MARC AFFIRMS CIMB ISLAMIC BANK'S FINANCIAL INSTITUTION RATINGS AT AAA/MARC-1 AND ITS RM2.0 BILLION TIER 2 JUNIOR SUKUK PROGRAMME AT AA+IS; OUTLOOK STABLE

Jan 22, 2014 -
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 RM2.0 billion Tier 2 Junior Sukuk Programme (Junior Sukuk) at AA+IS. The outlook on the ratings is stable. 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 FI ratings are equalised to that of its parent CIMB Bank Berhad (CIMB Bank) whose ratings were recently affirmed by MARC at AAA/Stable. The equalised rating is premised on MARC’s continued view of the Islamic bank’s status as CIMB Bank’s core domestic Islamic operating subsidiary as exemplified by the latter’s strong strategic fit with the banking operations of its parent bank as well as the ultimate parent, CIMB Group Holdings Berhad (CIMB Group), the shared branding with the parent and the high degree of operational integration between them.
The AAA/MARC-1 ratings incorporate CIMB Bank’s and CIMB Islamic’s strong domestic competitive position as one of the leading conventional and Islamic banking institutions in the country, resilient core earnings generation, stable funding base, sound risk management and strong capital position. The ratings also continue to factor a high probability of systemic support in view of CIMB Islamic’s systemic importance domestically. These positive factors notwithstanding, MARC notes the persistent margin pressures, arising largely from prevailing intense competition domestically and CIMB Group’s exposure to external risks arising from geographic expansion.
With a 12.3% market share of Islamic assets in Malaysia, CIMB Islamic is the second-largest Islamic bank by assets in the country. CIMB Islamic’s operations through CIMB Bank’s 297 branches nationwide as at end-September 2013 provides it with good access to retail and domestic corporate funding. CIMB Islamic is also Malaysia’s second-largest Islamic mortgage financier with a 15.6% market share in the Islamic residential mortgage segment. MARC views that CIMB Islamic’s regional presence in the Islamic banking segment is enhanced by its close partnership with CIMB Investment Bank Berhad (CIMB Investment) for the development and execution of domestic and global sukuk transactions under the CIMB Group’s regional universal banking platform. 
For the nine-month period ended September 30, 2013 (9MFY2013), CIMB Islamic registered slower year-on-year financing growth of 13.2% due to tighter regulatory policies on consumer financing. CIMB Islamic’s asset quality remained sound with a sustained gross impaired financing ratio of 0.9% as at end-September 2013, despite the relatively higher new impaired financing of RM321.2 million in 9M2013, compared to RM383.1 million for the full year 2012. The higher new impaired financing was moderated by the impaired financing written-off, recoveries and reclassified as non-impaired. MARC observes the Islamic bank’s adherence to conservative provisioning policy with financing loss coverage standing at a favourable 124% as at end-September 2013, although the ratio declined from 134% and 151% in 2012 and 2011 respectively.
CIMB Islamic’s net income registered a marginal 2.4% increase to RM730.0 million during 9M2013 (9M2012: RM712.6 million), driven by higher net financing income, which in turn was due to a larger financing base. However, non-financing income declined to RM39.8 million (9M2012: RM120.7 million) due to sluggish Islamic capital market activities which affected fees and commission income. CIMB Islamic’s pre-tax pre-provision profit, however, declined by 9.4% (9M2013: RM389.0 million; 9M2012: RM429.5 million), attributed to higher shared service costs with CIMB Bank and CIMB Investment as well as personnel expenses. Nonetheless, MARC notes that the cost pressure on profits was moderated by a continued trend of lower impairment charges. Going forward, MARC expects continued pressure on the bank’s profit margins on account of continued subdued financing growth and cost pressures.
CIMB Islamic’s funding and liquidity profile remained satisfactory, supported by its sustainable deposit-taking business. The bank’s customer deposit base expansion is driven by term deposits, the largest constituent of the bank’s total customer deposits as at end-September 2013. However, the high funding cost associated with term deposits have contributed to the narrowing of CIMB Islamic’s margins. While the bank’s financing-to-customer deposit ratio remained high at levels above 90%, liquidity concerns are largely mitigated by its access to funds from its parent via the restricted profit sharing investment account (RPSIA). The RPSIA financing is an arrangement with the parent bank, CIMB Bank, which invests in CIMB Islamic’s financing portfolio and retains the credit exposure of the financing. During 9M2013, the RPSIA balance increased (end-September 2013: RM2.15 billion; end-December 2012: RM0.98 billion) and moderated the decline in deposits from other financial institutions.
CIMB Islamic’s capital ratios as at end-September 2013 are a new set of metrics for the bank under BNM’s Basel III capital standards, which the bank regulator began phasing in from the start of 2013. Although the introduction of Basel III somewhat complicates the comparison of 2013 with pre-2013 capital ratios, the bank’s total capital and Tier 1 capital ratios had not been significantly affected by the new capital requirements. The Islamic bank maintains healthy regulatory capital ratios as at end-September 2013 with Tier 1 capital adequacy ratio (Tier 1 CAR) and total capital ratio (Total CAR) at 9.0% and 12.8% respectively (2012: 8.7% and 13.3% respectively). The improvement in the Tier 1 CAR was attributed to lower risk-weighted assets, which in turn was due to an increase in the RPSIA which attracts no capital charges for credit and market risks. The total CAR, however, was slightly lower due to the gradual phasing out of non-Basel III compliant capital instruments in accordance with BNM’s Basel III regulatory framework. This phasing out affects the bank’s perpetual preference shares and subordinated debt securities which accounts for more than 30% of the bank’s total capital base as of end-December 2012. Meanwhile, CIMB Islamic’s common equity Tier 1 (CET-1) capital ratio is satisfactory at 8.7%. While this ratio is above the minimum regulatory requirement of 3.5%, this level is below the industry’s average of 12.1% during the same period, reflecting lower amount of high quality capital relative to the Islamic banking sector’s average.   
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:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.