MARC has affirmed its AAA issuer rating on Credit Guarantee Corporation Malaysia Berhad (CGC). The rating reflects CGC’s important policy role in promoting access to financing for small and medium enterprises (SMEs), as well as its majority-ownership by Bank Negara Malaysia (BNM). The rating also takes into consideration the credit guarantee provider’s strong capitalisation, adequate liquidity and established underwriting policies in place. The rating outlook is stable.

Established in 1972, CGC is Malaysia’s sole provider of guarantee schemes to assist SMEs in obtaining loans from financial institutions. In addition, the corporation also administers BNM initiated funds that are introduced from time to time to assist SMEs. CGC is 79.3% owned by BNM, while the remaining 20.7% is held by a consortium of financial institutions. The Deputy Governor of the BNM is also the Chairman of the Board. In addition, the government, mostly through the BNM, has channelled various funds to the corporation at below market rates. The board representation and the low-cost funding from BNM imply a high degree of involvement and support from the government for CGC’s public policy role.

Given its public policy role in SME development, CGC has historically relied on investment income to produce operating profits. CGC reported lower profits in FY2008, with net profit declining by 67.9% to RM13.7 million from RM42.7 million a year ago; ROA and ROE of 0.27% and 0.58% respectively in FY2008. While the guarantee fees under risk-adjusted pricing have increased significantly by 24.6% in 2008, the claims incurred by CGC was double that of the guarantee fee income, registering at RM276.0 million (2007: RM221.0 million). Investment income continues to be an important source of revenue for the corporation, although an inherent risk-return trade-off entailed by its capital preservation investment policy has seen lower yields on an investment portfolio mainly composed of bank deposits and government fixed income securities. The decrease in the overnight policy rate at the end of 2008 and beginning of 2009 exposed the corporation to significant reinvestment risk, and has also affected its investment income, which further raises concerns with regard CGC’s financial sustainability.

In an attempt to improve its relevance and develop a more viable business model, CGC embarked on a 3-year transformation plan in 2006. Some key steps included the introduction of a risk-based pricing mechanism to link guarantee fees to the risk profile of the guaranteed entity, refinements to the risk evaluation and scoring system used at present and the exploration of new revenue generation activities for the corporation. Another notable development was the establishment of a SME Credit Bureau to bridge the information gap between financial institutions and SMEs. However, a proposed move to tap into capital markets has been deferred due to the unfavourable economic conditions. Its current key challenge, MARC believes, is to reverse declining profitability while maintaining current levels of risk.

In light of the challenging credit climate and low-interest environment, MARC expects CGC’s profitability to be further pressured in the coming year. That said, CGC’s strong capitalisation (equity-asset ratio of 39.3% at end-June 2009) should enable it to absorb most normal operating and financial risks. Besides, given the corporation’s vital public policy mandate and BNM’s majority shareholding, support from BNM and/or government in the event of need is likely to be high and is a key determinant of the issuer rating assigned to the corporation.  

Contacts:
Lim Kok Seng 03-2090 2272 / kokseng@marc.com.my;
Anandakumar Jegarasasingam 03-2090 2250 / kumar@marc.com.my