MARC AFFIRMS ITS AA+/MARC-1 CORPORATE CREDIT RATINGS ON CIMB GROUP HOLDINGS BERHAD; CONCURRENTLY AFFIRMS ITS AA RATING ON THE ISSUER’S RM10 BILLION SUBORDINATED DEBT PROGRAMME

MARC has affirmed its long-term and short-term corporate credit ratings of AA+/MARC-1 on CIMB Group Holdings Berhad (CIMB Group) and accordingly affirmed its issue rating of AA on the group’s RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme (sub-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 reflects the subordination of the latter to the senior obligations of CIMB Group in line with MARC’s methodology.

CIMB Group is a non-operating financial holding company whose key indirect banking subsidiaries are CIMB Bank Bhd (CIMB Bank), CIMB Investment Bank Bhd (CIMB Investment) and Indonesia-based PT Bank CIMB Niaga Tbk (CIMB Niaga). CIMB Group’s long-term rating reflects its subordination to its banking subsidiaries. Of these, CIMB Bank remains the group’s core operating entity, accounting for 82.0% of the group’s consolidated assets as at end-June 2016 (end-2015: 81.5%) and more than 90.0% of dividend income historically. As a bank holding company, CIMB Bank’s two main subsidiaries are CIMB Islamic Bank Berhad (CIMB Islamic) and Thailand-based CIMB Thai Bank PLC (CIMB Thai). CIMB Bank has a rating of AAA/MARC-1/stable from MARC.

CIMB Group is Malaysia’s second-largest and ASEAN’s fifth-largest banking group in terms of assets. For 1H2016, its Malaysian operations contributed 75.0% of its pre-tax profit, followed by Indonesia (13.0%) and Thailand (4.0%). Following a period of rapid expansion, the group has recently undertaken a rationalisation exercise under which it downsized its Malaysian, Indonesian and Australian operations to reduce operating costs. While CIMB Group has also taken borrowings to strengthen its investments in its banking subsidiaries in the past, the extension of Basel III capital requirements to financial holding companies in 4Q2015 has led the group to put in place Tier 2 subordinated debt and Additional Tier 1 (AT1) capital securities programmes with limits of RM10.0 billion each. The proceeds from issuances under the programmes are being invested in similar capital instruments of its banking subsidiaries. During 1H2016, the group subscribed to CIMB Bank’s AT1 issuance of RM1.0 billion.

CIMB Group’s continued investments in the capital instruments of its subsidiary has meant that the double leverage ratio remains high at 140% as at end-1H2016 (2015: 141%). This ratio could face further upward pressure as more sub-debt issuances are undertaken to invest in its banking subsidiaries. MARC draws some comfort from the group’s strong consolidated common equity Tier 1 (CET1) capital ratio of 10.7% as at end-June 2016, which remains higher than the regulatory requirement of 7.0% (including capital conservation buffer of 2.5%) that will take effect in January 2019. MARC expects CIMB Group’s capital to continue be supported by the group’s dividend reinvestment scheme (DRS); the reinvestment rate under the DRS has been above 70.0% since the scheme’s initiation in 2013.

For 1H2016, CIMB Group registered consolidated pre-tax profit of RM2.3 billion, an increase of 35.4% y-o-y owing to continued loan growth in Malaysia, Singapore and Thailand as well as lower overhead expenses following the completion of a mutual separation scheme (MSS) exercise and a restructuring of the investment banking business in 1H2015. On excluding the MSS and restructuring costs of RM518.4 million incurred in 1H2015, net profit would have declined by 3.1% y-o-y in 1H2016. The cost-to-income ratio declined to 55.4% in 1H2016 from 56.7% in the previous corresponding period (excluding the MSS and restructuring costs). Despite lower operating expenses, MARC views that the weakening domestic and regional economic growth could have an impact on the group’s asset quality and consequently its earnings over the near term. The group’s impairment charges increased to RM1.17 billion in 1H2016 (1H2015: RM1.07 billion) mainly due to the weaker asset quality of its Thai operations.

CIMB Group’s sub-debt obligations are expected to be met by cash flows from the capital instruments it has subscribed. In addition, MARC observes that dividends from CIMB Bank have been stable and sufficient to support the holding company’s debt obligations. For 1H2016, CIMB Group’s dividend income increased to RM1.05 billion (1H2015: RM753.0 million). Of its subsidiaries, CIMB Niaga has not distributed any dividends since 2011; the bank has continued to face a tough operating environment that has weighed on its asset quality and financial performance. Going forward, the phasing in of the Basel III capital framework and potential earnings pressure on its key banking subsidiaries could affect dividend flows to the parent.

The stable outlook reflects MARC’s expectation that the group’s overall credit profile will be maintained against a more subdued domestic and regional macroeconomic outlook. The ratings remain driven by the key performance metrics of the group’s key subsidiaries, and therefore any change in their credit profile would impact CIMB Group.

Contacts: Joan Leong, +603-2082 2270/ joan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

November 15, 2016