MARC has affirmed its AAA issuer rating on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook. The rating agency continues to classify CGC as a government-related financial institution on the basis of its public policy role of facilitating access to financing for small and medium enterprises (SMEs) by providing credit guarantees, and its majority government shareholding. CGC’s affirmed rating and outlook incorporates recent improvement in CGC’s operating performance as a consequence of progress made in its transition from non-risk based pricing to risk-based pricing, its sound capitalization and prudent investment policy. The rating incorporates support uplift from the institution’s standalone credit strength based on MARC’s expectation of high likelihood of timely and sufficient government support in the event of financial distress.

CGC was established in 1972 for the purpose of assisting SMEs to access financing by providing guarantees. Apart from providing guarantees, CGC also acts as an administrator to various financing schemes introduced by Bank Negara Malaysia (BNM). In addition to being a majority shareholder of CGC with a 78.7% stake, BNM also has ongoing responsibility for supervising and guiding CGC’s activities as a development financial institution. The government’s support for CGC’s mandate is also evidenced by the low-cost funds channeled by BNM to support its operational sustainability. As at end-2010, CGC’s credit guarantee portfolio of RM8.3 billion represented close to 6.0% of total SME financing outstanding from financial institutions of RM141.2 billion. MARC sees a continuing important role for CGC in supporting the growth of the SME sector, which according to 2010 statistics, constitutes 99.2% of the country’s business establishments, and contributes about 32% of Gross Domestic Product (GDP) and 59% of total employment.

As at end-2010, CGC’s non-performing loans (NPL) ratio as per MARC’s calculation improved to 4.8% compared to the preceding year corresponding period’s 5.6%, on account of loan recoveries, restructuring of NPLs and loan write-offs. MARC notes that the subsequent increase in CGC’s NPL ratio to 5.9% as at end-June 2011 was primarily due to contraction in its credit guarantee portfolio. The rating agency believes that CGC’s introduction of its revised risk-adjusted pricing structure for all its guarantee schemes in February 2010 and focus on pricing its guarantees appropriately would improve its business and financial risk profile going forward.

In the six months to June 30, 2011 (1H2011), CGC posted a significantly higher net profit of RM65.8 million compared to the 1H2010’s net loss of RM15.1 million, largely on the back of lower claims provisioning requirements. Provisions for claims declined to RM97.9 million in 1H2011 compared to RM133.9 million in 1H2010. CGC’s guarantee fee income increased by 25% while interest income from its direct lending activities increased by 215%. As in previous financial years with the exception of 2009 which saw stronger business volume, CGC’s investment income was higher than its guarantee fees in 2010 and in 1H2011. MARC considers the significant narrowing of the institution’s credit guarantee losses favourably. Apart from commitment to risk return pricing, further improvement in the profitability of its credit guarantee operations will also depend significantly on the ability of banks to manage underlying SME loan portfolios to acceptable levels of performance.

CGC maintains strong liquidity with significant liquid assets; term deposits and cash balances accounted for 47% of its total assets as at end-June 2011. In addition, CGC maintains a highly-rated fixed income investment portfolio. Relative to the risk of CGC’s credit guarantee portfolio, the credit guarantee corporation continues to exhibit a sound capital position. Its leverage, measured by the ratio of total outstanding guarantees to its shareholders’ funds remained conservative at 2.8 times (1H2010: 3.8 times) compared to credit guarantee schemes in other countries. Given its increased profitability and earnings retention policy, the corporation’s internal capital generation improved to 2.7% (1H2010: -0.6%). MARC expects the credit guarantee corporation’s capital adequacy and strong perceived government support to impart stability to CGC’s rating.

Contacts:
Sakinah Mohd Ali, +603-2082 2272/ sakinah@marc.com.my;
Milly Leong, +603-2082 2288/ milly@marc.com.my.