RAM Ratings has reaffirmed the AA1/Stable/P1 ratings of Sabah Credit Corporation's (SCC or the Corporation) outstanding sukuk instruments

Published on 23 June 2016

RAM Ratings has reaffirmed the AA1/Stable/P1 ratings of Sabah Credit Corporation's (SCC or the Corporation) outstanding sukuk instruments. SCC is wholly owned by the State Government of Sabah, and operates under the purview of the Sabah State Ministry of Finance.

The ratings mainly reflect our expectation of continued support from the State Government. This has been clearly demonstrated through the subordination of SCC's loans from the State Government to its debt securities, the conversion of such loans into share capital, the reinvestment of dividends and the extension of letters of support for the Corporation's debt securities.

Personal-financing facilities remained SCC’s mainstay (96% of its financing) as at end-December 2015. Almost all of these facilities, which are primarily extended to civil servants, are repaid via direct salary deductions, thereby containing the Corporation's credit risk. Meanwhile, SCC's residential property, project loans, and hire-purchase segments continued to contract as the Corporation wound down these legacy exposures. On the whole, financing growth decelerated further to 6.6% in FY Dec 2015 (FY Dec 2014: 9.4%), following the implementation of Bank Negara Malaysia's 10-year cap on the tenures of new personal-financing facilities in September 2013.

Despite still being encumbered by legacy exposures, SCC's gross impaired-financing (GIF) ratio had eased to 3.3% as at end-December 2015 (end-December 2014: 3.7%), thanks to increased reclassification and the recovery of impaired financing. Nonetheless, the Corporation's credit-cost ratio remained elevated at 1.0% in FY Dec 2015 (FY Dec 2014: 1.0%), given its sizeable exposure to unsecured financing. Its GIF coverage ratio of 88.5% as at end-December 2015 was also weaker than the banking industry's average of 96.2%.

Although SCC's profit performance stayed healthy in FY Dec 2015, its pre-tax profit may be affected by the redistribution of interest income in the next few years, following the adoption of FRS139 as its interest-recognition method. We also note that the Corporation has become increasingly more reliant on wholesale funding, thus exposing it to refinancing and liquidity risks. However, we anticipate ready funding and liquidity support from the State Government, if needed. SCC's gearing ratio stood at 4.2 times as at end-December 2015, which is still deemed manageable.

Media contact
Choong Andrea
(603) 7628 1115
andrea@ram.com.my