Credit Guarantee Corporation Malaysia Bhd - 2008

MARC has affirmed its AAA issuer rating on Credit Guarantee Corporation Malaysia Berhad (CGC). The rating continues to reflect CGC’s role as a policy institution in promoting access to financing for small and medium enterprises (SMEs), as well as its majority-ownership by Bank Negara Malaysia (BNM). The rating is also underpinned by the credit guarantee provider’s robust capitalization, sound culture, adequate liquidity and low investment risk appetite. The rating outlook is stable.

Established in 1972, CGC is the country’s sole provider of guarantee schemes and ancillary services to assist SMEs with little or no collateral in procuring loans from financial institutions. MARC sees a continued strategic role for CGC in facilitating SME development as provided in its three-year transformation plan which was first embarked upon in 2006. Initiatives taken to date have included expanding its range of products and services as well as widening its distribution channels, forging alliances with strategic local and foreign institutions for capacity building objectives and establishing the SME Credit Bureau. In May 2007, CGC partially-guaranteed the RM600 million securitization of SME loans originated by Malayan Banking Berhad. Given its mandate, its portfolio of loans guaranteed intrinsically involves a higher degree of credit risk. 

CGC is 76.4% owned by BNM. The latter is represented on CGC’s board by one of its Deputy Governors as Chairman of the board. This, and funds provided by the latter to CGC, implies a high degree of commitment and support for CGC’s public policy role. MARC expects CGC’s plans to tap medium-term funding from the capital markets for SMEs to be challenged by current market conditions in the near term. Until the capital markets regain their footing, CGC will continue to assist SMEs mainly through its credit guarantee schemes.

Claims paid out by CGC continue to exceed its guarantee fee income in 2007. MARC notes that CGC’s revised pricing structure for guarantees, which is intended to be more risk-sensitive, is still in its preliminary stages of implementation. Provisions for claims in 2007 almost doubled to RM221.0 million from RM113.8 million a year earlier, reflecting the deteriorating performance of guaranteed loans. CGC’s prudent provisioning for claims provide a buffer against potential erosion of its capital position on account of declining credit quality of underlying loans. In light of the more challenging credit environment, MARC  expects CGC’s profitability to remain under  pressure given the outlook for sustained high provisioning for claims. MARC believes that its robust capitalization and healthy liquidity levels will remain supportive of its credit quality in addition to the high probability of support emanating from BNM to the corporation in a distress scenario.

Strengths

• Strong support and high involvement from the Central Bank;
• Important credit enhancement role played in SME financing; and
• Established procedures and guidelines with a well-contained risk appetite.

Challenges

• Susceptibility to deterioration in underlying loan performance as a result of tighter credit conditions.