MARC has affirmed its AAA issuer rating on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook. The affirmed rating incorporates systemic support uplift from the institution’s stand-alone credit strength based on CGC’s public policy role to facilitate access to financing for small- and medium-enterprises (SMEs) and its majority ownership by the government via central bank, Bank Negara Malaysia (BNM). CGC’s credit strength is underpinned by sound capitalisation and prudent investment practices as well as the continued efforts undertaken to counter the declining business trend.

CGC was established in 1972 as a development financial institution to support the development of the SME sector by providing credit guarantees on loans extended to SMEs. Notwithstanding its stated objective of increasing SMEs accessibility to financing, CGC continues to face challenges in growing its loan base to the SME sector. Total gross loans outstanding declined to RM8.2 billion in 2012 from RM9.2 billion in 2011, which is attributed to the ending of most government-funded guarantee schemes, the winding down of the Direct Access Guarantee Scheme (DAGS) under which CGC provided 100% guarantee cover and higher cancellations resulting from fully paid loans. For 1H2013, gross loans outstanding reduced further to RM7.6 billion while new guarantee loans stood at RM455.8 million (2012: RM904.8 million; 2011:RM2.1 billion).

Nonetheless, MARC notes that CGC has continued with efforts to meet enhanced requirements of SMEs to improve its guarantee loan portfolio in which it currently has 15 guarantee schemes. This is evident in the launch of two innovative products and replacement of an existing one in 2013 that have drawn good response from the SMEs. CGC has also made progress on its Portfolio Guarantee (PG) schemes, which enables businesses that meet predetermined criteria to have easier access to funds, with the recent launch of the first Islamic PG scheme. For 2012, CGC’s revenue incorporated the full impact of risk-based pricing model under which the guarantee fee reflects borrower credit profile. As such, CGC’s migration to risk-based pricing has moderated the pace of the decline in guarantee fee on the outstanding guaranteed loans.

Guarantee fees declined to RM88.6 million in 2012 compared to RM124.6 million the previous year (2010: RM112.2 million) as outstanding guaranteed loans continued to decline. On the other hand, CGC continued to rely on investment income to offset declining guarantee income; CGC’s investment and guarantee incomes constituted 45% and 24% of its total income respectively in 2012. MARC notes that CGC has continued to enhance its investment income by placing its funds with fund managers. The gains on placement with fund managers increased by 45.7% to RM69.5 million during the year (2011: RM47.7 million). Notwithstanding the investment gain, the continued low interest rate environment may negatively affect CGC’s investment income. In 2012, operating revenue grew modestly by 2.5% to RM362.2 million (2011: RM353.4 million). Net profits in 2012 was higher at RM160.8 million (2011: RM65.5 million), attributed to a low net provision for claims during the year. In 1H2013, CGC posted lower revenue and net profits of RM141.3 million (1H2012: RM182.3 million) and RM50.8 million (1H2012: RM74.9 million) respectively, due to lower guarantee fee and investment income, and higher operating expenses.

CGC’s net non-performing loans (NPL) ratio reduced to 3.8% and 3.5% as at end-December 2012 and end-June 2013 respectively (end-December 2011: 4.6%). This is attributed to thorough credit assessment as well as proactive loan restructurings and redemption efforts. During 2012, CGC restructured a total of RM220.1 million and recovered a total of RM59.0 million loans. It redeemed (by taking over the guaranteed loans from participating financial institutions (PFIs)) a total of RM64.2 million guaranteed loans. Nonetheless, this constitutes a small amount of less than 1% of CGC’s total outstanding guaranteed loans. MARC views CGC’s strategy of risk-sharing with financial institutions through its shared risk schemes positively as PFIs would be motivated to monitor and assess loan disbursements under the schemes.

CGC continues to demonstrate adequate funding and liquidity as reflected by the 40.3% of its total assets being accounted for by term deposits and cash and bank balances as at end-December 2012 (end-December 2011: 36.0%). During 1H2013, the proportion of its liquid assets stood higher at 69.3%. MARC views CGC’s funding base to be stable from being well supported by the government through BNM. 

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

Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my;