Published on 19 Aug 2020.
RAM Ratings has reaffirmed CIMB Group Holdings Berhad’s (the Group) AA1/Stable/P1 corporate credit ratings (CCRs) and the AAA/Stable/P1 financial institution ratings of its Malaysian banking subsidiaries – CIMB Bank Berhad, CIMB Islamic Bank Berhad and CIMB Investment Bank Berhad. Concurrently, the ratings of the entities’ debt/sukuk facilities have also been reaffirmed (Table 1). The one-notch difference between CIMB Group’s long-term CCR and the long-term AAA financial institution ratings of its Malaysian banking subsidiaries reflects its structural subordination as a non-operating holding company and its moderate holding-company debt load at the holding-company level.
The reaffirmations are premised on our view that CIMB Group’s pre-provision earnings and capitalisation provide a sound loss absorption capacity to ride out the credit downcycle brought about by the COVID-19 pandemic. The Group enters this turbulent period in a stronger position, having strengthened its common equity tier-1 capital ratio to 12.5% as at end-March 2020 from 10.0% five years ago.
CIMB Group’s ratings continue to incorporate its strong universal banking franchise and systemic importance in Malaysia. Within ASEAN, the Group is the fifth-largest banking group by assets, with a presence in all 10 countries in the region. In Malaysia, the Group is the second-biggest lender and is designated by Bank Negara Malaysia (BNM) as a domestic systemically important bank. The Group is expected to benefit from government support in times of need.
While CIMB Group’s regional operations enhance its franchise, they give rise to greater asset quality pressure relative to domestic peers. Indonesia and Thailand, which collectively account for a quarter of the Group’s loan book, have weaker track records of loan quality and the pace of their economic recovery is expected to lag Malaysia’s. While temporary loan relief measures are available across the Group’s main markets (Malaysia, Indonesia, Thailand and Singapore), these will not fully mitigate widespread disruptions caused by the pandemic.
The Group’s gross impaired loan (GIL) ratio had risen to 3.4% as at end-March 2020, although this is not reflective of the COVID-19 induced stress given that about 67% of domestic loans were under moratorium or had been restructured/rescheduled at the end of April 2020. Loans in its other markets have also come under various loan forbearance programmes although at a much lower proportion. The GIL ratio had deteriorated from 2.9% as at end-December 2018 mainly due to a handful of corporate borrowers and will likely climb further. Nonetheless, we take cognisance of reduced higher-risk exposures in Indonesia (e.g., mining sector) and Thailand (e.g., SMEs) over the years.
CIMB Group expects its credit cost ratio to spike to 100 bps-120 bps in fiscal 2020 (fiscal 2019: 46 bps). This range includes pre-emptive provisions to be built up during the year and full provisions for two oil and gas borrowers (equivalent to credit costs of 25 bps) in Singapore that defaulted this year. The heftier provisions and margin compression arising from multiple policy rate cuts will result in significantly lower earnings in the near term. These factors, coupled with weaker trading income, caused the Group’s pre-tax profit to tumble 55% y-o-y to RM714 mil in 1Q fiscal 2020, translating into an annualised return on risk-weighted assets of only 0.9%.
CIMB Group is primarily funded by deposits, which are supplemented by wholesale funding that is diversified in terms of currency and instrument. The liquidity coverage ratios of its key banking subsidiaries were all above 130% as at end-March 2020 while their net stable funding ratios had exceeded the requirement of 100%. We expect the Group’s liquidity to remain sufficient despite the six-month loan moratorium that temporarily diminishes the cash inflow of banks.
Given the challenging operating environment, CIMB Group will emphasise capital preservation and apply its dividend reinvestment scheme to future dividend payments. The scheme had been well received in the past, seeing an average take-up rate of 79% since inception. Meanwhile, the Group has availed itself of the regulatory flexibility accorded by BNM in fully releasing its RM2 bil of regulatory reserves in 1Q 2020. This had lowered its GIL coverage ratio to 76% (end-December 2019: 100% inclusive of regulatory reserves). The Group’s capitalisation will be largely intact after 2020 when it will need to rebuild its regulatory reserves based on BNM’s requirement.
CIMB Group Holdings Berhad
RM6.0 billion Conventional/Islamic MTN Programme (2008/2038)
RM6.0 billion Conventional CP Programme (2015/2022)
RM10.0 billion Additional Tier-1 Capital Securities Programme (2016/-)
CIMB Bank Berhad
RM10.0 billion Tier-2 Subordinated Debt Programme (2013/2073):
RM20.0 billion MTN Programme (2017/-)
CIMB Islamic Bank Berhad
RM10.0 billion Sukuk Wakalah Programme (2017/-)
Wong Yin Ching, CFA
(603) 3385 2555
(603) 3385 2577
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Rating Rationale: CIMB Group Holdings Berhad
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Rating Rationale: CIMB Investment Bank Berhad
Ratings on CIMB Group Holdings Berhad