Singapore — Moody’s Investors Service has assigned the following debt and deposit ratings to CIMB Islamic Bank Bdh (CIMB Islamic), with a stable outlook.
In a statement, the ratings for local currency deposits and issuer stood at A1/P-1 and foreign currency deposits and issuer at A3/P-2.
Bank Financial Strength rating (BFSR): D+, mapping to a baseline credit assessment (BCA) of ba1. The adjusted BCA, incorporating parental support, is baa1.
Moody’s said this was the first time it had assigned international ratings for CIMB Islamic.
The A1 long-term local currency deposit and issuer ratings incorporate Moody’s expectation of full parental support from CIMB Bank Berhad (A1 stable, C-/baa1 stable), which resulted in the rating uplift from its baseline credit assessment (BCA) of ba1.
Moody’s has assigned deposit ratings to CIMB Islamic, on the basis that the ratings apply to the bank’s deposits in accordance with the definition of Islamic deposits laid out in the 2013 Islamic Financial Services Act 2013, gazetted in March 2013, which excludes investment accounts with contractual loss-sharing features.
It said this expectation of support was based primarily on CIMB Islamic’s strategic importance to CIMB Group’s (not rated) Islamic banking business in Malaysia.
CIMB Bank owns 100 per cent of CIMB Islamic. The bank’s adjusted BCA, incorporating parental support, is baa1.
Moody’s said the ratings took into account its assessment of the very high probability that the Malaysian Government (A3 stable) would provide support to CIMB Bank, in times of need, which in turn effectively resulted in support for CIMB Islamic.
CIMB Islamic’s deposit and issuer ratings and their outlooks are positioned in line with those of CIMB Bank, and are likely to move in tandem with any movement in CIMB Bank’s ratings and outlooks.
Due to the high degree of interconnectedness between the two and our expectation of full parental support for CIMB Islamic, Moody’s views the risk to the depositors and creditors of CIMB Bank and CIMB Islamic to be the same.
CIMB Islamic’s standalone D+/ba1 BFSR/BCA is positioned three notches below that of its parent. This reflects the high degree of interconnectedness in operations and risk management between it and CIMB Bank.
As a result, CIMB Islamic has a high dependence on CIMB Bank for liquidity and capital support. And importantly, CIMB Islamic’s higher leverage — when compared to its parent — makes it more vulnerable to stress conditions, and accordingly in greater need of extraordinary support.
The main drivers of CIMB Islamic’s standalone credit profile are: (1) its dominant domestic market position as the 2nd largest Islamic banking franchise in Malaysia, which benefits from its ability to leverage CIMB Group’s resources, particularly its extensive distribution network, risk management infrastructure, human resources, and brand recognition, etc; (2) its good asset quality metrics, mirroring improvements at the parent bank; (3) its stable liquidity profile; and (4) its weak core capitalization, reflective of its highly leveraged balance sheet.
At end-June 2013, CIMB Islamic’s impaired financing ratio was 0.9%, relatively unchanged from end-2012, and much lower than Moody’s-rated Malaysian bank average of 1.8%.
Its 3-year (2010-2012) average financing-to-deposit ratio (FDR) was about 97% and the ratio was still stable at end-June 2013. Over the next 12-18 months, we expect its FDR to gradually decline to 90-95%, driven primarily by a moderation in credit growth in accordance with management targets.
At end-June 2013, its Tier 1 ratio had remained fairly low at 9.4%, compared with the Malaysian rated-bank average of 13%. In line with its low capitalization, CIMB Islamic’s leverage remains high, and significantly higher than its parent bank.
At end-June 2013, total assets were 20x the bank’s equity, down slightly from 22x at end-2012, but well above the 14x maintained by its parent, CIMB Bank. Such a high level of leverage will weigh on its loss-absorption capacity during stress conditions.
WHAT COULD CHANGE THE RATING UP/DOWN
The bank’s deposit and issuer ratings are in line with the sovereign ceilings. Unless the sovereign ceilings are upgraded, the bank’s ratings are unlikely to be upgraded.
The bank’s BCA could be revised upwards, or the BFSR outlook could be revised to positive from stable, if: (1) leverage — measured by the multiple of total assets over equity — declines significantly and stabilizes below 15x, and (2) its other credit metrics remain robust.
We currently do not expect any change in our expectation of full parental support for CIMB Islamic, given the high strategic importance of Islamic banking to CIMB Group.
However, should the credit fundamentals of the bank deteriorate, and to an extent that we view CIMB Bank would be better off disposing of CIMB Islamic, and/or CIMB Bank’s standalone credit strength deteriorates and its BCA is revised downwards, CIMB Islamic’s ratings are likely to be downgraded.
The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
As defined under the Islamic Financial Services Act 2013, Islamic deposits relate to money accepted or paid in accordance with Shariah on terms under which the money will be repaid in full; investment accounts relate to accounts for which money is accepted for the purpose of investment in accordance with Shariah on terms that there is no express or implied obligation to repay the money in full, and both profits and losses shall be shared between the party paying the money and the party accepting the money.
Headquartered in Kuala Lumpur, CIMB Islamic reported total assets of MYR51.0 billion ($16.2 billion) at end-June 2013.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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