Published October 23, 2008

Off-balance sheet items no worry: CIMB

By S JAYASANKARAN
IN KUALA LUMPUR

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FEARS that Malaysia's largest investment bank CIMB could be sitting on a huge pile of off-balance sheet contingent liabilities that could become distressed are largely misplaced, the bank said.

Mr Nazir: CIMB has no exposure to toxic assets or troubled banks

At end-June 2008, according to French-based securities house CLSA, the bank recorded off-balance sheet 'commitments and contingencies' of RM327.42 billion (S$137.4 billion), a figure that is 13 per cent up from RM289.1 billion a year ago.

By way of contrast, the corresponding figure in Maybank, the country's largest bank, was RM204.22 billion; and RM59.2 billion at Public, the country's third-largest bank. But the other two banks are more consumer driven.

Nazir Razak, the bank's urbane chief executive, is emphatic about the bank's soundness. 'There are only two ways to get into trouble - exposure to toxic assets, and exposure to the troubled banks,' he said. 'We have neither.'

CIMB's off-balance sheet items are mainly of three types - commitments to customers on loans that have not been drawn down, contracts on foreign exchange and interest rate swap contracts, he said.

'To minimise the risk of interest rate fluctuations on the bonds we hold, we try and hedge everything using interest rate swaps, so it's a notional value that you see. It's greatly exaggerated. The actual exposure is very, very small. And that's borne out by our profit-and-loss numbers. Whether interest rates go up or down, they remain very steady.'

Analysts said that the 'notional' figure Mr Nazir talks about is generally meaningless. What is more important, they said, is the actual credit equivalent, which in CIMB's case is estimated around RM20.9 billion.

Moreover, the bulk of CIMB's derivatives are ringgit-denominated, a fact underlined by the central bank last week when it released a statement allaying concerns about Malaysia's financial system.

'We do have some US dollar exposure,' shrugged Mr Nazir. 'But they are stuff like Petronas's Yankee bonds and Singapore Telecommunications' US dollar bonds.'

Indeed, analysts are relatively sanguine about the size of CIMB's derivatives pool. 'CIMB is the largest investment bank in the country and the biggest market maker where bonds are concerned,' said Shan Choo, the head of CLSA in Kuala Lumpur. 'Their foreign exchange trades are not inconsiderable either so you'd expect them to have the biggest amount.'

She added: 'The bottom line is that it's pretty effective risk management. It neutralises any risk on interest rate fluctuations.'

Indeed, perhaps because of its very nature, CIMB has always been the bank with the largest amount of off-balance sheet items. But concern over its health mirrors fears that the financial maelstrom engulfing the West could somehow spread eastwards. Moreover, the main culprit behind the turmoil in Western banks was off-balance sheet assets that turned toxic.

According to CIMB insiders, the bank began eliminating its counter party exposures to foreign investment banks that its internal research units deemed risky back in August last year. This was confirmed by Mr Nazir.