Report ID 605309 Popularity 1168 views 77 downloads 
Report Date Nov 2020 Product  
Company / Issuer Small Medium Enterprise Development Bank Malaysia Bhd Sector Finance - Financial Institution
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MARC has affirmed its financial institution (FI) rating of AAA to Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank). The rating outlook is stable.

The affirmed FI rating remains premised on SME Bank’s status as a wholly government-owned development financial institution (DFI) with a mandate to develop small and medium enterprises (SMEs) in the country. For executing this role, the government extends support through government-guarantees, profit subsidies, soft loans and grants, as well as through other measures such as converting a government loan of RM500.0 million into capital in 2017 to strengthen the Bank’s capital position. Held through the Minister of Finance Inc (MoF Inc), SME Bank is regulated by Bank Negara Malaysia (BNM) and supervised by the Ministry of Entrepreneur Development and Cooperatives (MEDAC), underscoring its importance in the development of SMEs in Malaysia.

MARC opines that SME Bank is likely to face renewed financing asset quality weaknesses, arising from the impact of the COVID-19 pandemic and the restrictive measures imposed to curtail the spread of the virus. SME Bank has provided a six-month financing moratorium which has seen a take-up rate of 67.9% as at end-July 2020. While the Bank has implemented a targeted moratorium beginning early October 2020, any increase in impaired financing is expected to be tackled through its restructuring and rescheduling (R&R) efforts. As at 1H2020, SME Bank’s gross impaired financing (GIF) was on a declining trend, registering 18.1% (2018: 22.9%) and at the Group level at 23.4% (2018: 28.6%). The higher GIF at the Group level includes the consolidation of SMEB Asset Management Sdn Bhd (SAM), a wholly-owned subsidiary that was set up in 2014 to manage the Bank’s impaired financing, including legacy financing. Notwithstanding the improvement, SME Bank’s GIF level remains higher than the 3.4% SME GIF of the financial institutions; the substantial difference to some extent reflects SME Bank’s role of providing funding to underserved SMEs.

Financing/loans to the SME sector remains competitive domestically; nonetheless, as SME Bank is the government arm to assist SMEs, it contributed a sizeable 56.5% of the sector’s total financing in the DFI space in 1H2020. Financing growth has remained flat in recent years, with the Group’s total financing standing at RM6.9 billion at end-2019 as the Group was focused on improving its asset quality. However, in 1H2020, SME Bank’s financing book grew 6.1% to RM7.3 billion from end-2019, helped by the government’s stimulus package and the national economic recovery plan (PENJANA). 

Its portfolio has been largely skewed towards the services sector (2019: 63.7%; 2018: 63.2%), given that this segment continues to be a major contributor to the nation’s gross domestic product (GDP), accounting for 54.2% in 2019. 

The Group had returned to profitability in 2019, recording a net profit of RM198.9 million (2018: net loss of RM556.1 million) as provisioning normalised after the implementation of the Malaysian Financial Reporting Standards 9 (MFRS 9). However, for 1H2020, net profit declined sharply by 92.1% y-o-y to RM3.3 million (1H2019: RM42.0 million) due to a combination of lower financing income, higher impairment charges and higher expenses which grew by 51.9% y-o-y to RM123.1 million.

The Group’s core capital ratio and risk-weighted capital ratio increased to 13.1% and 20.1% in 2019 (2018: 11.6%, 18.8%) due to better performance in 2019. The Group’s funding profile remained largely supported by deposits and borrowings from the government and government-related entities as well as by government-guaranteed borrowings and sukuk issuances. These accounted for 77.0% of total funding as at end-2019. As a DFI, SME Bank has access to funding from the government and its related entities in line with the government’s policy to generate economic growth from the SME sector.

Major Rating Factors

Wholly government-owned financial institution; 
Continued government focus on the SME sector; and
Strong regulatory oversight.

Potential for further rise in high impairment levels; and
Competition from other financial institutions in lending to the SME sector.