CIMB ISLAMIC BANK BERHAD Initial Rating. Date Rating Action Current Rating Outlook May 2009 Assigned AA IS Stable

Transcription

1 KDN NO: PP9914/09/2009(022511) CD Corporate Debt Rating Financial Institution s CREDIT CREDIT ANALYSIS ANALYSIS MALAYSIAN RATING CORPORATION BERHAD CREDIT CIMB ISLAMIC BANK BERHAD 2009 Initial Rating Date Rating Action Current Rating Outlook May 2009 Assigned AA IS Stable Issue Programme Tenure Principal Adviser/ Lead Arranger Facility Agent Trustee First Issue Date August 2009 Related Ratings MALAYSIAN RATING CORPORATION BERHAD (Company No.: V) RM2.0 billion Junior Sukuk Programme 22 years from date of first issuance CIMB Investment Bank Berhad CIMB Investment Bank Berhad Malaysian Trustees Berhad Financial Institution Ratings CIMB Bank Berhad AA+ Stable AA+ Stable Contact Analysts Taufiq Kamal taufiq@marc.com.my Milly Leong milly@marc.com.my (603) Publication Date: August 18, 2009 Note: This credit analysis report is in relation to the press announcement made on June 8, 2009.

2 MALAYSIAN RATING CORPORATION BERHAD CREDIT ANALYSIS CORPORATE DEBT/ Financial Institution 2009 Initial Rating CIMB ISLAMIC BANK BERHAD Major Rating Factors Strengths Ability to leverage CIMB Bank s strong banking franchise and infrastructure; Strategic entity of the CIMB Group s Universal Bank in providing Shariah-compliant banking products; High level of integration with CIMB Bank, the third largest domestic bank; and Sound standalone financial metrics. Challenges Increasing competition in domestic Islamic banking as a result of new foreign bank entrants. Rationale MARC has assigned a rating of AAIS to s (CIMB Islamic) proposed Tier-2 Junior Sukuk Programme. The rating is positioned one notch lower than MARC s assigned long-term financial institution rating on CIMB Islamic of AA+. The assigned corporate debt rating reflects the subordinated position of the Junior Sukuk relative to the bank s deposits as well as senior unsecured debt. The financial institution rating of CIMB Islamic is equalised with that of the parent, CIMB Bank Berhad (CIMB Bank) and reflect extremely high probability of support for the Islamic bank from CIMB Bank should it become necessary. As a core entity of the collectively larger, stronger and diversified CIMB Group banking franchise, CIMB Islamic benefits from cost efficiencies derived from the high level of operational integration between CIMB Islamic and the other CIMB Group entities in addition to the shared branding. MARC expects CIMB Islamic to continue developing its Islamic banking franchise and augmenting its competitive positions in its target market segments, leveraging on the CIMB Group s franchise and its parent bank s comprehensive network of branches. CIMB Islamic displays sound asset quality, satisfactory capitalisation and strong liquidity. Meanwhile, CIMB Group s strong enterprise risk management and relatively conservative risk appetite is mirrored in CIMB Islamic s overall asset quality. CIMB Islamic is the Islamic banking component of the CIMB Group s Universal Bank which encompasses investment banking, commercial banking, asset management as well as takaful. CIMB Group in turn ranks among the top three banking groups in Malaysia and has a strong presence in its domestic market in the investment banking, retail and commercial banking, and wealth management sectors. The group s corporate strategy is to operate as a seamless universal bank with top-tier positions in the commercial banking, investment banking and asset management segments. The group has also extended its reach by distributing Islamic banking and insurance products mainly via wholly-owned CIMB Islamic and 51%- owned CIMB Aviva Takaful Berhad, respectively. CIMB Islamic assumed its present name in September 2006 following the merger exercise between Commerce Tijari Bank Berhad (subsidiary of the then Bumiputra-Commerce Bank Berhad) and the Islamic investment banking division of CIMB Investment Bank Berhad (then known as Commerce International Merchant Bankers Berhad) to transform itself into an Islamic universal bank providing Shariah-compliant banking products and services. In 2007, CIMB Bank transferred its Islamic banking 1

