MARC AFFIRMS ITS FINANCIAL INSTITUTION RATING OF AAA ON CREDIT GUARANTEE CORPORATION MALAYSIA BERHAD

MARC has affirmed its AAA financial institution rating on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook.

The affirmed rating incorporates a high systemic support uplift from CGC’s standalone credit profile based on its public policy role as a development financial institution (DFI) and its majority ownership by the central bank, Bank Negara Malaysia. CGC facilitates access to financing for small and medium enterprises (SME) by providing credit guarantees on loans extended to them by financial institutions.

CGC’s guarantee portfolio size has continued to decline, mainly attributed to the increased pace of write-off of loans under inactive schemes as part of a clean-up exercise. Net loans guaranteed stood lower at RM4.5 billion as at end-June 2015 (end-2014: RM4.6 billion), although new guarantee business volume grew by an annualised 13.2% during the period as CGC expanded its popular portfolio guarantee (PG) scheme. The PG scheme, which accounted for 70.2% of the total new guarantee amount during the period, and wholesale guarantee (WG) scheme, are undertaken with participating financial institutions (PFI), allowing CGC to share its guarantee risks. MARC views that the partnership with PFIs has enabled CGC to strengthen its risk profile. In addition to the guarantee schemes, CGC also provides direct financing under some schemes, one of which was introduced in October 2015 to promote entrepreneurship among women.

MARC observes CGC’s net non-performing loans (NPL) ratio has risen to 3.5% as at end-June 2015 (end-2014: 3.1%), and could increase further over the intermediate term owing to the challenging economic environment. Higher impairments were recorded in the manufacturing and general business segments. CGC is expected to manage its NPL levels through proactive risk management and enhanced credit evaluation processes. At the same time, it will continue to redeem (by taking over the guaranteed loans from PFIs) and restructure loans. For 1H2015, these amounted to RM608.2 million and RM18.1 million respectively (1H2014: RM501.9 million; RM44.3 million).

MARC considers CGC’s capitalisation to be strong, as reflected by the capital adequacy ratio of 39.6% on a comparable Basel II basis as at end-June 2015 (end-2014: 38.0%). In addition, its guarantee cover value-to-shareholders’ fund ratio of 1.6x as at end-June 2015 remains low (end-2014: 1.7x). For 1H2015, CGC’s operating income increased to RM147.9 million on the back of higher guarantee fee and investment income (1H2014: RM142.5 million). However, net profit declined to RM72.3 million, mainly on account of higher operating expenses (1H2014: RM78.8 million).

MARC views CGC’s funding and liquidity profile as stable, with cash balances and term deposits accounting for 31.8% of total assets as at end-June 2015 (2014: 32.9%). Cash balances and term deposits have declined as CGC steadily increased its investment in fixed income securities to obtain higher investment returns. The bulk of the debt securities in CGC’s investment portfolio are rated AA- and above. Its plans to allocate a small portion of investment funds to fixed income securities in the A rating band is not expected to compromise the overall credit quality of its investment portfolio. MARC notes that under a new leadership, CGC has plans to strengthen its investment framework and strategies to optimise returns, in addition to its more immediate goals of increasing its guarantee portfolio and improving asset quality metrics.

The stable outlook reflects MARC’s expectations that government support for CGC will remain and that the DFI will continue to maintain its financial fundamentals.

Contacts: Joan Leong, +603-2082 2270/ joan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

February 11, 2016