MARC has affirmed its financial institution (FI) rating of AAA on Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank). The rating outlook is stable.

The affirmed FI rating is premised on SME Bank’s status as a wholly government-owned development financial institution (DFI) with a mandate to develop small and medium enterprise (SME) in the country. Held through the Minister of Finance Inc, SME Bank is regulated by Bank Negara Malaysia and supervised by the Ministry of Entrepreneur Development and Cooperatives, underscoring its importance in the development of SMEs in Malaysia.

MARC opines that SME Bank is highly likely to face renewed asset quality issues, arising from the impact of the COVID-19 pandemic and the restrictive measures imposed to curtail the spread of the virus. While the Bank has implemented a targeted extended moratorium beginning early October 2020, any increase in impaired financing is expected to be tackled through its restructuring and rescheduling efforts. As at 1H2020, SME Bank’s gross impaired financing (GIF) was on a declining trend to 18.1% (2018: 22.9%) and at the Group level to 23.4% (2018: 28.6%). The higher GIF at the group level includes the consolidation of SMEB Asset Management Sdn Bhd, which was set up to manage the Bank’s impaired financing. Notwithstanding the improvement, SME Bank’s GIF level remains higher against the 3.4% of the whole SME sector.

Financing/loans to the SME sector remains competitive domestically; nonetheless a sizeable 56.5% of the sector’s total financing in the DFI space in 1H2020 was contributed by SME Bank. SME Bank’s financing portfolio has been largely skewed towards the services sector (2019: 63.7%; 2018: 63.2%). The Group had returned to profitability in 2019, recording a net profit of RM198.9 million (2018: net loss of RM556.1 million) as provisioning normalised after the implementation of MFRS 9. However, for 1H2020, net profit declined sharply by 92.1% y-o-y to RM3.3 million (1H2019: RM42.0 million) due to lower income as well as higher personnel expenses.

The Group’s core capital ratio and risk-weighted capital ratio increased to 13.1% and 20.1% in 2019 (2018: 11.6%, 18.8%). The Group’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 77.0% of total funding as at end-2019.

Contacts: 

Farhan Darham, +603-2717 2945/ farhan@marc.com.my; 

Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my.