3 assets to CIMB Islamic along with Shariah-compliant assets the former had acquired from Southern Bank Berhad. CIMB Islamic operates under a dual banking model structure which leverages on its parent company s infrastructure as well as resources. Islamic financial products are distributed via the CIMB Bank s network of 359 branches. The sharing of resources improves operational and cost efficiency as well as productivity for the CIMB Group as a whole. CIMB Islamic s forte lies in investment banking. The bank s reputation for innovation in Islamic finance has been a primary driver of its Shariah-compliant investment banking deal flow. The bank continues to dominate the Islamic debt lead managers league tables and in 2008, CIMB Islamic garnered 40.1% 1 of the RM Islamic bond market and 20.9% of the global Islamic bond market. CIMB Islamic has seen fairly strong growth in its commercial banking activities in recent years, as seen in the expansion in its total net financing base from RM6.2 billion as at end of FY2005 to RM7.6 billion as at end of March For FY2008, CIMB Islamic reported a net profit growth of 13.2% to RM73.3 million, which was mainly driven by growth in financing income. The latter has been an important offset to its falling capital market-related fee income. The bank s recently strengthened credit risk management infrastructure ensures financing portfolio growth is consistent with the stated risk appetite of the group. This underpins CIMB Islamic s good asset quality measures. Its net non-performing financing (NPF) ratio improved from 6.7% as at end of 2006 to 1.3% as at end of March As the CIMB Group takes a group-wide approach in the management of the capital of its regulated entities, including CIMB Islamic, the bank s capital adequacy will eventually be aligned with that of the group s targeted levels of 10.0% and 12.0% for core capital ratio and risk-weighted capital ratio (RWCR), respectively. It currently reports satisfactory capitalsation with core capital and risk-weighted ratios of 9.0% and 10.5% respectively, as at end of March The ratings outlook is stable premised on MARC s belief that CIMB Islamic will continue to exhibit resiliency amidst a less benign banking and economic environment relative to prior years owing to tight risk management and satisfactory recurring income generation capacity. The sound deposit bases of CIMB Bank and CIMB Islamic as well as their ability to access capital market funding for its general banking purposes underscores our expectations that both entities will continue to maintain funding and liquidity profiles that are consistent with assigned ratings. Exhibit 1: Financial Highlights - CIMB Islamic FYE 31 December 1Q Total Assets (RM million) 18, , , , Gross NPFs/ Gross loans (%) ROE (%) 17.56* (19.48) Gross Financing/ Customer Deposits (%) Capital adequacy ratio (%) Source: Bank s Annual Reports *Annualised 1 Source: Bloomberg 2

4 BACKGROUND CIMB Islamic (CIMB Islamic) is the Islamic banking arm of the CIMB Group. CIMB Islamic operates under the dual banking model which leverages on its parent company CIMB Bank Berhad s (CIMB Bank) infrastructure as well as resources. The Islamic financial products are distributed via CIMB Bank s 359 branches nationwide. The sharing of resources facilitates operational efficiencies and enables the CIMB banking group to fit in the universal banking model which encompasses conventional as well as Islamic banking. CIMB Group Universal Bank (CIMB UB) is housed under CIMB Group Sdn Bhd (CIMBG), and comprises CIMB Bank, CIMB Investment Bank Berhad (CIMB IB), CIMB Islamic, Commerce International Group Berhad (CIGB) and CIMB-GK Pte Ltd (CIMB-GK). CIMB Islamic operates alongside the conventional bank in providing Shariah-compliant products and services throughout the universal bank. Commerce Tijari Bank Berhad merged with the Islamic investment banking division of CIMB IB and assumed its present name, CIMB Islamic, in Following the acquisition of Southern Bank Berhad (SBB) by CIMB Bank in 2006, all the Islamic assets and businesses of CIMB Bank were transferred to CIMB Islamic in The CIMB Group streamlined all of its Islamic banking and finance business from the three different business entities and merged them under CIMB Islamic. The bank then became the anchor universal banking operating entity of the CIMB Group s Islamic banking and finance franchise. CIMB Islamic offers Shariah-compliant consumer and investment banking products and services parallel to the traditional offerings of CIMB Bank and CIMB IB. As an Islamic universal bank, CIMB Islamic provides both Islamic consumer and investment banking services. CIMB Islamic s business model capitalises on CIMB Bank s considerable product and distribution infrastructure. Despite the entry of wellheeled global and regional Islamic banks and the ensuing intense competition in the market, CIMB Islamic has grown its assets from RM521.2 million as at end of FY2005 to RM18.1 billion as at end-march MARC believes that CIMB Islamic s differentiated product development capability will continue to be an important driver of its growth going forward. CIMB Islamic s forte continues to be in structuring Shariah-compliant investment banking transactions. CIMB Islamic s contribution to the BCHB Group remains small at this stage, and it contributed approximately 4% (FY2007: 3%) and 5% of CIMB UB s pre-tax profit in FY2008 and 1QFY2009 respectively. CIMB Islamic s retail franchise ambitions could face formidable competition from international entrants into the domestic banking scene that could in turn pose a likely constraint on its growth. In FY2008, CIMB Islamic garnered a 40.1% market share in the Malaysian Ringgit Islamic bonds segment of the domestic bond market and a 20.9% market share in global Islamic bonds 2. Meanwhile, the bank managed to capture a 3.6% market share of the international sukuk market. Going into 1QFY2009, the bank continued to maintain its pole position in the sukuk league tables. CIMB Islamic derives a high level of implied support from its parent, CIMB Bank, reflecting expectations of timely capital and liquidity support by CIMB Bank should the financial support be required. 2 Source: Bloomberg 3

