RAM Ratings assigns AAA/P1 ratings to CIMB Islamic Bank; reaffirms ratings of CIMB Group Holdings, CIMB Bank and CIMB Investment Bank

Published on 04 July 2011
RAM Ratings has assigned respective long and short-term financial institution ratings of AAA and P1 to CIMB Islamic Bank Berhad (CIMB Islamic) while reaffirming the AAA and P1 financial institution ratings of CIMB Bank Berhad (CIMB Bank) and CIMB Investment Bank Berhad (CIMB IB). Concurrently, we have also reaffirmed the AA1/P1 corporate credit ratings of CIMB Group Holdings Berhad (CIMBGH or the Group) as well as the AA1/P1 ratings of its RM6 billion Conventional and Islamic Commercial Papers/Medium-Term Notes Programme (2008/2038), along with the AA3 rating of its RM3 billion Subordinated Notes Programme (2009/2074). All the long-term ratings have a stable outlook.

CIMB Bank, CIMB Islamic and CIMB IB collectively form the third-largest universal-banking group by assets in Malaysia, and are viewed to be systemically important. The AAA/Stable/P1 ratings reflect their integrated operations and close relationships, particularly the ability to leverage on distribution channels, treasury operations and risk-management systems, as well as their strong and entrenched franchise and market positions. Meanwhile, CIMBGH’s ratings are supported by the sound credit fundamentals of its subsidiaries and the Group’s expanding regional franchise.

CIMBGH is the fifth-largest banking group in ASEAN in terms of assets; it enjoys a strengthening franchise in the region. In Malaysia, the Group remains among the top players in consumer banking, and is a leader in investment-banking and stockbroking league tables. Meanwhile, the Group’s domestic Islamic banking business, conducted via CIMB Islamic, has made strides in its financing and deposit-expansion strategy – Islamic financing facilities and deposits expanded 18% and 14%, respectively, in 2010.

While the Malaysian entities still contribute most (52%) of the Group’s pre-tax profits, PT CIMB Niaga Tbk (CIMB Niaga) - its Indonesian commercial-banking subsidiary - is a crucial component in CIMBGH’s profit aspirations. In FY Dec 2010, contributions from CIMB Niaga made up 34% of the Group’s consolidated pre-tax profit of RM4.7 billion (FY Dec 2009: 21% and RM3.8 billion). CIMB Niaga is Indonesia’s fifth-largest bank by assets, and CIMBGH’s largest overseas subsidiary. Elsewhere, the Group has a smaller presence in Thailand through CIMB Thai Bank Public Company Ltd (CIMB Thai, a subsidiary of CIMB Bank). Although CIMB Thai’s profitability has improved, it remains a marginal contributor of the Group’s pre-tax gains.

Notably, CIMBGH’s banking entities continue to constitute the lion’s share of its profits; its asset-management and insurance division only accounted for 2% in fiscal 2010. As at end-March 2011, the Group’s gross impaired-loan (GIL) ratio of 5.9% was better than its restated GIL ratio of 7.6% as at end-December 2009. Meanwhile, its credit-cost ratio was kept low at 0.4% in FY Dec 2010, with one-off impairment adjustments made on its retained earnings - a result of having adopted FRS 139 for provisioning purposes.

Including the borrowings of CIMB Group Sdn Bhd (the intermediate holding company), CIMBGH’s adjusted gearing ratio had eased to 0.31 times as at end-December 2010 (end-December 2009: 0.4 times); its double-leverage ratio stood at 1.15 times. The dividends received by CIMBGH from its Malaysian subsidiaries have been sufficient for its debt servicing needs. To sustain capital for business growth, CIMB Niaga did not pay any dividends to its parent in fiscal 2010, and is expected to continue retaining its earnings this year for future growth. CIMB Niaga’s capital management plans also include the issuance of subordinated debt.

