CIMB Bank Bhd. #A-/A-2# Ratings Affirmed With Stable SACP Revised To #a-# From #bbb+#

Stocks and Financial Services Press Releases Monday October 16, 2017 17:40
SINGAPORE--16 Oct--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Oct. 16, 2017--S&P Global Ratings affirmed its 'A-' long-term and 'A-2' short-term issuer credit ratings on CIMB Bank Bhd. (CIMBB) and CIMB Investment Bank Bhd. (CIMBIB). The outlook on the long-term rating is stable. CIMBB is the main operating subsidiary of CIMB Group Holdings Bhd. (CIMB Group), and CIMBIB is the investment banking subsidiary of CIMB Group.

We affirmed the rating on CIMBB because we expect the bank to maintain its business position, strong funding capacity, and improved capitalization over the next 18-24 months. We expect CIMBB to maintain its position among the top three largest Malaysian banks. CIMBB has established itself as a leading regional bank with a focus on countries in the Association of Southeast Asian Nations (ASEAN), and is more geographically diversified than domestic peers. CIMBB's large, stable retail deposit base underpins its funding profile. The bank's exposure to higher risk emerging markets and margin pressure in its home market are constraining factors.

We revised CIMBB's stand-alone credit profile (SACP) to 'a-' from 'bbb+' because of the bank's strengthened capital position. The bank's capital ratio has been steadily improving in recent years. Management has taken a disciplined approach to bolster its capital buffers in anticipation of slower economic growth, both domestically and in other ASEAN economies where it operates. This is consistent with CIMBB's "Target 2018" initiatives to optimize capital, tighten costs, and grow prudently in a tough operating environment. The bank's slower, more careful loan growth and high profit retention also supported its capital enhancement efforts. A dividend reinvestment scheme with a high dividend reinvestment rate exceeding 80% in 2016 underpinned the bank's high profit retention.

We expect CIMBB to maintain the S&P Global Ratings risk-adjusted capital (RAC) ratio at 8%-8.5% over the next 18-24 months. Our assumptions factor in loan growth of 5%-7% and a prudent dividend payout to support earnings retention. We expect the bank's net interest margins to decline 5-10 basis points due to competition, and credit costs to increase slightly due to a generally challenging macro environment. This will be partially offset by tight cost control and efficiency improvements.

In our view, CIMBB's reported nonperforming loans and credit costs could deteriorate further in 2017 as the credit cycle plays out after increasing slightly in 2016. Malaysia's oil and gas sector continues to grapple with depressed oil prices and excess capacity, particularly in the upstream or support services sector. CIMBB's limited exposure to this sector (less than 3% of total loans) caps the downside risks. The bank has also taken a more circumspect approach to its regional expansion into higher yielding economies such as Thailand. It has recently exited the unsecured credit card business in Thailand, and trimmed its branches by almost half as part of its strategy to de-risk and shift away from retail toward the mid-to-higher-end customer segment.

We affirmed the rating on CIMBIB because we continue to view CIMBIB as a core entity of the group.

The stable outlook on CIMBB reflects our view that the bank's SACP will remain resilient over the next two years despite asset quality pressure in its main markets. We believe that any extraordinary government support is likely to flow through CIMBB as the main operating subsidiary of CIMB Group in Malaysia rather than any other group entities. The ratings and outlook on CIMBB will move in tandem with the sovereign credit rating on Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1), in line with our assessment of the bank as a highly systemic institution in the country.

We are unlikely to lower the ratings on CIMBB in the next 18-24 months because a downgrade will require the bank's financial profile to weaken significantly such that its SACP declines to 'bbb-'. This could happen, for instance, due to aggressive expansion, particularly in higher-risk emerging markets, and if credit losses are materially higher than our base-case expectation.

The likelihood that we may raise the ratings on CIMBB over the next 18-24 months is low as it requires both the bank's SACP and the long-term foreign currency sovereign credit rating on Malaysia to go up. We do not rate CIMBB higher than Malaysia because the bank primarily operates in that country and we do not expect it to be able to withstand the stress associated with a sovereign default.

The stable outlook on CIMBIB reflects the stable outlook on CIMBB. The outlook also reflects our expectation that CIMBIB will remain a core entity of CIMB Group. We expect the rating on CIMBIB to move in tandem with the rating on CIMBB.

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