5 CIMB Bank CIMB Bank is the third largest domestic commercial bank in terms of asset size, and is part of CIMB UB. The universal bank was launched in September 2006, and was formed following a series of mergers with businesses in commercial banking, investment banking, asset management, life and takaful insurance. CIMB Bank is a central entity in the universal banking group, accounting for approximately three-quarters of the group s asset base and profits. CIMB Bank s balance sheet has expanded on account of asset transfers undertaken in connection with the group s realignment of its business entities, of which the transferors were CIMB IB and CIMB Discount House Berhad. Further to these transfers, the merger with SBB significantly strengthened CIMB Bank s consumer banking franchise, notably in the mass affluent market, and also contributed significantly to the bank s credit card business. In addition, the merger with SBB expanded its customer base and branch network. CIMB Bank continues to grow its retail customer base, and as at June 2008, has over 5 million retail customers. CIMB Islamic, as the wholly-owned Islamic banking subsidiary of CIMB Bank, leverages on its parent s branch distribution network. The universal banking group has reaped cost-related synergies as well as revenue driven synergies through cross-selling and development of new products. Key initiatives undertaken by the universal banking group during 2007 included the implementation of a new credit framework, strengthening risk management and improving its transfer pricing mechanism. The group then focused on strengthening its credit risk management ahead of loan growth initiatives. The focus then shifted to loan growth, which yielded a 15.4% increase in CIMB Bank s gross loans from RM77.4 billion to RM89.3 billion during FY2008. CIMB Bank continues to focus on improving integration with core entities of the group, and acts as a distribution channel for the group s capital market products. Bumiputra-Commerce Holdings Berhad (BCHB) Group s investment banks, CIMB IB and CIMB GK Pte Ltd, are able to leverage on CIMB Bank s balance sheet strength to facilitate their financial advisory and deal arranging activities. This has enabled them to make significant strides in regional investment banking. Shariah Committee With the integration of the Shariah Committees of CIMB IB and CIMB Islamic effective January 2007, all the Islamic banking businesses of the CIMB Group came under the purview of the CIMB Islamic Shariah Committee. The Shariah Committee advises the board on Shariah matters to ensure that the business operations and products comply with Shariah principles in all aspects. The Committee reports to the bank s Board of Directors. In advising on such matters, the Committee also considers the views of the Shariah Council/Committees of relevant authorities like Bank Negara Malaysia, (BNM) and the Securities Commission on issues relating to the activities and operations of Islamic banking and financing. CIMB Group Corporate Structure The group corporate structure reflects the level of integration among core banking entities, centralised functions and board committees within the CIMB group. The structures for the board and board committees strengthen oversight by integrating internal oversight functions across the group wherever feasible. The Nomination and Remuneration Committee, which resides at BCHB, provides the oversight function for the entire CIMBG banking group, while the Audit Committee, residing at CIMB Bank, provides independent oversight on the state of internal control and review of the financial conditions of the entities under CIMBG. A Board Risk Committee oversees and assumes ultimate responsibility for the risk management function within the CIMB Group, and reports directly to the Board. 4

6 Exhibit 2: Organisation structure of the CIMB Group Audit Committee Nomination & Remuneration Committee Board Risk Committee Compensation Review Committee Board of Directors Group Chief Executive Group CEO s Office Strategic Risk & Compliance International Advisory Panel (IAP) Products Divisions Retail Banking Corporate & Investment Banking Group Special Asset Management Business Banking Group Treasury Islamic Banking Direct Banking and Cards Group Asset Management Insurance Sales Divisions Support Divisions Corporate Client Solutions Consumer Sales and Distribution Group Strategy and Finance Group Corporate Resources Group Information and Operations Group Customer Care and Management Support Group Risk International Operations Indonesia Thailand Singapore International Branches Source: CIMB Bank As an Islamic universal bank, CIMB Islamic operates as a Shariah-compliant financial institution parallel to its conventional counterparts within the group, namely CIMB Bank and CIMB IB. Its main business can be divided into two major segments: consumer banking and investment banking. Consumer Banking a) Retail Banking - focuses on CIMB Islamic s individual retail customers. Main retail financing products and services include Islamic property financing and hire purchase as well as other retail financial products and services such as deposit-taking and wealth management. The Islamic hire purchase segment currently dominates retail banking at CIMB Islamic. In FY2007, the introduction of Why Wait Fixed Return Investment Account-i, a guaranteed deposit product, saw retail deposits surge by 66.9% to RM839.3 million. b) Business Banking - serves the middle market customers as well as small- and medium-enterprises (SME). CIMB Islamic s business banking has shown good progress, with total financing growing from RM661.1 million as at end of FY2006 to RM1.0 billion as at end of FY2008. Growth emanated from both the bank s existing customer base as well as new business development. This division works closely with the CIMB Bank to provide Islamic financing packages to SMEs. 5

