MARC AFFIRMS CIMB ISLAMIC’S FINANCIAL INSTITUTION RATINGS AT AAA/MARC-1 AND CONCURRENTLY AFFIRMS ITS TIER 2 JUNIOR SUKUK AT AA+IS

Dec 14, 2012 -

MARC has affirmed CIMB Islamic Bank Berhad’s (CIMB Islamic or the bank) financial institution (FI) ratings at AAA/MARC-1 and concurrently affirmed its rating on CIMB Islamic’s Tier 2 Junior Sukuk Programme (Junior Sukuk) at AA+IS. CIMB Islamic’s Junior Sukuk is rated one notch lower than its long-term financial institution rating due to the subordination of the Junior Sukuk to the bank’s deposits and its other senior unsecured debt. The outlook on the long-term ratings is stable.

The rating actions on CIMB Islamic follow MARC’s recent affirmation of parent CIMB Bank Berhad’s (CIMB Bank) ratings of AAA. CIMB Islamic’s FI ratings are equalised with its parent bank’s as MARC continues to view the Islamic bank as a core subsidiary of CIMB Bank in light of its strong strategic fit with the banking operations of the parent bank as well as the ultimate parent, CIMB Group Holdings Berhad (CIMB Group), the high degree of operational integration between the Islamic bank and its parent and common branding with the parent. CIMB Islamic constitutes an important part of CIMB Group's overall franchise as the core Islamic banking and finance entity of the group providing Shariah-compliant consumer and investment banking products and services.

Positive rating drivers include CIMB Bank’s and CIMB Islamic’s strong domestic competitive position, resilient core earnings generation, sound risk management and strong capital adequacy. The ratings continue to incorporate a degree of systemic support in light of CIMB Bank’s systemic importance domestically. Also factored in the ratings is CIMB Group’s strong track record of integrating acquisitions which offsets the inherent risks of the group’s active acquisition-driven growth strategy. At the same time, MARC notes continued margin pressure, heightened competition in the parent bank and subsidiary’s home market and CIMB Group’s increased exposure to geographic expansion-related external risks.

CIMB Islamic is the second largest Islamic bank by assets in Malaysia, with a 13% market share of Islamic assets in the domestic market at the end of June 2012. CIMB Islamic operates through the CIMB Bank’s nationwide network of 312 branches, which gives the bank good access to retail funding and domestic corporates. CIMB Islamic possesses a strong competitive position in the retail financing and investment banking segments. CIMB Islamic is Malaysia’s second largest Islamic mortgage financier with an 18% market share in the Islamic residential mortgage segment and maintains strong positions in domestic and global Sukuk league tables by working in close partnership with CIMB Investment Bank Berhad (CIMB Investment). The continued strengthening of CIMB Group’s regional universal banking platform through acquisitions should help CIMB Islamic to enhance its regional presence in the Islamic investment banking segment and shore up potential for additional earnings generation.

CIMB Islamic’s gross financing, advances and other financing expanded at slower pace during the first quarter of 2012. However, MARC notes some pick-up in retail and commercial financing in the subsequent two quarters in respect of property and auto financing, and the financing of construction and working capital. The Islamic bank’s asset quality remains sound; its gross impaired financing ratio remained low at 1.08% as a percentage of total financing as at end-September 2012 amid a fairly large increase in credit impairments on financing during 2Q 2012, mostly from the non-residential property financing segment of its financing book. Nonetheless, write-offs, and reclassifications to a lesser extent, have helped to lower gross impaired financing in absolute terms (end-September 2012: RM339.3 million; end-December 2011: RM345.8 million) and keep the gross impaired financing ratio around one percentage point. While MARC believes that the bank’s asset quality could see deterioration in the event of an economic slowdown, any deterioration is likely to be gradual and manageable. Provisioning coverage of impaired financing remains strong at 143.0% as of end-September 2012.

The bank's pre-tax pre-provision profit for the nine-month period ended September 30, 2012 (9M2012) increased 5.6% year-on-year while after-tax profits were higher by 3.7%. CIMB Islamic saw higher impairment charges, as well as notable increases in shared service costs paid/payable to CIMB Bank and CIMB Investment, as well as higher establishment and marketing costs. MARC sees sustained pressure on profitability on account of continued subdued financing growth, increased competition and cost pressures but expects CIMB Islamic’s core earnings to remain steady.

CIMB Islamic continues to maintain a satisfactory funding and liquidity profile, supported mostly by its sustainable deposit taking business, albeit slower current and savings accounts (CASA) deposits growth. However, CIMB Islamic continues to rely on access to money market and remains a net recipient of interbank funds. The bank’s gross financing-to-customer deposit ratio edged upwards to 102.7% as at end-September 2012. The dependence on money market funds is mitigated by its access to funds from its parent.

The bank’s regulatory capital ratios imply satisfactory loss-absorption capacity. CIMB Islamic’s risk-weighted capital and core capital ratios stood at 14.2% and 9.4% respectively as of end-September 2012. The bank recently issued an additional RM300 million of the Junior Sukuk.

The stable outlook on CIMB Islamic is underpinned by the stable rating outlook of its parent. As the FI rating of the Islamic bank is equalised with that of CIMB Bank, the subsidiary’s ratings and outlook are sensitive to changes in the parent’s willingness and capacity to provide support.

Contacts:

Milly Leong, +603-2082 2288/ milly@marc.com.my;

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.