CREDIT GUARANTEE CORPORATION MALAYSIA BERHAD - 2017

MARC has affirmed its AAA financial institution rating on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook.

As a development financial institution (DFI), CGC plays a public policy role to facilitate access to financing for SMEs by providing credit guarantees on loans extended by financial institutions. It is majority-owned by Bank Negara Malaysia. MARC considers these key factors as the basis for incorporating high systemic support uplift from CGC’s standalone credit profile.

For six months ended June 30, 2017, CGC’s net loans guaranteed grew by 21.9% y-o-y to RM6.6 billion, with the growth mainly concentrated in portfolio guarantees (PG) which accounted for 76.3% of the total new guarantee amount during the period. The PG scheme which is undertaken with participating financial institutions (PFI) allows CGC to share its guarantee risks with PFIs. CGC’s direct financing accounted for only about 9% of total new loans and guarantees.

CGC’s guarantee scheme’s gross non-performing loans (NPL) ratio declined to 12.6% as at end-June 2017 (end-2016: 13.9%). The current NPL ratio is well below the historical trend of above 30%, owing to significant clean-up since 2016, which entails write-offs and winding down old guarantee schemes. MARC understands that CGC has also strengthened its risk management process by establishing a collection unit in 2017 which performs first level follow-up with customers, complemented by periodical site visits. CGC’s capitalisation remains strong with a capital adequacy ratio of 35.2% as at end-June 2017 on a comparable Basel II basis. In addition, the DFI operates well below its maximum guarantee cover value-to-shareholders’ funds ratio of 6.0x at 2.1x.

For 1H2017, CGC’s operating income rose by 12.3% y-o-y to RM203.9 million on the back of higher guarantee fees and increased investment income which benefitted from investments in higher yield instruments. CGC’s investment and guarantee incomes constituted 48.7% and 32.5% respectively of its total income in 1H2017. However, net profit was flat at RM84.6 million due to the corresponding increase in operating costs.

In respect of funding and liquidity, CGC maintains a stable profile, supported by strong cash balances and term deposits, which account for 26.7% of its total assets as at end-June 2017 (end-2016: 31.0%). CGC increased its holdings of fixed income securities as part of its efforts to enhance investment returns; nonetheless, over 90% of debt securities in its investment portfolio are rated AA and above. Its strategy in allocating a small portion of investment funds to fixed income securities in the A rating band is not expected to compromise the overall credit quality of its investment portfolio.

The stable outlook reflects MARC’s expectations that government support for CGC will remain and that the DFI will continue to maintain its financial fundamentals.

Major Rating Factors

Strengths

• Public policy role as a development financial institution;
• Strong support from its main shareholder, Bank Negara Malaysia; and
• Strong capitalisation.

Challenges

• Strengthening business volume; and
• Maintaining credit risk management standards.