7 c) Direct Banking & Credit Cards - comprises three business units which serve different customer segments: Direct Banking, Credit Cards and Micro-credit Financing. Following the merger between SBB and CIMB Bank, the division embarked on an aggressive strategy to strengthen the group s Islamic franchise. In 2008, the division broadened its Islamic portfolio by launching two major products : the CIMB Islamic Credit Card, based on the Ujrah service fee concept; and the Pembiayaan Peribadi Sektor Awam- " product, a personal financing product targeted at Malaysian civil servants. d) Consumer Sales & Distribution - is the sales, marketing and distribution arm for both CIMB Islamic and CIMB Bank. It is responsible for sales operations, branch network, resources and staff; and services the 5.4 million customers of the bank. This division is the main marketeer for the CIMB Group, marketing over 90% of retail and business financial products and services through its sales and distribution channels. Investment Banking a) Shariah Advisory - provides Shariah advisory services on various Islamic banking and financial products to ensure compliance with applicable Shariah principles as well as the relevant resolutions and rulings made by the Shariah Advisory Councils of the regulatory bodies and CIMB Islamic s Shariah Committee. b) Islamic Capital Markets - specialises in arranging, structuring, managing and underwriting Islamic securities covering sukuks, short- and medium-term debt instruments such as commercial papers and medium term notes, floating rate notes and other capital market products. c) Corporate Banking - provides a wide range of Shariah-compliant products and services for domestic and multinational corporations. This segment works closely with CIMB IB to capture investment banking business. The products and services are arranged and structured to cater to clients different financing needs and objectives. d) Treasury - handles the markets and treasury operations with capabilities to intermediate in profit/interest rate, credit spread and forex term structures across market segments. The group treasury is also responsible for balance sheet management, which encompasses preservation and optimisation of economic value and periodic net profit/interest income of the commercial bank s loan/financing and deposit balance sheet from profit/interest rate volatility. This division is also responsible for market making and proprietary trading in debt securities, foreign exchange, commodities, equities and derivatives. Other functions include origination, syndication and marketmaking of fixed income securities, sales of primary and secondary fixed income securities, foreign currency and corporate deposits as well as structuring hedging solutions and structuring banking products for the commercial bank. e) Asset Management - covers all Islamic asset management business within the CIMB Group and offers a wide range of services across all asset classes. The division also manages portfolios, unit trusts and other investment vehicles for a broad spectrum of clients. It leverages on the resources of CIMB Group s other subsidiaries, branches and affiliates within the region. 6

8 OWNERSHIP CIMB Islamic is a wholly-owned subsidiary of CIMB Bank. The latter is 99.99% owned by CIMBG, which in turn is held by the public-listed BCHB. CIMB Group began creating a strong and competitive universal bank anchored by CIMB Berhad in CIMB Berhad was the then immediate holding company of Commerce International Merchant Bankers Berhad (now known as CIMB IB). Four strategic acquisitions have taken the group where it is now, starting with the acquisition of the fund management entity, CIMB-Principal Asset Management Berhad (CIMB-Principal) in 2004; the regional institutional equities and retail broking firm, CIMB-GK Pte Ltd (CIMB-GK) in 2005; followed by two commercial banks, Bumiputra-Commerce Bank Berhad in 2005 and SBB in The Group has also extended its regional footprint to Thailand via its recent acquisitions. It now holds a 93.15% stake in BankThai Public Company Limited, which has been renamed CIMB Thai Bank Public Company Limited (CIMB Thai); and a strategic stake in the Bank of Yingkou Co Ltd (Bank of Yingkou), China. In Indonesia, the CIMB Group has a significant banking presence via its 78.3%-owned PT Bank CIMB Niaga Tbk (CIMB Niaga). FINANCIAL ANALYSIS Capital Adequacy Exhibit 3: CIMB Islamic - Capital Adequacy Indicators FYE 31 December 1Q Paid-Up Capital (RM million) Reserves & surplus (RM million) (15.8) Capital adequacy ratio (%) Tier 1 (%) Source: Bank s Annual Reports CIMB Islamic s core capital ratio and risk-weighted capital ratio (RWCR) were 9.0% and 10.5% respectively as at end-march MARC notes that this is lower than the RWCR of the Islamic banking system s 14.7% at end-march 2009 and target capital ratios at CIMB Group of 10.0% and 12.0% for core capital ratio and RWCR respectively. As BCHB takes a group-wide approach in the management of the capital of its regulated entities, including CIMB Islamic, the latter s capital adequacy will eventually be aligned with that of the group s targeted levels. CIMB Islamic s capital ratios had decreased in 1QFY2009 as a result of growth in its financing portfolio, which led to an increase in risk-weighted assets. Over time, profit retention is expected to contribute significantly to growth in the bank s capital base. The bank s RWCR closely tracks its core capital ratio, reflecting a high proportion of tier 1 capital in its capital structure. Tier 1 capital is mainly paid-up share capital and retained profits, while the bank s tier 2 capital only comprises general allowance which have increased in tandem with growth in its financing base. CIMB Group takes a proactive approach in managing its capital levels. This, coupled with the bank s healthy internal capital generation rate, should ensure a more than ample buffer for its regulatory requirements. 7

