Moody's ups CIMB's BFSR outlook to positive

SINGAPORE: Moody's Investors Service has changed the D+ Bank Financial Strength Rating (BFSR) outlook of CIMB Bank Bhd from stable to positive, while the bank's Tier 1 capital qualifying securities' rating of Baa3 remains on review for possible downgrade.

At the same time, the rating agency placed the D- BFSR and Baa2/P-3 foreign currency deposit ratings of AmBank (M) Bhd on review for possible upgrade, but its foreign currency hybrid Tier 1 capital securities' rating of Ba2 also remained on review for possible downgrade.

In a statement yesterday, Moody's said the reviews were in line with its new guidelines for rating bank hybrid capital securities.

On CIMB Bank, it said the outlook for the BFSR was revised to positive because of the bank's sound financial condition despite the challenging operating environment, and which reflects management's ongoing initiatives to strengthen the bank's franchise.

"To date, CIMB Bank's profitability has been resilient, despite weak economic conditions and intense competition. CIMB Bank has also progressively increased its provision and core capital to improve protection against potential losses in an uncertain environment," said John Tham, a Moody's vice-president and senior credit officer.

Moody's said CIMB Bank's gross non-performing loan (NPL) ratio remained relatively high due to legacy NPLs and the consolidation of recently acquired BankThai.

It said the bank's management intended to transfer the legacy NPLs to Southeast Asia Special Asset Management Bhd (SEASAM), a separate legal entity formed under the CIMB Group's holding company structure.

"While the NPL transfer will lower the bank's reported NPL ratio, we believe the ability to protect future asset quality is a more important driver for further positive rating actions. Furthermore, we expect the NPL transfer to have a neutral impact on CIMB Bank's risk profile until their eventual sale because they will still reside within the group, of which the bank is an integral part.

"However, the NPL transfer could benefit the bank over the medium- to long-term by freeing up capital and management time for more productive use," it said.

On AmBank, Moody's said the review for upgrade of the bank's ratings was due to its much improved asset quality and expectations of its ability to generate more stable earnings.

"To date, AmBank has managed its asset quality reasonably well. The bank's gross NPL ratio fell to 3.9% as at end-September 2009 from 5.3% a year ago. Meanwhile, its NPL reserve coverage rose to 82.8% from 74.2%. The higher reserve coverage enhances protection against loss, an important ratings factor in view of still weak economic conditions," Tham said.

Another important rating consideration is recurring earnings, which serve as a first line of defence against loss as well as the formation of capital.

"AmBank's diversification of its portfolio by selectively growing lower yield but stable corporate loans should improve earnings from a risk-adjusted perspective.

"The review for possible upgrade of AmBank's BFSR and deposit ratings will consider the prospects for continued improvements in its financial fundamentals, particularly in the areas of asset quality and recurring earnings, of which funding cost is an important driver," Tham said.