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

Published on 11 Jul 2017.

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 (97% of its financing) as at end-December 2016. 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. SCC expanded at a faster 13.5% in fiscal 2016. The salary increments for civil servants in July 2016 had boosted demand for personal-financing facilities. The Corporation expects financing growth to be equally robust in fiscal 2017, as it anticipates handouts and/or further salary increases ahead of the upcoming elections. 

As at end-December 2016, SCC's gross impaired financing (GIF) ratio eased to 3.0% (end-December 2015: 3.3%) amid healthy financing growth and write-offs. However, its credit cost ratio remained lofty at 1%; the Corporation incurred higher provisions in fiscal 2016 as the mass lay-offs at a major airline had given rise to impairments. Correspondingly, the Corporation’s GIF coverage ratio had improved to 98% as at end-December 2016.

In January 2016, SCC adopted FRS139 as its profit-recognition method for personal-financing facilities which had led to the redistribution of SCC’s financing profit, thus smoothening its profit stream over the tenure of the financing. The adoption of FRS139 had a one-off negative impact of RM20 million on financing income in fiscal 2015 which thinned its net financing margin (NFM) to 4.6% (fiscal 2014: 5.6%). SCC closed fiscal 2016 with a still-healthy NFM and ROA of 4.6% and 2.3%, respectively. 

As at end-December 2016, short-term market-based borrowings comprised a higher 44% of total borrowings (end-December 2015: 32%) and could expose it to refinancing and liquidity risks. However, we anticipate ready funding and liquidity support from the State Government, if needed. Separately, we expect SCC's gearing ratio to remain manageable. 

Analytical contact
Chan Yin Huei
(603) 7628 1180
yinhuei@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my