MARC Ratings has affirmed its financial institution (FI) rating of AAA on Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank). Concurrently, the rating agency has affirmed its ratings of AAA_IS / MARC-1_IS on the bank’s Islamic Medium-Term Notes (IMTN) Programme of up to RM3.0 billion and Islamic Commercial Papers (ICP) Programme of up to RM1.0 billion with a combined aggregate limit in nominal value of up to RM3.0 billion. The ratings outlook is stable.

Rationale     

The affirmed ratings are driven by SME Bank’s status as a wholly government-owned development financial institution (DFI) with a mandate to develop small and medium enterprises (SMEs). Regulated by Bank Negara Malaysia (BNM) and supervised by Kementerian Pembangunan Usahawan dan Koperasi (KUSKOP), SME Bank has remained a key player in the development of SMEs in Malaysia. In executing this role, SME Bank has continued to benefit from funding support from the government and government-related entities, which constituted 71.8% of its funding profile as at end-2021. 

As at end-2021, SME Bank’s financing portfolio recorded a growth rate of 7.5% y-o-y to stand at RM8.3 billion. Growth was aided by the DFI’s continued role as a conduit to channel the government’s stimulus facilities to those impacted by the pandemic. Notable facilities include the Targeted Relief and Recovery Facility, Lestari Bumi Financing and the SME Technology Transformation Fund. These are guaranteed up to 80%, providing the DFI with mitigation against credit risk. Recovery of SMEs amid a pick-up in the economy coupled with the government’s continued accommodative stance in supporting the SME industry would lend strength to the DFI’s portfolio growth in the near term. 

SME Bank’s gross impaired financing (GIF) ratio remained high at 18.4% as at end-2021, although this is a slight downtick from 20.5% a year earlier. At the bank level, GIF ratio stood lower at 14.3% (end-2020: 16.0%). The decrease was largely due to the DFI’s financing portfolio expansion, coupled with continued accommodative relief measures. SME Bank’s double-digit impairment levels remained well above the SME industry’s average at 3.2% as at end-2021, in part due to its developmental role. The DFI would maintain its accommodative stance, offering rescheduling and restructuring programmes to its customers in managing asset quality levels. While the various measures provide some relief on asset quality, clarity on customers’ repayment capabilities would only become more apparent as the bank winds down the repayment assistance and this could result in an increase in delinquencies in the months ahead.

SME Bank’s core capital ratio (CCR) and risk-weighted capital ratio (RWCR) remained sound at 12.9% and 19.2% as at end-2021, providing some headroom to withstand asset quality weakening. Although the capital ratios were below those of its peers, we opine that capital support from the government, if necessary, would be forthcoming given SME Bank’s status. 

As at end-2021, the DFI charted better operating profit, supported by stronger net financing income, up 43.2% to RM325.0 million on the back of a growing financing book as well as lower financing expenses. This, coupled with better non-financing income on the back of stronger bank guarantee fee income, led to an increase in the DFI’s pre-provision operating profit to RM177.9 million. However, the DFI’s bottom line was impeded by higher impairment charges during the year as net profit fell 56.2% y-o-y to RM52.6 million. With 48.7% of its financing book still under relief measures, coupled with its low financing loss coverage ratio of 57.7% as at end-2021, this may necessitate further provisions, consequently adding pressure on the DFI’s earnings in the near term. 

Rating outlook