9 Exhibit 4: CIMB Islamic RWCR & core capital ratio 70.0% 60.0% 50.0% 40.0% 30.0% RWCR Core cap 20.0% 10.0% 0.0% Asset Quality Exhibit 5: CIMB Islamic - Asset Quality Indicators FYE 31 December 1Q Gross Financing (RM million) 8, , , , Financing Growth (%) 24.4 > >100 n.a. Gross NPFs/ Gross financing (%) Net NPF ratio (%) Financing Loss Reserves Coverage (%) n.a. CIMB Islamic has experienced high growth in its financing portfolio relative to its small base. Since its inception in 2005, its financing portfolio has grown from RM6.3 million as at end-december 2005 to RM8.0 billion as at end-march The slower growth in FY2007 was a result of the CIMB Group restructuring as well as concentration in its loan clean-up exercise. In FY2008, the bank s financing growth was largely driven by financing for the purchase of securities as well as end-consumer financing. However, in recent quarters, the bank has also expanded its business in providing financing to corporates. For the 3-month period ending March 2009, the bank grew its financing portfolio by 24.4%, driven by increases in transport vehicle, working capital and residential property financing. Transport vehicles, the largest asset category financed by the bank, comprised 26.2% of its financing portfolio as at end-march The bank has gradually reduced its exposure to this segment from 57.3% as at end of 2006 to its current levels, and has increased its property financing. CIMB Islamic also launched its maiden credit card product in FY2008 and has expanded its unsecured retail financing line. Towards 4QFY2008, the bank experienced a sharp increase in financing purchases of securities. Generally, the bank s financing portfolio is well-diversified and balanced with about 49.9% and 49.6% of its financing extended to individuals and business enterprises respectively as at end-march The bank s financing portfolio composition as at end of March 2009 is depicted in the chart below: Exhibit 6: CIMB Islamic s financing portfolio composition as at end March % 9% 6% Purchase of transport vehicles 27% Working capital Purchase of securities Residential Property 14% 18% Non-residential Property Consumer loans 17% Other purpose 8

10 The bank has also increased liquidity by disposing some of its housing financing to Cagamas. As at end- March 2009, the bank had disposed an outstanding amount of RM179.0 million (FY2008: RM294.9 million) of its financing to Cagamas. CIMB Islamic s financing based on the Bai Bithaman Ajil, (BBA), a deferred payment sale concept, dominates its financing portfolio. As at end-march 2009, 49.1% of its financing was based on BBA, followed by Ijarah Muntahia Bittamlik which comprised 31.9% of total financing. The increased use of Islamic variable rate financing under the BBA concept which was introduced in 2003, has generally allowed Islamic banking institutions to mitigate the exposure to fixed rate products typical of Islamic financing. CIMB Islamic s variable rate financing has also increased from 12% of total financing as at end of 2007 to 44.9% as at end-march Profit and loss sharing modes of financing feature minimally on CIMB Islamic s balance sheet, and this consequently shields the bank s income from volatility and does not heighten the risk profile of the bank s financing portfolio compared to a conventional bank. Meanwhile, MARC expects financing growth in the near to medium term to be subdued with slower economic expansion and with a more cautious stance taken by the bank to mitigate deterioration in credit quality. Low non-performing financing As CIMB Islamic is relatively new, it currently has very low non-performing financing (NPF) levels. While NPF are still very manageable at this juncture, as at end-march 2009, the bank s NPF levels have shown signs of an uptick. As the portfolio begins to season in the midst of challenging economic conditions, NPF levels are expected to increase. The large exposure to vehicle financing increases the risk of holding collateral with depreciable values. However, pressure on NPF ratios would be alleviated by growth in its financing base. MARC continues to be comforted by CIMB Group s good credit risk management, which should ensure that CIMB Islamic also maintains vigilant monitoring of its asset quality. CIMB Islamic has benefited from CIMB Group s strengthened credit culture and centralised credit risk management infrastructure. The bank s financing loss coverage stood at 96.3% as at end-march Earnings Trends and Profitability Exhibit 7: Profitability Indicators FYE 31 December 1Q Net financing Income (RM million) Other Income (RM million) Pre-tax profit (RM million) (21.0) ROA (%) 0.66* (3.2) ROE (%) 17.6* (19.5) Net financing margin (%) 2.38* Cost-income ratio (%) >100.0 Source: Bank s Annual Reports *Annualised CIMB Islamic continued to show strong financing income growth in FY2008. Net financing income grew by 69.2% to RM209.9 million on the back of a much larger earning asset base. Net financing margins, however, narrowed to 1.59% in FY2008 from 1.94% recorded in FY2007, reflecting a more competitive environment amidst challenging financial conditions. CIMB Islamic s relatively lower composition of fixedrate financing, which comprised 53.1% of total financing as at end of FY2008 (FY2007: 87.7%) against a lower composition of transactional deposits, was also affected by Bank Negara Malaysia s, (BNM) more accommodative monetary policy towards the later part of the year. Meanwhile, against lackluster capital market activities, the bank s fee income fell by 41.7% in FY2008 to RM33.1 million. All these led to a relatively marginal increase of 13.2% in net profit despite an increase of 106.1% in average earning assets in FY

