RAM Ratings reaffirms Sabah Credit Corporation's AA1/P1 issue ratings, with stable outlook

Published on 13 July 2012

RAM Ratings has reaffirmed Sabah Credit Corporation’s (“SCC” or “the Corporation”) issue ratings at AA1/Stable/P1 (refer to Table 1). SCC is wholly owned by the State Government of Sabah (“State Government”, whose debt facility is rated AAA/Stable/P1 by RAM Ratings) and operates under the purview of the Sabah State Ministry of Finance. Support from the State Government to SCC has been demonstrated through the subordination of SCC’s State Government loans to its debt securities, conversion of SCC’s State Government loans into share capital, reinvestment of dividends into capital and extension of Letters of Support vis-à-vis its debt securities.

SCC serves about one-third of the civil servants in Sabah and conducts direct salary deductions for repayments on personal financing from the Sabah State and Federal Government employees. Its financing portfolio is highly concentrated in unsecured personal financing, which accounted for 82% of total financing assets as at end-December 2011. This segment is envisaged to remain as the main driver of the Corporation’s financing growth, going forward. 

SCC’s overall gross-impaired-financing (“GIF”) ratio had deteriorated to 10.3% as at end-December 2011 (end-December 2010: 9.0%), mainly due to the impairment of a lumpy corporate loan. In terms of SCC’s personal-financing portfolio (which forms the bulk of its financing assets), its GIF ratio is deemed high at 4.6% as at end-December 2011, given that the bulk of this portfolio is facilitated by direct salary deductions. Besides job transfers, administrative problems pertaining to delays in salary deductions and the abolishment of the upfront 2-month salary deduction for new loan disbursements, among others, the Corporation’s gross impaired personal financing is high as GIF are written off only after exhausting all recovery and legal efforts. Excluding all personal financing that are past due for more than 12 months and fully provided for, SCC’s personal financing portfolio’s GIF ratio would have declined to 2.7% as at end-December 2011. Meanwhile, the Corporation’s profitability is deemed robust due to its high-margin products, although we opine that keen competition may lead to margin compression.

As SCC has no deposit-taking capabilities, it relies heavily on wholesale funding to support its financing growth. While SCC is exposed to roll-over risk upon the maturity of its borrowings, it has secured banking lines as contingency funding facilities. Based on RAM Ratings’ estimates, SCC’s tier-1 risk-weighted capital adequacy ratio stood at a strong 21.5% as at end-December 2011. All in all, we believe that support from the State Government will be readily extended should the need arise. 

 Table 1: SCC’s debt securities

Instrument	Issue ratings	Rating action
Islamic Commercial Papers (2011/2018)/Islamic Medium-Term Notes (2011/2031) Programme of up to RM1 billion*	AA1/Stable/P1	Reaffirmed
RM500 million Commercial Papers/Medium-Term Notes Programme (2007/2014)^	AA1/Stable/P1	Reaffirmed

* The aggregate outstanding nominal value of the Islamic Commercial Papers and/or Islamic Medium-Term Notes shall not exceed RM1 billion at any point in time.
^ The aggregate outstanding nominal value of the Commercial Papers and/or Medium-Term Notes shall not exceed RM500 million at any point in time.

 

Media contact
Kwan Ji-Ling
(603) 7628 1115
jiling@ram.com.my