MARC has affirmed its long-term and short-term corporate credit ratings of AA+/MARC-1 on CIMB Group Holdings Berhad (CIMB Group) and its issue rating of AA on the group’s RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme. The outlook on the ratings is stable. The one-notch rating differential between CIMB Group’s long-term corporate credit rating and its sub-debt programme is in accordance with MARC’s methodology.

CIMB Group is a non-operating financial holding company of CIMB Bank Berhad (CIMB Bank), CIMB Investment Bank Berhad and Indonesia-based PT Bank CIMB Niaga Tbk, all of which are held through 100%-owned CIMB Group Sdn Bhd. CIMB Group’s long-term rating of AA+ reflects its subordination to its banking subsidiaries, of which CIMB Bank remains the core operating entity, accounting for 85% of total consolidated assets as at end-June 2018 and more than 90% of dividend income historically. CIMB Bank, which is an operating bank holding company with two main subsidiaries, CIMB Islamic Bank Berhad and Thailand-based CIMB Thai Bank PLC, carries a AAA/Stable rating from MARC.

CIMB Group is Malaysia’s second-largest and ASEAN’s fifth-largest banking group with total assets of RM514.5 billion as at end-June 2018. Its domestic loans accounted for 60% of total consolidated loans, followed by Indonesia at 17%, Thailand 9% and Singapore 8%. The stable outlook reflects MARC’s expectation that over the near term, CIMB Group’s main subsidiaries would be able to maintain their key credit metrics notwithstanding the current challenging economic conditions in the group’s key markets.

For 1H2018, the group’s key markets registered higher loan growth after a period of subdued performance, particularly in the Singapore and Thailand markets over the last two years. Overall loan growth increased by 7.0% y-o-y on excluding the foreign exchange effect. The domestic loan portfolio remains the key growth driver for the group with a loan growth of 7.9% y-o-y in 1H2018. Loan growth in Indonesia has started to pick up mainly in the mortgage and corporate segments. At the same time, the group has curtailed loans in the vehicle segment on asset quality concerns. In Thailand, the stronger growth was mainly driven by increasing consumer and corporate loans; the bank reduced its exposure in the SME segment given challenging conditions in the segment.

CIMB Group’s overall asset quality has shown some improvement partly due to enhanced risk management and portfolio rebalancing with a focus on risk-adjusted returns. The gross impaired loans (GIL) ratio declined to 3.17% as at end-June 2018 (2017: 3.39%) with all key markets registering a lower GIL ratio except Thailand. However, the pace of incremental GIL in Thailand has slowed due to the group’s tightened lending standards and the country’s stable operating environment. As at end-June 2018, the group’s loan loss reserves ratio increased to 90.7% mainly due to higher provisions under MFRS 9.

As at end-June 2018, CIMB Group’s consolidated CET1 capital ratio declined slightly to 11.9% from 12.2% in December 2017 due to a 70 basis points (bps) impact following the implementation of MFRS 9. This was moderated by a 29 bps increase in the CET1 ratio arising from partial disposals of the group’s stockbroking and asset management arms during 1H2018, in addition to the group’s continued dividend reinvestment scheme (DRS). CIMB Group is on track to meet its targeted CET1 capital ratio of 12.0% under its T18 programme. However, the group’s CET1 capital ratio remained lower compared to its domestic peers which registered an average CET1 capital ratio of 12.7% as at end-June 2018.

In 1H2018, the group’s core income declined mainly due to increased competition in the banking industry and challenging capital market conditions. Net interest income declined by 10.2% to RM4.8 billion due to a lower net interest margin. Non-interest income declined slightly by 1.0% to RM3.2 billion. However, the group’s net profit increased by 42.8% y-o-y to RM3.4 billion mainly due to gains on disposals of subsidiaries, without which the increase would be 2.8% y-o-y. Going forward, external risks arising from the US-China trade war and US policy tightening could impact the group’s earnings growth.

At the holding company level, CIMB Group’s dividend income was RM2.0 billion during 1H2018, with CIMB Bank remaining the largest dividend contributor. Dividend payments from CIMB Bank have remained sufficient to meet the holding company’s debt obligations. As at end-June 2018, the holding company’s debt-to-equity ratio was stable at 0.46 times, although total borrowings have been on a rising trend since 2015, largely due to issuances of Basel III-compliant sub-debt issuances. However, given that these issuances are invested in similar capital instruments issued by its banking subsidiaries, the debt servicing costs under the issuances have been met by cash flows from its subsidiaries. Additionally, the holding company’s debt maturity profile has remained well spread, which reduces refinancing risks.

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