[RAM] RAM Ratings reaffirms CIMB Thai's AA2/Stable/P1 financial institution ratings

RAM Ratings has reaffirmed CIMB Thai Bank Public Company Limited’s (the Bank) AA2/Stable/P1 financial institution ratings as well as the AA3/Stable rating of its RM2 bil Tier-2 Subordinated Debt Programme (2014/2044). The ratings reflect CIMB Thai’s strategic role in CIMB Group Holdings Berhad’s (the Group) ASEAN-focused strategy and our expectation of continued parental support. 

While local regulations prohibit it from injecting further equity into CIMB Thai, the Group is committed to employing other channels of support to strengthen the Bank’s capital buffers when required. These include the subscription of additional tier-1 or tier-2 capital, purchase of CIMB Thai’s impaired loans via Sathorn Asset Management Company Limited and the diversion of large credits to other banking subsidiaries within the Group. 

CIMB Thai’s common equity tier-1 (CET-1) capital ratio had eased to 12.5% as at end-March 2020 (end-December 2018: 14.1%) due to strong loan growth in 2019. We highlight that the Bank’s reported CET-1 capital indicator does not include surplus provisions, i.e. provisions in excess of the requirement of Thai Financial Reporting Standard 9 (TFRS 9). These provisions will be amortised to profit or loss equally over five years, unlocking some capital upside in the process – albeit not substantial on a yearly basis. As at end-March 2020, surplus provisions stood at THB3.2 bil (or 0.9% of risk-weighted assets).

As with other banks, CIMB Thai will not be spared the ravaging effects of the economic crisis at hand – recovery from which will hinge on the Thai government’s ability to contain the spread of Covid-19. To stem potentially widespread delinquencies, the Bank of Thailand (BoT) has outlined minimum relief measures that banks are required to offer borrowers, encouraging banks to pre-emptively restructure loans to manage borrowers’ debt burdens before they become impaired. Save for SMEs with credit lines of below THB100 mil whose loan payments are automatically deferred for six months, other borrowers have to request for a moratorium on payments. CIMB Group’s disclosure indicates that 27% of its loans in Thailand were under relief measures as at end-April 2020.

In light of greater uncertainties ahead, we expect CIMB Thai’s asset quality to deteriorate further in the 2020 and 2021 period. The severity of provisioning needs will ultimately depend on the speed of economic recovery as well as the Bank’s ability to pre-emptively restructure loans before signs of weakness emerge. CIMB Thai’s gross impaired loan ratio stood at 5.6% as at end-March 2020 (industry: 3.6%; end-December 2019: 4.7%; end-December 2018: 4.4%). The q-o-q increase was primarily attributable to the alignment of the Bank’s impaired loan classification with that of its parent after the adoption of TFRS 9, as the Group had classified loans that are restructured or rescheduled following an increase in credit risk, as impaired. Although this requirement has since been lifted, it is not retrospectively applied to loans previously impaired on such basis.

Apart from potentially larger provisioning needs, a compressed net interest margin would also be an earnings dampener for banks – as the BoT had slashed the policy rate by 75 bps since the start of the year to an all-time low of 0.50% in May 2020. Although its profit performance had improved on the back of lower impairments in fiscal 2019 and 1Q fiscal 2020, CIMB Thai’s profitability is likely to weaken from an already-low base. Besides generally hefty provisioning costs, the Bank’s low profitability is also a reflection of its lack of scale in a banking sector dominated by a few large players – seen in consistently high cost-to-income ratios of more than 50% in the last five years. 


Analytical contact
Loh Kit Yoong
(603) 3385 2493
kityoong@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my