Over the medium term, profit contributions from CIMBGH’s foreign operations are expected to surpass those of its Malaysian entities. Although the Group’s geographical expansion strategy has aided its earnings diversification, RAM Ratings is mindful of the risks associated with rapid expansion in emerging markets. On this note, we will keep monitoring CIMBGH’s ability to manage these risks, as well as the extent of financial support required by its emerging-market entities.

CIMB Bank Berhad
CIMB Bank’s AAA/Stable/P1 ratings are supported by its systemic importance as Malaysia’s third-largest commercial bank by assets; it held 11% of the domestic banking industry’s loans and deposits as at end-December 2010. CIMB Bank’s profit performance remained resilient in fiscal 2010, with a 16% jump in pre-tax profit to RM3 billion. Nonetheless, we note some compression in net interest margins, along with relatively high operating costs.

As at end-December 2010, CIMB Bank’s asset quality was moderately healthy, with an improved GIL ratio of 3.9% (end-December 2009: restated GIL of 6.2%). On the whole, its funding and liquidity profiles remained healthy, aided by strong accumulation of deposits. We opine that CIMB Bank’s capitalisation levels are favourable, with respective tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) of 11.4% and 14.9% as at end-December 2010.

CIMB Islamic Bank Berhad
CIMB Islamic’s AAA/Stable/P1 ratings are anchored by the high degree of integration between its operating model and that of its parent, CIMB Bank. CIMB Islamic leverages on its parent’s back-room operations, risk-management systems, treasury operations and distribution channels, and also benefits from CIMB Bank’s strong franchise and market position. CIMB Islamic is the second-largest Malaysian Islamic commercial bank in terms of assets, with a 14.3%-share of the Islamic banking industry’s assets as at end-2010. Its gross financing portfolio augmented 39% to RM23 billion in FY Dec 2010 - the primary reason for the surge in its pre-tax profit to RM403.8 million the same year.

CIMB Islamic’s asset quality is deemed moderate, although RAM Ratings notes that its financing portfolio remains unseasoned due to its rapid expansion in the last few years. On the back of a larger financing base, CIMB Islamic’s gross impaired-financing ratio only came up to 1.5% as at end-December 2010. On the other hand, its financing-loss provisions over average gross financing ratio remained high at 1.0%, albeit better than the 2.5% of a year earlier. With financing growth ahead of deposit accumulation, CIMB Islamic’s financing-to-deposits ratio had risen to 99% as at end-December 2010. While this ratio is high, funding and liquidity support from CIMB Bank has been observed, with inter-bank deposits from the latter making up almost 25% of CIMB Islamic’s profit-bearing funds. We consider CIMB Islamic’s tier-1 and overall RWCARs to be healthy, at a respective 13.2% and 17.2% as at end-December 2010, following a rights issue and a smaller risk-weighted asset base.

CIMB Investment Bank Berhad
CIMB IB holds AAA/Stable/P1 ratings; it is the investment-banking, advisory and stockbroking arm of the larger Group. Its ratings mirror those of its sister company, CIMB Bank, and reflect the close relationship between these 2 entities. CIMB IB has retained its leadership in Malaysian mergers and acquisitions, advisory services, debt-capital-market as well as equity league tables, and secondary equity-market trades.

Given the robust capital markets last year and the procurement of major deals, CIMB IB’s fee and brokerage income surged to a respective RM260.2 million and RM163.7 million in FY Dec 2010 (FY Dec 2009: RM235.7 million and RM108.6 million).

Nonetheless, this had been partially offset by a hefty RM80 million one-off provision on losses from its investment-management and securities services. As a result, its pre-tax profit diminished 53% year-on-year to RM96.2 million in fiscal 2010 (FY Dec 2009: RM204.7 million). As at end-December 2010, CIMB IB’s overall RWCAR stood at 17.1%. While this is lower than the Malaysian investment-banking industry’s average of 35% as at the same date, capital support from the Group is expected to be forthcoming, if needed.

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Joanne Kek
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joanne@ram.com.my