11 For 1QFY2009, CIMB Islamic continued to post improved results. The bank reported higher financing income of RM125.3 million (1QFY2008: RM48.3 million) on the back of growth in its financing portfolio. Meanwhile, income from its investment securities and deposits were slightly lower by 6.4% in 1QFY2009 compared to 1QFY2008. Meanwhile, in 1QFY2009, the bank recorded higher fee income, higher gain on disposal of investments and higher unrealised gain on revaluation of its securities, which more than offset the 129.2% increase in financing loss provisions during the three-month period against the prior year s corresponding period. As the bank s portfolio seasons and could potentially see NPF levels rise, the bank may have to increase its financing loss provisioning, apart from increases as a consequence of a larger financing portfolio. Nevertheless MARC believes the bank s good credit risk management and debt recoveries should be able to mitigate these increases. CIMB Islamic s segmental profit contribution (before allowances and excluding the support and others category) from its various divisions is depicted in the chart below: Exhibit 8: Segmental profit contribution for FY2008 (before allowances and excluding support and others) 9% 14% Treasury 44% Retail banking Corporate and investment banking Business banking 33% Meanwhile, CIMB Islamic s cost-to-income ratio increased to 40.3% in FY2008 (FY2007: 32.2%) before declining marginally to 39.1% for 1QFY2009. In FY2008, the bank had stepped up its advertising and publicity measures, and increased employee remuneration, which drove its overhead expenses up by 65.3%. The bank continues to leverage on its parent company s infrastructure to distribute its Islamic products. Accordingly, CIMB Islamic s income statement also reflects its share of the expenses incurred by CIMB Bank. With growth in assets outpacing the rate of increase in income, the bank s ROA dropped from 0.94% in FY2007 to 0.53% in FY2008 (Annualised 1QFY2009: 0.66%). Liquidity and Funding Exhibit 9: Liquidity & funding FYE 31 December 1Q Gross Financing/Customer Deposits (%) Total customer deposits growth (%) (16.1) n.a. Savings + Demand Deposits/Total Customer Deposits (%) Source: Bank s Annual Reports CIMB Islamic leverages on its parent company s wide branch network to tap deposits from the public. The bank s deposit base largely comprises deposits from business enterprises as well as government and statutory bodies at 42.9% and 33.9% of total customer deposits respectively. Meanwhile, deposits from individuals have shown improvement rising from RM208.5 million as at end of 2006 to RM2.3 billion as at end-march CIMB Islamic also has a high proportion of Mudharabah-based deposits. These deposits, which form 72% of the bank s customer deposit base, are profit sharing investment accounts (PSIA), which to a certain extent act as an absorbent for risks inherent in assets funded by these PSIAs. This consequently reduces funding and liquidity risk of the bank. Meanwhile, low-cost deposits account for about 16.6% of the bank s customer deposits compared to approximately 26.8% at industry level. 10

12 Asset-liability maturity mismatches commonly feature in Islamic banks. In FY2008, there was a maturity mismatch in CIMB Islamic s short-term assets to short term-liabilities as reflected by an excess of RM4.6 billion of liabilities over assets in the less than 3 months category. Nevertheless, the bank revealed that as of January 2009, its net cumulative maturity mismatch under the up to 1-month bucket showed a RM3.6 billion excess of assets over liabilities. CIMB Islamic s strong liquidity profile is underpinned by the strong CIMB franchise and good access to customers deposits. Furthermore, its parent company CIMB Bank s good access to capital market funding also provides funding flexibility. RISK MANAGEMENT CIMB Islamic s risk management processes are very much aligned to that of its parent, CIMB Bank. CIMB Bank s Board Risk Committee also oversees CIMB Islamic s risk management framework for its Islamic banking operations. The risk committee is ultimately responsible for the risk management function within the CIMB Group, and reports to the Board. CIMB Group has implemented an enterprise-wide risk management framework that ties regulatory capital to economic capital as part of its Basel II Pillar II initiatives, and is in the midst of enhancing and inculcating a risk culture throughout the group. MARC believes that where economic capital allocation is concerned, credit risk will continue to be the bank s primary source of risk. CIMB Islamic, like CIMB Bank, is becoming more focused on risk-adjusted returns. Ultimately, the implementation of Basel II-related initiatives will enhance the bank s ability to manage its credit risks. The bank is targeting the adoption of the Internal Rating Based (IRB) approach in CIMB Islamic s underwriting criteria, internal credit rating system as well as credit approval processes and review procedures are consistent with that employed in CIMB Bank. To manage its credit risk better, CIMB Bank introduced a new credit risk framework, Risk Adjusted Performance Measures, which focuses on optimising risk-adjusted returns and franchise enhancement as opposed to nominal asset growth. Consequently, credit rating/scoring standards have been tightened, while pre-emptive strategies for early care have been implemented at the pre-delinquent stage. Unlike its previous practice of initiating legal action first, management now actively engages with borrowers. The Group Special Asset Management (GSAM), which commenced operations on 1 July 2007, was established as an independent debt recovery division to concentrate on and enhance the recovery of NPLs. All NPLs over 12 months in arrears from the business units of Corporate Banking, Business Banking and Retail are carved out and managed independently by GSAM. As an independent business division, GSAM possesses a clear mandate to pursue and maximise the recovery value of NPLs, while other respective business units are able to concentrate on key business objectives. CIMB Islamic s treasury activities are coordinated by Group Treasury at CIMB Bank. This aligns CIMB Islamic s business and operational activities to that of the CIMB Group and also promotes efficiency of resource allocation at both the bank and group levels. The Group Risk Committee (GRC) sets overall risks limits guided by the group s risk appetite. The GRC is assisted by the Credit Risk Committee, Liquidity Risk Committee, Market Risk Committee (MRC) and Operational Risk Committee. The MRC monitors the group s exposure to market risk on a daily basis and evaluates market risks arising from trading, investment and underwriting proposals are within limits. The group s market risk exposures are managed in various ways, including hedging and through the use of derivative instruments. CIMB Islamic has minimal derivatives exposures, and these exposures are currently limited to Islamic profit rate swaps for hedging interest rate risk. Various limits and management triggers implemented at the bank level complement the global Capital-at-Risk (CaR) limit of the group. Limits constitute the key mechanism to control allowable risk-taking, and are regularly reviewed in the face of changing business needs, market conditions, and regulatory changes. Duration-weighted gap VaR and various other multi-factor models are also employed to assess market risk. 11

