o-y in 1H2018 compared to the Islamic banking industry growth of 12.0% over the same period. MARC is cognisant that the strong financing growth was due to its parent CIMB Bank’s “Islamic First” strategy that prioritises and delivers Islamic financing services. In contrast, CIMB Bank’s domestic loan portfolio grew by a modest 7.6% y-o-y in 1H2018.

As at end-June 2018, while total gross impaired financing (GIF) increased to RM435.9 million (2017: RM381.9 million), the bank’s GIF ratio was relatively unchanged at 0.65% (2017: 0.66%) due to high financing growth. However, seasoning of the financing portfolio following strong growth could translate into pressure on asset quality. Financing loss allowance coverage rose to 94.9% (2017: 77.0%) due to the adoption of MFRS 9 and remains below the industry average of 102.2% during the same period.

CIMB Islamic’s capital position remained strong and this mitigates concerns on asset quality. CET1, Tier 1 and total capital ratios stood higher at 14.1%, 14.7% and 17.3% as at end-June 2018. The bank’s capital position is supported by internal capital generation and its parent CIMB Bank through the restricted profit sharing investment account which proportionately absorbs credit risk. As at end-June 2018, the total risk weighted assets for credit risk absorbed by the parent increased to RM7.3 billion (2017: RM6.1 billion).

For 1H2018, the bank’s net financing income grew by 25.3% y-o-y to RM725.2 million on the back of strong financing growth. The bank’s net profit grew by 33.8% y-o-y to RM375.4 million, moderated by higher overhead expenses. The bank’s net financing margin (NFM) increased slightly to 1.70% in 1H2018 due to an increase in the overnight policy rate in January 2018. Nonetheless, MARC views that the intense competition among Islamic banks would continue to weigh on the bank’s NFM going forward. The bank’s liquidity and funding profile remained sound, with a financing-to-funds ratio of 81.2% as at end-June 2018 (2017: 77.1%). Liquidity coverage ratio stood at 127.6% in 1H2018, higher than the minimum requirement of 100% in 2019.

Contacts:
Lee Kar Xuan, +603-2717 2964/ karxuan@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.