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

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

CGC is a development financial institution (DFI) with majority shareholding held by the central bank, Bank Negara Malaysia. Its public policy role is to facilitate access to financing for small and medium enterprises (SME) by providing credit guarantees on their loans extended by financial institutions. MARC considers these factors as the basis for its rating assessment to incorporate high systemic support uplift from CGC’s standalone credit profile.

CGC’s guarantee portfolio size has rebounded, partly driven by the introduction of new schemes. Net loans guaranteed grew by 11.9% y-o-y to RM5.4 billion as at end-June 2016, with the growth mainly concentrated in portfolio guarantee (PG) and wholesale guarantee (WG) schemes. The PG and WG schemes, under which risks are shared with participating financial institutions (PFI), accounted for 81.8% of the total new guarantee amount during the period. In addition to the guarantee schemes, direct financing accounted for about 5% of total new loans and guarantees.

MARC notes CGC’s guarantee scheme’s gross non-performing loans (NPL) ratio has improved to 25.8% as at end-June 2016 (end-2015: 33.2%), mainly due to the write-off of non-performing guaranteed loans (NPL) and winding down of old guarantee schemes. MARC also notes that the NPL ratio improved further to 13.9% as at end-December 2016. Nonetheless, the rating agency views CGC’s asset quality could come under pressure should economic conditions weaken.

CGC’s capitalisation remains strong with a capital adequacy ratio of 37.2% on a comparable Basel II basis as at end-June 2016 (end-2015: 37.4%). In addition, the DFI operates well below its maximum guarantee cover value-to-shareholders’ fund ratio of 6.0x at 1.8x as at end-June 2016 (end-2015: 1.7x). The guarantee reserve ratio reflects the value of total guarantees covered against shareholders’ funds.

For 1H2016, CGC’s operating income rose by 22.8% y-o-y to RM181.6 million on the back of higher guarantee fees and increased investment income which benefitted from investment in higher yield instruments. Net profit increased to RM85.3 million from RM72.3 million in the corresponding period last year despite higher operating expenses of RM96.2 million and impairments and provision for claims of RM49.1 million (1H2015: RM75.6 million; RM31.5 million). In respect of funding and liquidity, CGC maintains a stable profile, supported by strong cash balances and term deposits, which account for 35.8% of its total assets as at end-June 2016 (end-2015: 37.0%). CGC increased its holdings of fixed income securities as part of its efforts to enhance investment returns; nonetheless, a significant proportion of its debt securities in the investment portfolio are rated AA and above, with less than 5% allocated in fixed income securities in the A rating band.

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: Afeeq Amiri, +603-2082 2256/ afeeqamiri@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

April 12, 2017