|
MARC has affirmed its insurer financial strength rating of AAA on Danajamin Nasional Berhad (Danajamin). Concurrently, the rating agency has assigned long-term/short-term counterparty credit ratings of AAA/MARC-1 to Danajamin. The ratings carry a stable outlook.
The ratings on Danajamin reflect its status as a government-sponsored and -owned financial guarantee insurer (FGI) that was set up to facilitate market accessibility to viable domestic bond and sukuk issuers. The FGI’s stringent risk controls, conservative investment policy and strong liquidity position also support the ratings.
During the eight-month period ended August 31, 2016 (8M2016), Danajamin insured two new issuers with a gross guarantee amount totalling RM785.0 million (8M2015: RM350.0 million), reflecting the lackluster corporate debt issuance environment. Coupled with a total redemption of RM484.0 million during the same period, Danajamin’s total gross outstanding guarantee amount grew slightly to RM5.98 billion (end-2015: RM5.56 billion). With the full redemption by six issuers, the FGI has 24 issuers as at end-August 2016. The number could increase if a few pending deals with gross insured limits totaling RM1.17 billion are completed over the near term. Nonetheless, MARC does not expect the FGI’s guarantee portfolio to increase significantly given that it has gross scheduled redemptions totalling RM815.0 million by end-2017.
MARC notes that Danajamin continues to face sector concentration risk, largely arising from its moderate insured portfolio size. Its exposure to the property sector has decreased but remains sizeable at 28.0% of total net insured limits of RM6.80 billion as at end-August 2016 (end-2015: 30.3%). At the same time, exposure to the challenging oil and gas sector rose to 14.0% from 10.1% of net insured limits as at end2015 after Danajamin underwrote an offshore service provider’s new issuance with a net guarantee amount of RM317.5 million (gross amount: RM635.0 million) in April 2016. In respect of single client concentration risk, the majority of the issuers have an individual guarantee amount of between RM300.0 million and RM400.0 million, or about 20.0% and 26.0% of Danajamin’s total equity of RM1.52 billion as at end-June 2016.
The rating agency takes comfort from Danajamin’s strong surveillance functions and its risk mitigation measures to reduce exposure risks on some issues. This includes collaborations with financial institutions to co-guarantee issues and/or undertake fronting arrangements under which the FGI would enter into back-to-back arrangements with the banks. Based on MARC’s own independent review, the overall risk profile of Danajamin’s insured portfolio remains adequate, reflecting the FGI’s developmental role in the domestic bond/sukuk market. As at date, Danajamin has not had any claims made against it. For 1H2016, Danajamin’s net earned premiums grew by 5.4% y-o-y to RM44.5 million on the back of revenue from new deals secured during the period. Investment income grew by 10.1% y-o-y to RM31.3 million, benefitting from a higher investment yield of 3.94% (1H2015: 3.89%). Net profit rose by 13.1% y-o-y to RM67.6 million, leading to higher returns on average assets and equity of 6.6% and 9.1% on an annualised basis respectively (1H2015: 6.3%; 8.7%).
Danajamin’s capital position continued to be supported by internal capital generation. Its capital adequacy ratio of more than 300.0% as at end-June 2016 was well above the minimum requirement of 130.0% under Bank Negara Malaysia’s risk-based capital (RBC) framework. Danajamin’s leverage ratio, as measured by total gross outstanding guarantee amount to total equity, rose to 4.2x as at end-June 2016 from 3.8x at end-2015, but remains well below the FGI’s internal limit of 7.5x. The current leverage ratio provides sufficient headroom for underwriting new financial guarantee business. The FGI’s net leverage ratio as at end-June 2016 stood at 3.7x (end-2015: 3.6x). MARC expects the ratio to rise moderately over the near term as an increase in new business will be partly offset by redemptions.
Danajamin has maintained a conservative investment approach: more than 80.0% of total investments have been in short-term money market deposits and low-risk assets (LRA) since 2012. As at end-June 2016, this increased to 88.2% from 84.6% at end-2015, well above its internal investment policy which requires 50.0% of the portfolio to comprise deposits and LRA. Nonetheless, given the continuing low interest rate environment in the wake of the overnight policy rate cut, it is likely that Danajamin will reallocate some funds to higher-yielding assets or realise some capital gains to sustain investment income growth. MARC expects any change in the fund reallocation to be within the FGI’s risk parameters as per its internal investment policy.
The stable outlook reflects MARC’s expectation that government support will remain strong and that Danajamin’s financial metrics will not weaken over the near term.
Major Rating Factors
Strengths
- Government-sponsored sole financial guarantee insurer;
- Sound governance structure; and
- Strong liquidity position and conservative investment policy.
Challenges
- Reducing concentration risks
|