13 MANAGEMENT AND OTHER QUALITATIVE FACTORS CIMB Bank and its universal banking group is one of the country s leading financial service providers. Its management team has been successful in steering the group through the formation of the universal bank and integration and streamlining post-merger operation. CIMB Bank continues to place a premium on its intellectual capital, as reflected in the bank s culture and remuneration scheme which rewards staff on the basis of performance and promotes alignment of the interests of its employees to that of the organisation. Key performance indicators of the group are well communicated downwards and progress is closely monitored by management. Meanwhile CIMB Islamic is led by its CEO, En Badlisyah Abdul Ghani. Under En Badlisyah s leadership, CIMB Islamic has established a reputation for innovative Islamic financial products. En Badlisyah is a recognised Islamic banker with considerable experience in structuring novel Islamic financial products. 12

14 CORPORATE INFORMATION BOARD OF DIRECTORS Datuk Dr Syed Muhamad bin Syed Abdul Kadir Dato Sri Mohamed Nazir bin Abdul Razak Dato Mohd Shukri bin Hussin Dato Anwar bin Raja Shaharul Niza bin Raja Abdul Aziz Professor Dr Mohammad Hashim Kamali (appointed on 15 September 2008) Badlisyah bin Abdul Ghani COMPANY SECRETARY Datin Rossaya Mohd Nashir HOLDING COMPANY CIMB Bank Berhad ULTIMATE HOLDING COMPANY Bumiputra-Commerce Holdings Berhad GROUP MANAGEMENT COMMITTEE OF CIMB GROUP Dato Sri Nazir Razak Group Managing Director/Chief Executive Officer Dato Mohd Shukri Hussin Executive Director, BCHB Dato Charon Wardini Mokhzani Deputy Chief Executive Officer, Corporate and Investment Banking Dr Gan Wee Beng Deputy Chief Executive Officer, Group Risk Management Lee Kok Kwan Deputy Chief Executive Officer, Group Treasury and Investments Dato Robert Cheim Adviser, Corporate and Investment Banking Kenny Kim Group Chief Financial Officer, Group Strategy and Finance Tunku Dato Ahmad Burhanuddin Group Customer Care and Management Support Badlisyah Abdul Ghani Islamic Banking Peter England Retail Banking Sulaiman Mohd Tahir Consumer Sales and Distribution Tan Leng Hock Business Banking Hamidah Naziadin Group Corporate Resources Iswaraan Suppiah Group Information and Operations Raja Noorma Raja Othman Group Asset Management Peter Miller Group Insurance Jean Yap Yoke Yuen Direct Banking and Cards Abd Karim Md Lassim Auto Finance Ahmad Shazli Kamarulzaman Group Special Asset Management Lim Tiang Siew Group Chief Internal Auditor BUSINESS ADDRESS CIMB ISLAMIC BANK BERHAD Level 34, Menara Bumiputra-Commerce 11 Jalan Raja Laut Kuala Lumpur CONTACT Telephone No. (603) Facsimile (603) Home page AUDITORS PricewaterhouseCoopers 13

15 ISSUE STRUCTURE AND TERMS Appendix Facility Junior Sukuk Programme Amount Up to RM2.0 billion in nominal value Details on Utilisation of Proceeds The proceeds of the junior sukuk will be for CIMB Islamic s banking operations or any other Shariahcompliant use. Tenure and availability Availability period of 7 years from initial issuance with programme tenure of 22 years from date of first issuance. Each issue may have tenures ranging from five years to fifteen years. Issues with a call option attached may be called on any periodic payment date on or after 5 years prior to maturity. Security and ranking The junior sukuk constitute direct and unsecured obligations of CIMB Islamic and rank pari passu among themselves. The junior sukuk are subordinated in right of payment to all deposit liabilities of the bank. Profit rate Expected profit rate will be determined prior to each issuance. Issues with call option attached are entitled to a step-up Periodic Payment Rate from the first Optional Redemption Date and thereafter. Profit payment frequency Profit is payable semi-annually Shariah Adviser CIMB IB backed by CIMB Islamic Shariah Committee 14

