MARC has assigned a preliminary rating of AA+IS to CIMB Islamic Bank Berhad’s (CIMB Islamic) proposed RM5.0 billion Basel III-compliant Tier 2 Junior Sukuk (Proposed Junior Sukuk) programme.

Aug 25, 2014 -
MARC has assigned a preliminary rating of AA+IS to CIMB Islamic Bank Berhad’s (CIMB Islamic) proposed RM5.0 billion Basel III-compliant Tier 2 Junior Sukuk (Proposed Junior Sukuk) programme. The bank’s financial institution (FI) ratings and corporate debt rating on its existing RM2.0 billion Tier 2 Junior Sukuk (Junior Sukuk) programme were affirmed at AAA/MARC-1 and AA+IS respectively. The outlook on the ratings is stable.
The one-notch rating differential between the long-term FI rating of CIMB Islamic and the Junior Sukuk programmes reflects the subordination of the programmes to the bank’s deposits and other senior unsecured debt. Given that the issuance under the Proposed Junior Sukuk programme will be included in the consolidated total capital of the bank’s parent, CIMB Bank Berhad (CIMB Bank), any outstanding sukuk under the programme are susceptible to non-viability event triggers at the parent bank level. Accordingly, the rating on the Proposed Junior Sukuk programme will be notched down from the lower of the ratings of CIMB Islamic or CIMB Bank.
CIMB Islamic’s FI ratings are equalised to its parent CIMB Bank’s ratings premised on MARC’s continued view of the Islamic bank’s status as a core operating subsidiary of CIMB Bank. CIMB Bank’s FI ratings have been affirmed at AAA/MARC-1/Stable to reflect its strong market position in the domestic banking sector, sustained earnings generation, sound risk management and healthy capital adequacy. The ratings also incorporate CIMB Bank’s systemic importance in the domestic banking sector as the second largest bank in Malaysia in terms of assets.
In respect of the ratings on CIMB Islamic, MARC takes into consideration the bank’s strategic fit with the overall banking activities of CIMB Bank, the high degree of operational integration between them and shared brand recognition. CIMB Islamic leverages on the resources and infrastructure of CIMB Bank and runs its operations through its parent bank’s wide branch network. The ratings also continue to incorporate a high probability of systemic support in view of CIMB Islamic’s systemic importance in the domestic market.
CIMB Islamic is the second-largest Islamic bank in Malaysia in terms of assets and mortgage financing; it accounts for 11% of the Islamic banking system’s assets and 14% of the mortgage financing market as at end-March 2014. CIMB Islamic has a strong position in bringing domestic and global sukuk issuances to the market through its close alliance with related entity, CIMB Investment Bank Berhad. MARC also expects the continued strengthening of CIMB Group’s universal banking platform in the region to further increase the bank’s franchise value and regional presence. 
CIMB Islamic’s net profit increased by 34.0% year-on-year in 1Q2014 due mainly to lower impairment charges (1Q2014: RM5.7 million; 1Q2013: RM25.5 million) and higher non-financing income (1Q2014: RM21.4 million; 1Q2013: RM11.7 million). However, the bank’s return-on-asset and return-on-equity measures have not materially strengthened, standing at 0.9% and 15.1% respectively on an annualised basis (2013: 0.7%; 14.6%).
CIMB Islamic’s cost-to-income ratio remains high relative to its peers at 45.9% (2013: 46.2%). In addition to high overheads, slower financing growth and potentially higher impairment charges could continue to weigh on profitability, although stronger non-financing income from Islamic capital market activities this year could provide some support to earnings. Impairment charges could increase in the later part of 2014 should the bank strengthen its allowance coverage ratio given that this ratio has declined to 100.7% while the gross impaired financing ratio rose slightly to 1.1% as at end-March 2014 (end-December 2013: 131.1%; 0.9%).
The bank’s gross financing-to-customer deposit ratio edged up to 94.4% as at end-March 2014 (end-December 2013: 92.1%). However, any concern on liquidity risk is largely mitigated by CIMB Islamic’s good access to the interbank market as well as funds from its parent bank via the restricted profit sharing investment account (RPSIA), which has an outstanding of RM2.5 billion as at end-March 2014. CIMB Islamic’s gross financing expanded by a marginal 0.6% to RM35.7 billion as at end-March 2014 from year-end 2013. MARC expects the bank’s financing growth to remain weak for 2014 due to the impact from tightening household financing measures and monetary policy imposed by Bank Negara Malaysia. The bank’s capital ratios remain higher than regulatory requirements: common equity Tier 1 (CET1), Tier 1 and total capital ratios stood at 9.7%, 10.7% and 14.0% respectively. MARC believes that the bank’s Proposed Junior Sukuk programme will strengthen its capital levels to support loss-absorption and business growth.
The ratings and stable outlook on CIMB Islamic are underpinned by the ratings and stable outlook on its parent bank. Any adjustments to the ratings and outlook are susceptible to changes in the parent bank’s willingness and capacity to provide support. Notwithstanding these factors, the outcome of the 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 of the entities when key information on the proposed merger exercise becomes available.
Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.