Credit Guarantee Corporation Malaysia Bhd - 2014

MARC has affirmed its AAA financial institution rating on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook. The affirmed rating on the government-related entity incorporates systemic support uplift from the institution’s standalone credit strength based on CGC’s public policy role to facilitate access to financing for small and medium enterprises (SME) and its majority ownership by the government via the central bank, Bank Negara Malaysia (BNM). CGC’s credit strength is underpinned by its sound capitalisation and prudent investment practices.

CGC was established in 1972 as a development financial institution (DFI) to support the growth of the SME sector by providing credit guarantees on loans extended to SMEs. CGC has continued its efforts to introduce new guarantee products to support its objective; nonetheless, the DFI has faced challenges to boost its guarantee portfolio which had been on a declining trend in recent years. However, the trend reversed during 1H2014 when outstanding loans under guarantee rose for the first time in the last four years to RM7.6 billion (end-December 2013: RM7.4 billion; end-December 2012: RM8.2 billion). This was mainly due to the response to the recently introduced Wholesale Guarantee (WG) scheme as well as the improved performance of its Portfolio Guarantee (PG) scheme. The WG scheme provides a blanket guarantee to participating financial institutions (PFI) on loans underwritten by the PFIs, while the PG scheme allows for easier access to funds for businesses that meet pre-existing criteria.

For first half ended June 30, 2014 (1HFY2014), revenue increased slightly to RM142.5 million (1HFY2013: RM141.3 million), although the increase was mainly attributed to investment income from fixed income securities rather than fee income. Investment income grew by 19.2% to RM68.9 million (1H2013: RM57.9 million) as CGC increased its holdings of fixed income securities due to the low interest rate environment. Investment in debt securities increased by 53.2% to RM605 million from RM395 million at end-2013. Although new loans under guarantee increased in 1H2014, guarantee fee income declined to RM26.2 million (1H2013: RM35.8 million) in part due to a smaller base of outstanding loans under guarantee coupled with fee-sharing with the PFIs for some of its schemes. However, the reduction was smaller when compared with guarantee fees in 2H2013 which stood at RM27.3 million. MARC expects guarantee fee income to increase gradually as CGC expands its WG and PG schemes. Net profit increased by 55.2% to RM78.8 million (1H2013: RM50.8 million), supported by lower provision for claims of RM30.5 million (1H2013: RM57.4 million).

CGC’s net non-performing loans (NPL) ratio improved to 3.1% and 3.5% as at end-June 2014 and end-December 2013 respectively (end-December 2012: 3.8%), attributed to improved credit assessment as well as continued loan restructurings and redemption efforts. During 2013, CGC restructured a total of RM207.3 million and recovered a total of RM27.5 million loans. CGC redeemed (by taking over the guaranteed loans from PFIs) a total of RM501.9 million guaranteed loans.

CGC continues to demonstrate a sustainable funding and liquidity profile with 44.1% of its total assets comprising term deposits and cash and bank balances as at end-June 2014 (end-December 2013: 37.6%). MARC views CGC’s funding base to be stable, being well supported by the government through BNM.

The stable rating outlook reflects adequate financial fundamentals and strong perceived government support.

Strengths 

• Public policy role to support the development of the SME sector;
• Track record of support from its main shareholder, Bank Negara Malaysia; and
• Sound capitalisation.

Challenges

• Reducing dependence on investment income to offset losses from credit guarantee operations;
• Developing new guarantee programs to improve CGC’s business volume; and
• Maintaining credit risk management standards.