MARC AFFIRMS CIMB BANK’S FINANCIAL INSTITUTION AND RELATED ISSUE RATINGS; OUTLOOK STABLE

Aug 25, 2014 -

MARC has affirmed the long-term and short-term financial institution (FI) ratings on CIMB Bank Berhad (CIMB Bank) at AAA/MARC-1 and the ratings of all corporate debt issuances by the bank; the full list of these issuances is given at the end of this section. CIMB Bank’s existing subordinated debt and hybrid securities are notched down from the bank’s FI rating in accordance with MARC’s general notching policy. (Please refer to MARC’s Analytical Insights “Recent Developments in Rating of Hybrid Securities” for its notching policy.) The outlook on the ratings is stable.

The FI ratings reflect CIMB Bank’s strong market position in the domestic banking sector, expected sustained earnings generation, sound risk management and healthy capital adequacy. The ratings also incorporate the bank’s systemic importance in the domestic banking sector as the second largest bank in Malaysia in terms of assets. CIMB Bank’s strong domestic banking franchise is supported by its extensive network of 297 branches nationwide; its domestic market share of loans and deposits stood at 11.0% and 10.2% respectively as at end-March 2014. CIMB Bank’s strong branding and operating linkages within CIMB Group entities have continued to support growth domestically and regionally. In 2013, the bank registered an aggressive loan growth of 22.2% year-on-year (y-o-y), arising largely from its Singapore branch operations. The growth momentum continued during 1Q2014 at 20.0% y-o-y; however, MARC opines that stricter prudential measures on lending and the change in the interest rate environment could weigh on loan growth going forward.

As at end-1Q2014, CIMB Bank’s gross impaired loan ratio stood at 2.36% as compared to 3.18% as at end-1Q2013 on the back of a decline in gross impaired loans to RM3.22 billion from RM3.63 billion. In addition, the bank’s loan loss coverage ratio improved to 84.0% from 79.1% at end-March 2013. Notwithstanding the improvement, CIMB Bank’s gross impaired loans ratio and loan loss coverage ratio continued to lag the industry average of 1.83% and 104.7% respectively due largely to legacy loans.  MARC expects any decline in the bank’s asset quality measures, should market conditions become more challenging, to be mitigated by the bank’s prudent risk management practices and proactive delinquent loan management efforts. CIMB Bank’s funding and liquidity profile has remained healthy, reflecting the bank’s strong access to capital markets and cheaper funding source; its CASA-to-deposit ratio of 36.7% as at end-1Q2014 is well above the banking industry’s average of 26.3%

For 2013, CIMB Bank registered lower pre-tax pre-provision profit of RM2.97 billion (2012: RM3.14 billion), primarily attributed to a RM200 million organisational restructuring cost incurred during the year. Excluding this one-off charge, the bank would register only a slightly higher pre-tax pre-provision profit of RM3.17 billion, reflecting in part the continued pressure on net interest/financing margins. For 2013, net interest/financing margins narrowed further to 2.32% from 2.39% in 2012. In addition, non-interest income declined to RM2.06 billion (2012: RM2.28 billion) due to sluggish capital market activities. For 1Q2014, CIMB Bank posted improved performance with pre-tax pre-provision profits increasing by 59.6% y-o-y to RM891.7 million, driven mainly by a decline in operating costs compared to the previous corresponding period.

MARC views that the bank’s capital position has weakened with Common Equity Tier 1, Tier 1 and total capital ratios standing at 8.57%, 10.16% and 12.37% respectively as at end-March 2014, below industry average levels (end-March 2014: 12.2%, 12.9% and 14.5% respectively). This is largely due to the gradual phasing out of non-Basel III-compliant capital instruments. The bank set up its RM10.0 billion Basel III-compliant Tier 2 subordinated debt issuance programme in August 2013, and has made two issuances totalling RM1.05 billion to address the phase out. The bank’s capital adequacy levels are also expected to be supported by the reinvestment of cash dividends from its parent, CIMB Group Sdn Bhd, as well as the bank’s good access to capital markets. MARC does not anticipate any constraints on CIMB Bank to comply with the regulatory capital adequacy ratios under the Basel III regiment in the prescribed time frame.

The stable outlook on the ratings reflects the rating agency’s expectation that CIMB Bank’s financial profile will remain commensurate with its ratings. Notwithstanding this, the outcome of the recently announced proposed merger of the bank’s ultimate parent company, CIMB Group Holdings Berhad (CIMB Group), with RHB Capital Berhad and Malaysia Building Society Berhad could potentially affect the ratings of CIMB Group and its related entities. MARC will undertake a rating assessment on the entities as key information on the proposed merger exercise becomes available.

The full list of MARC’s rating actions on CIMB Bank’s corporate debt issuances is as follows:

RM5.0 billion Subordinated Debt & Junior Sukuk Programmes affirmed at AA+/ AA+IS/stable

RM4.0 billion Perpetual Non-Innovative Tier 1 Stapled Capital Securities affirmed at AA/stable

RM1.0 billion Innovative Tier 1 Capital Securities affirmed at AA/stable

RM10.0 billion Basel III-compliant Tier 2 Subordinated Debt Programme affirmed at AA+/stable

Contacts:

Sonia Lim, +603-2082 2267/ sonia@marc.com.my;

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

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.