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

The affirmed rating reflects CGC’s status as a development financial institution (DFI) with an explicit public policy role, underpinned by the support provided by the government through Bank Negara Malaysia (BNM), its key shareholder with a 78.6% interest. This is the basis for the rating agency to incorporate a very high systemic support from BNM. 

CGC provides credit guarantees on loans and financing extended to micro, small and medium-sized enterprises (MSMEs) by participating financial institutions (PFIs). As at end-1H2022, CGC’s net loans guaranteed stood higher at RM15.1 billion (1H2021: RM13.0 billion) with the growth coming from funds channelled to the MSME sector. This includes the Targeted Relief and Recovery Facility (TRRF), which was initiated by BNM and has remained the key contributor to the growth of net loans guaranteed. BNM’s Disaster Relief Fund, which was introduced in 2021 to assist MSMEs affected by floods, also contributed to the higher net loans guaranteed.

Regardless of TRRF and other one-off programmes that have boosted the size of guaranteed loans in recent years, the Portfolio Guarantee (PG) and Wholesale Guarantee (WG) schemes will continue to remain CGC’s key products, accounting for a combined 86.3% of guaranteed loans in 1H2022. Under the PG and WG schemes, CGC provides guarantees with various coverage levels on new and existing loans of PFIs. This approach has allowed CGC to mitigate guarantee risks.

For 1H2022, gross non-performing loans/financing (NPL) ratio rose to 3.3% from 2.7% as at end-2021. This was mainly due to an increase in defaulters following the expiry of the extended relief assistance and the impact off the severe floods in December 2021 on MSME businesses. We also note that loan recovery of RM10.9 million in 2021 was also lower than in prior years (2020: RM12.5 million) due to the moratorium extended to its customers and the increase in bankruptcy thresholds.

Total income declined to RM163.7 million (1H2021: RM191.4 million), mainly on lower investment income of RM30.8 million (1H2021: RM63.6 million). CGC recorded higher guarantee fees of RM97.8 million (1H2021: RM92.2 million). As a pre-emptive measure, CGC substantially increased its provisions of claims to RM150.7 million from RM7.2 million in the previous corresponding period. As a result, it recorded a net 

loss of RM62.6 million during the period. The DFI has maintained a stable liquidity profile, supported by strong cash balances and term deposits, accounting for 22.3% of total assets (1H2021: 18.4%). Debt and sukuk securities constituted around 56.3% of its total investment portfolio as at 1H2022. Of these, around 81.1% comprise bonds/sukuk rated AA and above.

The rating agency notes that CGC generated a one-off gain from the disposal of its 50%-stake in Danajamin Nasional Berhad amounting to RM440.1 million in 2021. The proceeds have been placed in a special reserve account and will be used for its growth and contingency purposes.

The stable outlook assumes continued government support to CGC to carry out its mandated role.

The rating could come under pressure if there is an explicit decline in financial and/or operational support from the government.