DANAJAMIN NASIONAL BERHAD - 2015

MARC has affirmed its AAA insurer financial strength (IFS) rating on Danajamin Nasional Berhad (Danajamin) with a stable outlook. The affirmed IFS rating is based on MARC’s assessment on the high probability of support from the Malaysian government to Danajamin. The assessment considers Danajamin’s status as a government-sponsored and -owned financial guarantee insurer (FGI) and its key role in facilitating market access for viable domestic bond and sukuk issuers. The IFS rating also incorporates the FGI’s stringent risk controls, its conservative investment policy and strong liquidity position.

Danajamin’s business growth has been weighed down by the prevailing conditions for domestic bond and sukuk issuers. For the 8M2015, the FGI guaranteed only one issuer with an approved insured limit of RM350 million as compared to RM870 million in 2014 (2013: RM1.2 billion). In addition, early redemptions of guarantee facilities with an approved insured limit of RM535 million (outstanding amount: RM390 million) during 8M2015 have reduced the total approved insured limit to RM7.0 billion (2014: RM7.2 billion). Accordingly, the outstanding insured amount fell to RM5.7 billion (2014: RM5.8 billion). However, with potential new deals of approximately RM800 million approved but pending issuance, the FGI could register a marginal year-on-year (y-o-y) growth in total approved insured limit.

Danajamin’s portfolio remains relatively concentrated in the property (development and investment) and infrastructure sectors (toll roads, power and water) which accounted for 26.7% and 24.2% of its total insured portfolio as at end-August 2015. While the property sector has reduced from 33.4% as at end-2014, Danajamin’s exposure to the infrastructure sector has increased from 18.7% after providing a financial guarantee insurance on a fairly large facility for an interurban highway project in August 2015. Correspondingly, Danajamin remains exposed to single concentration risk. While the FGI’s portfolio composition is reflective of the capital market sectoral exposure of long term assets being funded by long term financing, the credit profile of several issuers in its portfolio has weakened during the review period in tandem with the economic slowdown. The concentration and credit risks are, however, mitigated by Danajamin’s strong capital and stringent surveillance capabilities.

MARC views Danajamin’s capitalisation as strong, as reflected in its capital adequacy ratio (CAR) of more than 300% as at end-June 2015. This is well above the minimum requirement of 130% under the risk based capital (RBC) framework the FGI has been subjected to since January 1, 2015. Danajamin’s qualified capital, which includes the RM1.0 billion capital on call, has continued to grow from internal capital generation, standing at RM2.4 billion as at end-June 2015 (end-June 2014: RM2.3 billion). MARC also notes that the repayment of shareholders’ advance of RM100 million from the government in 1H2015 has had no impact on the FGI’s capital position. Danajamin’s leverage ratio of 3.8x (1H2014: 4.5x) remains well below the maximum leverage of 7.5x, providing sufficient headroom to underwrite new FGI businesses. The leverage ratio continued its declining trend in 1H2015 on the back of higher bond redemptions relative to new drawdowns.

Danajamin declared dividends of RM11.2 million for the first time in relation to the 2014 financial year in 1H2015, the quantum of which is well within its conservative dividend policy under which dividends will be declared only if its net profit is above RM100 million with the dividend payout ratio capped at 30.0%. In addition, the FGI requires approval from Bank Negara Malaysia to declare dividends. The FGI’s payout ratio for 2014 was 10.0%.

Danajamin’s net earned premiums grew slower by 13.2% y-o-y to RM89.5 million in 2014 (2013: 35.0%; RM79.1 million), in line with the slower deal flows and higher bond redemptions relative to new drawdowns. For 1H2015, net earned premiums declined by 8.1% y-o-y to RM42.2 million as no new deals were secured during the period. The lower premium income was offset by a higher investment income which grew by 13.3% y-o-y to RM28.4 million in 1H2015. Coupled with lower operating costs, the FGI posted a higher net profit of RM59.8 million for the period (1H2014: RM57.7 million). This would translate to an increase in returns on assets and equity to 6.4% and 8.5% on an annualised basis respectively.

Danajamin has continued to shift its investment funds to relatively higher yielding assets within its conservative risk parameters. This is reflected in the decrease in allocation to short-term money market instruments and a corresponding increase in higher yielding assets which rose to 44.5% of its investment portfolio in 1H2015 (2013: 36.2%). In addition to its traditional low- risk assets (government and government guaranteed assets) and “AAA” papers (government-related issuances), MARC notes that the FGI has invested in “AA” papers since 2014. However, MARC understands that the “AA” papers consist of subordinated debts of a AAA-rated bank and the aggregate limit for “AA” papers is capped at RM25 million. This represents approximately 1.7% of the FGI’s investment portfolio. MARC views that the current investment strategy allows Danajamin to benefit from higher investment yields (1H2015: 3.89%; 2014: 3.47%) while maintaining a conservative approach on managing its investment portfolios. The FGI remains in compliance with its investment policy which requires at least 50% of the portfolio to comprise deposits and low-risk assets, underpinning its strong liquidity position.

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; and
• Increasing business growth.