16 15

17 16

18 17

19 18

20 19

21 RATING SYMBOLS & DEFINITIONS ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS - ISLAMIC SUKUK (ASSET-BASED INSTRUMENTS) LONG-TERM RATINGS MARC s Long-Term Ratings are assigned to non-ringgit denominated Sukuk issuances with maturities of more than one year. These ratings specifically assess the likelihood of timely payment of the instrument issued under the various Islamic asset-based financing contract(s). Investment Grade AAA IS Extremely strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). AA IS A IS Very strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating. Strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). However, risks are greater in periods of business and economic stress than for instruments with higher ratings. BBB IS Adequate ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Vulnerable to moderately adverse developments, both internal and external. Non-Investment Grade BB IS Uncertainties exist that could affect the ability to make timely payment on the instrument issued under the Islamic assetbased financing contract(s). B IS C IS Significant uncertainty exists as to timely payment on the instrument issued under the Islamic asset-based financing contract(s). Slight adverse developments could impair ability to make timely payment. Possesses a substantial risk of default, with little capacity to address further negative changes in financial circumstances. D IS Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing contract(s). Notes : Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories. Bank-guaranteed issues will carry a suffix (bg), corporate-guaranteed issues, a (cg), issues guaranteed by a financial guarantee insurer (FGI), an (fg), and all other supports, an (s) when such guarantees or supports give favourable effect to the assigned rating. SHORT- TERM RATINGS MARC s Short-Term Ratings are assigned to non-ringgit denominated Sukuk issuances with original maturities of one year or less, and are intended to assess the likelihood of timely payment of the instrument issued under the various Islamic asset-based financing contract(s). Investment Grade MARC-1 IS Extremely strong capacity to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). MARC-2 IS MARC-3 IS Strong capacity to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). Timeliness of payment is slightly susceptible to adverse changes in operating circumstances and economic conditions. Adequate capacity to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). Moderately adverse changes in operating environment and economic conditions may weaken financial capacity to make timely payment. Non-Investment Grade MARC-4 IS Vulnerable to non-payment of instrument issued under the Islamic asset-based financing contract(s). Capacity to make payment on the instrument is dependent upon favourable business, financial and economic conditions. D IS Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing contract(s). Notes : Short-Term Ratings will also carry a suffix (bg) for bank-guaranteed issues, (cg) for corporate-guaranteed issues, (fg) for FGI-guaranteed issues, and (s) for all other supports when such guarantees or supports give favourable effect to the assigned rating. Subscript IS for Long-Term and Short-Term Ratings denotes an Islamic Sukuk (Asset-based Instruments). The rating symbols and definitions above have been approved by the Shariah Council of MARC RATING OUTLOOK MARC s Rating Outlook assesses the potential direction of the rating on the Sukuk over the intermediate term (typically over a one to two-year period). The Rating Outlook may either be: POSITIVE NEGATIVE STABLE DEVELOPING indicates that a rating may be raised; indicates that a rating may be lowered; indicates that a rating is likely to remain unchanged; or indicates that a rating may be raised, lowered or remain unchanged. Note: For Structured Finance Ratings, MARC started assigning rating outlooks from 2008 onwards. 20

22 THIS PAGE IS INTENTIONALLY LEFT BLANK 21

23 THIS PAGE IS INTENTIONALLY LEFT BLANK 22

24 Disclaimer The Credit Analysis Report is the property of Malaysian Rating Corporation Berhad (MARC) and is protected by Malaysian and international copyright law and conventions. The Credit Analysis Report and all information contained herein shall not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person without MARC's prior written consent. MARC does not make any warranties, express or implied, including, without limitation, those of merchantability and fitness for a particular purpose, with respect to the Credit Analysis Report and all information contained herein. The Credit Analysis Report and all information contained herein is provided on the basis of information believed by MARC to be accurate and reliable as derived from publicly available sources or provided by the rated entity or its agents. MARC, however, has not independently verified such information and makes no representation as to the accuracy or completeness of such information. Any assignment of a credit rating by MARC is solely to be construed as a statement of its opinion and not a statement of fact. A credit rating is not a recommendation to buy, sell, or hold any security. No investment decision should be made solely on the basis of a credit rating as it does not, among others, comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. MARC reviews from time to time the credit ratings it has assigned and may change such credit ratings or place them on credit watch. Further, the Credit Analysis Report and all information contained herein may include inaccuracies or typographical errors. Moreover, MARC may make modifications and/or changes in the Credit Analysis Report and all information contained herein at any time, for any reason. Any person using and/or relying on the Credit Analysis Report solely assumes the risk in making use and/or relying on the Credit Analysis Report and all information contained herein. Any person making use of and/or relying on the Credit Analysis Report and any information contained herein expressly absolves and releases MARC and its licensors and suppliers from any liability for any damages arising from the use of and/ or reliance on the Credit Analysis Report or information contained herein. Under no circumstances will MARC or its affiliates be liable for any special, indirect, incidental or consequential damages of any kind, including, but not limited to, compensation, reimbursement or damages on account of the loss of present or prospective profits, expenditures, investments or commitments, whether made in the establishment, development or maintenance of business reputation or goodwill, cost of substitute materials, products, services or information, cost of capital, and the claims of any third party, or for any other reason whatsoever, even if MARC has been advised of the possibility of such damages. Any person making use of and/or relying on the Credit Analysis Report and all information contained herein hereby acknowledges that he has read this Disclaimer and has understood it and agrees to be bound by it Malaysian Rating Corporation Berhad Published and Printed by: MALAYSIAN RATING CORPORATION BERHAD (Company No. : V) 5 th Floor, Bangunan Malaysian Re, No 17 Lorong Dungun, Damansara Heights, KUALA LUMPUR Tel: [603] Fax: [603] marc@marc.com.my H-page : 23