View Credit Analysis Report (605389011)

Aid605389011
StatusPublished
CategoryReport
SubcategoryFinance - Financial Institution
CoidSMEBANK
Appoletid0
Date Article2021-07-19 00:00:00
PublicYes
TitleSMALL MEDIUM ENTERPRISE DEVELOPMENT BANK MALAYSIA BERHAD - 2021
Content
Rating action     
MARC has assigned final ratings of AAAISMARC-1IS on Small Medium Enterprise Development Bank Malaysia Berhad’s (SME Bank) Islamic Medium-Term Notes (IMTNs) Programme of up to RM3.0 billion (which shall include Sustainability IMTNs) and Islamic Commercial Papers (ICPs) Programme of up to RM1.0 billion with a combined limit in nominal value of up to RM3.0 billion. Concurrently, the rating agency has affirmed its financial institution (FI) rating of AAA on SME Bank. The ratings outlook is stable.

Rationale      
The affirmed FI rating reflects SME Bank’s status as a wholly government-owned development financial institution (DFI) with a mandate to develop small and medium enterprises (SME) in the country. To execute this role, the government extends support through government guarantees, profit subsidies, soft loans and grants. 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.

For 2020, the DFI’s strong financing growth of 12.6% y-o-y to RM7.7 billion was aided by the government’s stimulus package to help support the SME sector during the COVID-19 pandemic. SME Bank launched several financing programmes including the Pelan Jana Semula Ekonomi Negara (PENJANA) Tourism Financing, Special Relief Facility, as well as the Targeted Relief and Recovery Facility during the period. The response has been strong for these programmes. The DFI also provided a six-month financing moratorium which has been extended by up to 12 months for certain customers including those in the transport, tourism, education and healthcare segments. The total outstanding amount of SME Bank’s relief programmes was RM2.9 billion as at end-2020. SME Bank’s financing in the DFI space accounted for a sizeable 52.6% of the SME sector’s total financing as at end-2020, which underscores the importance of the DFI in supporting the growth of SMEs. 

The DFI has continued to undertake restructuring and rescheduling (R&R) on affected financing to address customers’ payment constraints posed by the challenging environment. Combined with write-offs, SME Bank’s gross impaired financing (GIF) ratio declined to 16.0% as at end-2020 (2019: 19.4%). On the group level, its GIF ratio stood at 20.5% (2019: 25.0%); the higher GIF 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 against the 3.2% for the whole SME sector; the substantial difference to some extent reflects SME Bank’s role of providing financing to unserved and underserved SMEs.

The DFI’s core capital ratio and risk-weighted capital ratio (RWCR) declined to 12.6% and 18.9% as at end-2020 (2019: 13.5%, 20.1%) on the back of an increase in risk-weighted assets from the higher financing recorded this period. While downside risk on capital persists in view of its developmental role, MARC opines that capital support from the government would be forthcoming if required.

In terms of funding, the DFI’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 74.2% of total funding as at end-2020 (2019: 77.0%). SME Bank’s status as a DFI has enabled ready access to reliable long-term funding from the government and its related entities. 

SME Bank’s net profit declined to RM120.0 million as at end-2020 (2019: RM198.9 million). The decline was mainly due to lower financing income on the back of the lower overnight policy rate (OPR) as well as higher operating expenses.

Rating outlook     
The stable outlook reflects our expectation of ready government support when required.

Rating trajectory

Downside scenario     
The rating could experience sharp downward migration if there is an explicit decline in financial and/or operational support from the government.

Key strengths
  • Wholly government-owned development financial institution (DFI) focused on SME sector
  • Continued government support for the growth of SME sector
  • Strong regulatory oversight on the DFI
Key risks
  • Potential further rise in prevailing high impairment levels 
  • Competition from other financial institutions in lending to the SME sector


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