This article first appeared in The Edge Financial Daily, on October 7, 2015.

KUALA LUMPUR: Moody’s Investors Service has downgraded CIMB Bank Bhd’s baseline credit assessment (BCA) and adjusted BCA due to weaker capitalisation compared with its domestic and regional peers.

In a statement yesterday, Moody’s said it expects further pressure on asset quality from slowing operating conditions, which will weaken the bank’s profitability and ability to improve capital levels, resulting in a downgrade to “baa2” from “baa1”.

 “CIMB Bank’s Common Equity Tier 1 ratio on a consolidated basis declined to 9.6% at end-June 2015 from 10.1% at end-2014, as a result of poorer profitability and higher regulatory capital deductions under the Basel III transitional rules,” Moody’s said.

 The credit rating agency added that the ratio is lower than its domestic peers and the average of Moody’s-rated banks in Malaysia, which stood at 11.2% as at June 2015.

 “Although operating revenue growth was strong at 10.6% year-on-year in 1H15 (the first half of 2015) on an annualised basis, the bank’s restructuring expenses totalling RM303 million and higher credit costs of the bank’s Thailand operations have dragged the bank’s overall profitability,” it said.

 Moody’s expects economic conditions in Thailand and Malaysia to slow down over the next 12 to 18 months, which will in turn weaken the banking sector and CIMB Bank’s revenue growth, as well as increase downside risks to its asset quality and credit costs.

 “As the bank’s profitability weakens, its ability to generate capital internally will be limited,” Moody’s added.

 The one-notch downgrade of CIMB Bank’s adjusted BCA resulted in the downgrade of CIMB  Islamic Bank Bhd’s adjusted BCA, also to “baa2” from “baa1”.

 Meanwhile, the credit rating agency has affirmed CIMB Bank’s “A3/P-2” local and foreign currency deposit ratings, and its “A3” foreign currency senior unsecured debt rating.

 It also affirmed the bank’s “A3/P-2” foreign currency issuer rating and “(P)A3” foreign currency senior unsecured medium-term note rating.

 “The outlook for the ‘A3’ ratings remains positive,” Moody’s noted.

 According to the credit rating agency, the ratings affirmation reflects its expectation of “very high government support” for CIMB Group Holdings Bhd and its key subsidiaries, CIMB Bank and CIMB Islamic.

 “This high support is driven by the bank’s significant domestic market share of banking system deposits (1H15: 11%) and the 47% government stake in its parent holding company held through [the] Employees Provident Fund (17.2%) and Khazanah Nasional Bhd (29.5%),” Moody’s added.

CIMB Group (fundamental: 1.05; valuation: 1.65) closed 2.23% or 10 sen higher at RM4.59 yesterday, after 22.88 million shares were traded. The share price gave it a market capitalisation of RM38.71 billion.

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