RAM Ratings reaffirms Sabah Credit Corporation's AA1/Stable/P1 debt ratings

Published on 24 June 2015

RAM Ratings has reaffirmed the AA1/Stable/P1 ratings of Sabah Credit Corporation’s (SCC or the Corporation) outstanding debt instruments. SCC is wholly owned by the State Government of Sabah (whose debt facilities are rated AAA/Stable/P1 by RAM), and operates under the purview of the Sabah State Ministry of Finance.
The ratings reflect our expectation of the Sabah State Government’s continued support for SCC. 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 continue to dominate SCC’s financing portfolio (95%). The repayment of such facilities – primarily extended to civil servants – is conducted through direct salary deductions, thereby reducing the Corporation’s credit risk. SCC will remain focused on this segment as it continues winding down its portfolio of residential property loans, project loans and hire–purchase facilities. Nonetheless, the growth of its personal-financing portfolio has moderated following the implementation of a 10-year cap on the tenures of new facilities since September 2013. SCC had voluntarily implemented the cap after Bank Negara Malaysia’s imposition of the same on banks and selected non-bank financial institutions in June 2013.
As at end-December 2014, the Corporation’s gross impaired-financing (GIF) ratio had eased to 3.7% (end-December 2013: 4.1%), mainly due to large write-offs of impaired personal financing following the adoption of a policy that allows impaired financing to be written off earlier. SCC’s GIF ratio may improve further on additional write-offs this year. On the other hand, its credit-cost ratio remained high at 1.0% as it continued tightening its provisioning policy, resulting in a stronger provisioning coverage ratio of 82% (end-December 2013: 77%).
Notably, SCC cannot accept deposits and depends on wholesale funding for its financing needs. Its increasing reliance on private debt securities heightens its exposure to rollover and liquidity risks, which are inherent in market-based funding. Meanwhile, the Corporation’s capitalisation and profitability levels have remained sound. It registered a gearing ratio of 4.3 times – a manageable level considering the nature of its business – and a capital-adequacy ratio of 20% as at end-December 2014 (end-December 2013: 4.6 times and 19%). Its net financing margin held up at 5.5% while its ROA retreated from 3.6% to 3.2% y-o-y, following a drop in fee income, losses from its property-development joint venture and higher net impairment charges.

Media contact
Yong Jia Zheng
(603) 7628 1055
jiazheng@ram.com.my