Credit Guarantee Corporation Malaysia Bhd - 2010

MARC has affirmed its AAA issuer rating on Credit Guarantee Corporation Malaysia Berhad (CGC). The rating is underpinned by the high likelihood of government support, in view of CGC’s public policy role in providing credit access to small- to medium-sized enterprises (SME) and the majority shareholding by Bank Negara Malaysia (BNM). The rating also takes into account the corporation’s strong capitalisation, adequate liquidity and management’s ongoing initiatives to attain financial sustainability. The rating outlook remains stable.

Established in 1972, CGC assists SMEs in accessing credit facilities by providing guarantees. In addition to the provision of guarantees, the corporation is also the main administrator of various related financing schemes introduced by BNM from time to time. CGC is 76.4%-owned by BNM while the remaining is held by a consortium of commercial banks. The Deputy Governor of the BNM is also the Chairman of the Board. Over the years, the government, mostly through BNM, has channeled various funds to CGC at below market rates. The board representation and the low-cost funding from BNM imply a high degree of involvement and support from the government to CGC’s public policy role.

CGC suffered a net loss of RM40.9 million in FY2009 as compared to net profits of RM13.7 million in FY2008. Being a corporation with a public policy role, CGC has traditionally relied on investment income from its available funds to offset underwriting deficits and support its profitability. While guarantee fees have increased by 5.9% in FY2009 on the back of a larger guarantee portfolio, the corporation’s investment income contracted by 12.8% amidst the low interest rate environment that prevailed throughout the year. CGC’s investments are mostly term deposits and sovereign and corporate fixed income securities, consistent with its capital preservation investment objective. Meanwhile, CGC’s portfolio quality which has historically comprised of exposures to weaker credits, came under increased pressure as a result of the unfavourable economic environment. Claims experience continued to deteriorate, resulting in a 12.1% increase in claims incurred to RM306.8 million in FY2009, more than twice the guarantee income received in the same period of RM146.8 million. In addition, a one-off impairment charge of RM6.4 million for its investments in collateralised loan obligation transactions exerted further pressure on the corporation’s profitability.

CGC’s main challenge at this point is to reduce its reliance on investment income to cover underwriting deficits, which MARC regards as fundamental to preserving CGC’s capital strength and ensuring long-run financial sustainability. This would improve CGC’s resilience against a deteriorating short-term claims experience and/or a weaker investment environment. Meanwhile, CGC has embarked on various plans and initiatives to improve its revenue and problem loan recovery. Guarantee fees have been revised upward again in February 2010 within the range of 0.5% to 4.0% to reflect the higher inherent credit risk of SMEs. In addition, guarantee portfolios are closely monitored post-disbursement with a view to improve delinquencies and credit losses over time. Management is also looking for ways to increase investment returns and is currently exploring alternative investment avenue apart from its traditional investment options.

Although CGC’s equity-to-assets ratio has declined to 37.0% at end-FY2009 (FY2008: 42.9%; FY2007: 50.9%), the corporation’s capitalisation remains sound, considering the value of guarantees issued in relation to equity was maintained at a modest 3.9 times in FY2009 (FY2008: 3.7 times). As at end-FY2009, CGC’s cash flow and liquidity position were strong, supported by RM5.1 billion of term deposits.

MARC expects CGC’s profitability to remain subdued in the near term. CGC’s public policy oriented role and low prevailing interest rates will act as constraints to improvement in its underwriting and investment performance. That said, CGC’s strong capitalisation should enable it to absorb most normal operating and financial risks. Support from BNM is deemed to be high and underpins the AAA rating assigned to the corporation.

Strengths

• High perceived likelihood of eventual support from Bank Negara Malaysia in the event of need;
• Important public policy role played in offering credit enhancement for SME financing; and
• Adequate risk management controls and a reasonably well-defined risk appetite.

Challenges

• Guarantee fees do not adequately reflect default risk; and
• Quality of underlying guarantee portfolio is susceptible to deterioration in an economic downturn.