Published on 19 Sep 2019.
RAM Ratings has reaffirmed CIMB Thai Bank Public Company Limited’s (the Bank) AA2/Stable/P1 financial institution ratings (FIRs) as well as the AA3/Stable rating of the Bank’s RM2 billion Tier-2 Subordinated Debt Programme (2014/2044). The ratings reflect CIMB Thai’s strategic importance to CIMB Group Holding Berhad’s (the Group) ASEAN-focused strategy and our expectation of continued ready parental support, notwithstanding the local regulatory restriction against further equity injections into the Bank, effective November 2018. We derive comfort from the knowledge that the Group is committed to employing other channels of support in times of need, which could include offloading CIMB Thai’s non-performing loans (NPLs) to a sister company and booking large credits in other entities within CIMB Group. In addition, the provision of tier-2 capital is still permissible and the Bank has access to a contingent liquidity line from its immediate parent CIMB Bank Berhad (rated AAA/Stable/P1).
While CIMB Thai is a small player whose contribution to the Group is modest, Thailand remains a key market in the Group’s new five-year business plan (2019-2023), termed Forward23. CIMB Group has demonstrated a strong track record of support for the Bank, having participated in multiple capital injections (via CIMB Bank) over the years. The latest such exercise was CIMB Thai’s THB3.95 bil rights issue in October 2018, where CIMB Bank had subscribed for shares in excess of its shareholding proportion, raising its stake to 94.8%. The rights issue had enabled CIMB Thai to strengthen its NPL coverage ratio and common equity tier-1 capital ratio to a respective 106% and 13.7% as at end-June 2019 (pre-rights issue: 94% and 12.4% as at end-September 2018), affording the Bank a comfortable buffer against still-weak asset quality.
CIMB Thai’s NPL ratio eased from 5.1% to 4.4% in fiscal 2018 following a bad-debt disposal, before inching up to 4.5% in 1H fiscal 2019. The Bank’s net formation of new NPLs, which excludes the effect of disposal, had declined since 2017, albeit remaining at an elevated level. Asset quality weakness had mainly stemmed from the Bank’s commercial banking segment, which serves SMEs. While the challenging operating environment could give rise to further pressure, the downside is contained by the paring down of the Bank’s commercial banking book over the years. However, we are watchful of CIMB Thai’s stronger growth appetite amid a slowing economy.
CIMB Thai had incurred additional general provisions of THB1.3 bil (about a quarter of full-year provisions) in fiscal 2018 to boost its NPL coverage. The Bank’s credit cost ratio came in at 2.3% (fiscal 2017: 2.4%) as a result of these provisions, without which the indicator would have been 1.7%. The ratio had improved to an annualised 1.4% in 1H fiscal 2019, although still deemed high.
In 1H fiscal 2019, CIMB Thai’s pre-tax profit surged 33% y-o-y from a low base to THB693 mil, although its pre-tax return on risk-weighted assets stayed soft at only 0.5% (annualised). Excluding two extraordinary items that largely negated each other, pre-tax profit was 26% higher y-o-y, driven by a 31% decline in impairment charges that outweighed a further increase in operating expenses (+13%). Looking ahead, profitability upside will be capped by the ongoing compression of the Bank’s net interest margin, which had narrowed to an annualised 3.5% in 1H fiscal 2019 (fiscal 2018: 3.7%; fiscal 2017: 3.9%) amid funding cost pressures and a focus on better-quality but lower-yielding assets.
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
(603) 3385 2577
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Ratings on CIMB Thai Bank Public Company Limited