Posted Date: March 06, 2020

MARC has affirmed its financial institution (FI) rating of AAA on Credit Guarantee Corporation Malaysia Berhad (CGC) with a stable outlook.

The rating is driven by CGC's status as a development financial institution (DFI) for which the government through Bank Negara Malaysia (BNM), CGC's main shareholder, has continued to provide support. In its role, CGC provides credit guarantees on loans and financing extended to SMEs by financial institutions. BNM has a 78.7% interest in CGC, with the rest held by commercial banks. These factors are the basis for the rating agency to incorporate a high systemic support uplift from CGC's standalone credit profile.

As at end-June 2019, CGC's net loans guaranteed rose 4.0% YTD to RM8.7 billion (2018: RM8.4 billion). The steady growth of net loans guaranteed since 2016 has been aided by improved accessibility to financing through a simplified and structured approval process with participating financial institutions (PFI). Of its several guarantee schemes, its portfolio guarantee (PG) scheme remains popular, accounting for about 94.7% of the total new guaranteed amount during 1H2019. Under this scheme, CGC provides guarantees on new and existing loans of PFIs subject to borrowers meeting a set of predetermined eligibility criteria. MARC expects CGC's growth momentum to continue over the near term.

Gross non-performing loans (NPL) ratio continued to decline, standing at 8.2% as at end-June 2019, significantly lower than the 30% level prior to the clean-up exercise in 2016 which entailed write-offs and the winding down of old guarantee schemes. Nonetheless, given its mandate to support the development of SMEs, CGC remains exposed to the higher risk associated with SME financing. This risk to its asset quality metrics is mitigated by CGC's strong capitalisation as indicated by its capital adequacy ratio of 26.2% as at end-June 2019 on a comparable Basel II basis. Its guarantee cover value-to-shareholders' funds ratio of 2.5x as at end-June 2019, well below its internal guideline of a maximum permitted level of 6.0x, reflects adherence to a prudent guideline.

Net profit over 1H2019 rose 10.4% y-o-y to RM126.7 million on the back of lower provisions for claims over the period, leading to higher annualised return on assets (ROA) and return on equity (ROE) to 5.4% and 7.5% for 1H2019 (2018: 4.9%; 7.1%). MARC also notes that the strong demand for the PG scheme has continuously increased the proportion of guarantee fee income to total income, which stood at 33.6% as at end-June 2019 (2014: 19.2%).

CGC continues to maintain a stable liquidity profile, supported by strong cash balances and term deposits, which collectively accounted for 25.1% of its total assets as at end-June 2019 (end-2018: 22.6%). In terms of investments, the largest component of CGC's investment portfolio was debt securities, which made up around 49.0% of its total investment portfolio. Of these, around 84.6% comprised bonds rated AA and above.

Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my;
Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my.

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