MARC has affirmed its AAA issuer rating on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook. The affirmed rating takes into account CGC’s sound capitalisation and prudent investment practices as well as the changes that CGC has embarked on in recent years to transform itself into a commercially driven institution. CGC’s adoption of a risk-adjusted pricing methodology and risk sharing with participating financial institutions (PFIs) have positively impacted its profitability and return measures, however the rating agency notes that the value and number of SME loans guaranteed by CGC has been on the decline since 2010 with the discontinuance of its Direct Access Guarantee Scheme (DAGS) and most government-funded guarantee schemes. MARC believes that CGC faces an ongoing challenge of continually finding new avenues to support domestic SMEs and banks in sustaining its business volume.

Notwithstanding the change in CGC’s strategic orientation and its focus on SME outreach in a financially sustainable manner, the rating and rating outlook also continue to incorporate systemic support uplift from the institution’s stand-alone credit strength. MARC has not revised its systemic support assumption. The rating agency believes that the likelihood of support would be forthcoming from the government remains high in the event of need on account of CGC’s majority government shareholding, CGC’s unchanged objective of facilitating access to financing for small and medium enterprises (SME) and the Malaysian government’s commitment to SME development.

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 BNM and the government. CGC’s guarantee portfolio stood lower at RM5.7 billion as at end-June 2012 compared to RM6.3 billion in 2011. The declining trend in new guarantee volumes observed in major sector groupings marks the discontinuance of most government-funded guarantee schemes. Prior to 2010, government-funded schemes such as schemes introduced during the 2007/2008 financial crisis to assist viable SMEs that were adversely impacted by the economic slowdown were the primary driver of new guarantees.

During the first six months of 2012 (1H2012), total new guarantees declined by 66.4% year-on-year to RM325.6 million from RM968.4 million registered in 1H2011. Going forward, CGC has identified portfolio guarantees (PG) as an area of opportunity. CGC’s new partnership with OCBC Bank (Malaysia) Berhad under the scheme is expected to have a positive impact on portfolio growth in the near term and additional progress in this business area will depend on CGC’s ability to develop new collaborations with other banks.

As at end-June 2012, CGC’s non-performing loans (NPL) ratio improved to 4.1% compared to 5.9% in the preceding year’s corresponding period. The decline in NPLs reflects, among others, continuous improvement on loan monitoring, tightening of CGC’s eligibility criteria and proactive loan restructuring and redemption. During 2011, a total of 550 loan accounts amounting to RM219.9 million were restructured, and a further 329 loan accounts amounting to RM114.6 million were restructured during 1H2012. CGC redeemed (by taking over the guaranteed loans from PFIs) RM619.3 million of guaranteed loans in 2011 (2010: RM271.3 million) and a further RM35.9 million during 1H2012. CGC’s promotion of greater risk sharing with financial institutions through its shared risk schemes is viewed positively by MARC given the incentive for the PFIs to diligently monitor and prudently assess loans disbursements under the shared risk schemes.

CGC continues to demonstrate adequate funding and liquidity, however, MARC notes that its holdings of liquid assets have declined on account of loan repayments totalling RM1.39 billion to BNM in 2010 and 2011. CGC had term deposits of RM1.2 billion and cash and bank balances of RM31.7 million as at end-June 2012, which collectively accounted for 24% of its total assets on the aforementioned date.

In recent periods, the revenue impact of the reduced size of CGC’s outstanding guarantee portfolio has been more than offset by its improved pricing of risk following its migration to risk-based pricing. For 2011, CGC’s operating revenue increased by 11.3% to RM353.4 million from RM317.6 million in the previous year. Meanwhile, investment income increased to RM150.7 million in 2011 (2010: RM137.8 million) with higher income recorded from gains from placement with external fund managers and interest on bonds. Overall, CGC reported a stronger net profit of RM84.6 million (FY2011: RM15.6 million), also due in part to lower provision for claims attributable to improved credit risk control measures put in place. For 1H2012, CGC posted lower revenue of RM182.3 million (1H2011: RM192.2 million) but registered higher net profit of RM74.9 million compared to RM65.8 million in 1H2011, mainly due to lower provisions for claims and interest expenses.

The rating outlook is stable, reflecting improved financial fundamentals and strong perceived government support.

Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my