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RAM Ratings rates first Basel-III compliant subordinated debt in Malaysia by CIMB Bank.

RAM Ratings has assigned a preliminary 1 long-term rating to

CIMB Corporate Information Management Branch  
 Bank’s proposed

 10 billion Tier-2
Subordinated Debt

which is Basel III-compliant.

“At the same time, the bank’s long-term financial
institution ratings have been reaffirmed at A and P1,” said CIMB in
a public statement. “Both the long-term ratings have a stable
outlook. CIMB Bank’s financial institution ratings are supported by
its systemic importance as the third-largest commercial bank in
Malaysia, with entrenched business positions in retail and wholesale
banking. The ratings also take into consideration the growing CIMB
franchise in the
 see Association of Southeast Asian Nations.

 in full Association of Southeast Asian Nations

International organization established by the governments of Indonesia, Malaysia, the Philippines, Singapore, and Thailand in

“CIMB Bank is the core entity of the larger CIMB Group
Holdings (CIMB Group or the Group), the fifth-largest banking group in
ASEAN. The Group’s franchise includes a well-established Malaysian
universal banking franchise, and a growing commercial and universal
banking presence in Indonesia. CIMB Bank houses the Group’s
domestic commercial and
Islamic banking
 Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics.
 operations in Malaysia,
Singapore and Cambodia, and holds a 93.7 per cent interest in CIMB Thai
Bank Public Company Limited, which operates a universal banking
franchise in Thailand. The Group is looking to extend its reach into the
Philippines; CIMB Bank has obtained regulatory approval to acquire a 60
per cent-stake in the Philippine-based Bank of Commerce.

“This is the first RAM-rated Basel III-compliant tier-2
subordinated debt programme in Malaysia with a non-viability
loss-absorption feature,” says Foo Su Yin, RAM Ratings’ Chief
Executive Officer. “With Basel III regulation on capital components
coming into effect from 1 January 2013, we expect more issuances of
Basel III-compliant capital instruments in the Malaysian debt capital
market,” she adds.

“The subordinated debts issued under the proposed Subordinated
Debt Programme are rated 1 notch below CIMB Bank’s long-term
financial institution rating, underlining their lower ranking in the
priority of claims upon bankruptcy or liquidation, relative to senior
unsecured creditors. Compared to the existing Basel II subordinated
debts issued by Malaysian banks, the inclusion of the additional
non-viability term would not necessitate additional downward notching
adjustments, vis-a-vis RAM’s current approach for rating Basel II
tier-2 capital instruments. RAM views that the likelihood of a bank
being non-viable is already sufficiently reflected in its long-term
financial institution rating. Our view takes into account RAM’s
interpretation of the circumstances that will constitute a non-viability
event in Malaysia, as articulated by
Bank Negara Malaysia

 in its Capital
Adequacy Framework on Capital Components.

“CIMB Bank’s consolidated gross impaired-loan ratio had
eased to 2.8 per cent as at end-March 2013 (end-December 2011: 3.6 per
cent), although still higher than its domestic A-rated peers’. The
improvement was mainly supported by the better asset quality of the
Bank’s working-capital portfolio. With lower portfolio impairment
allowances, the Bank’s consolidated credit-cost ratio came up to a
low 0.1 per cent in FY Dec 2012 (FY Dec 2011: 0.25 per cent). While RAM
acknowledges the Bank’s forte in wholesale and investment banking,
we also note that CIMB Bank’s loan portfolio has a relatively high
level of borrower concentration risk.

Notably, CIMB Bank has maintained a healthy funding profile,
underpinned by a large base of customer deposits. The Bank’s
consolidated loan-to-deposit (“LD”) ratio stood at 75 per cent
as at end-March 2013. Given that loan expansion is expected to be
matched by a comparable rise in deposits in FY Dec 2013, the LD ratio is
expected to hover around this level.

“Going forward, CIMB Bank’s capitalisation levels will be
bolstered by the reinvestment of dividends paid, pursuant to a dividend
reinvestment scheme implemented by the Group. Assuming the reinvestment
of dividends paid, CIMB Bank’s pro-forma group-level Basel III
common equity tier-1 ratio was a sound 8.6 per cent as at end-March


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