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

CGC’s status as a development financial institution (DFI) with an explicit public policy role, underpinned by the support extended by the government through Bank Negara Malaysia (BNM), remains a key rating factor. BNM is CGC’s main shareholder with 78.7% interest, the rest is held by commercial banks. Given CGC’s role and its ownership, the rating agency continues to incorporate a high systemic support uplift from CGC’s standalone credit profile.

As at end-June 2020, CGC’s net loans guaranteed rose 32.7% y-o-y to RM11.6 billion with the growth mainly due to the Special Relief Facility under CGC’s government-backed scheme that was introduced to lessen the impact of the COVID-19 pandemic on the SME sector. Its portfolio guarantee scheme remains its key product, accounting for 93.6% of the total guaranteed schemes as at 1H2020 (2019: 92.7%).

Given CGC’s mandate to support the development of SMEs which poses higher business risk, the DFI’s non-performing loans/financing (NPL) were higher than the industry average. For 1H2020, the amount of NPLs rose to 15.6% y-o-y to RM898.4 million. Against the backdrop of the COVID-19 pandemic, NPLs are likely to increase over the near term. However, the risk to its asset quality is mitigated by CGC’s strong capitalisation as reflected by its capital adequacy ratio of 24.2% as at end-June 2020 (on a comparable Basel II basis). MARC understands that CGC adheres to prudent guidelines in terms of exposure; its guarantee cover value-to-shareholders’ funds of 3.1x as at end-June 2020 is well below its internal guideline of 6.0x.

In 1H2020, CGC recorded a lower net profit of 36.7% y-o-y to RM80.1 million, mainly due to reduced investment income as interest rates declined during the period. In addition, CGC experienced higher expected credit losses. Its annualised return on assets (ROA) and return on equity (ROE) declined to 3.2% and 4.4% (2019: 4.7%; 6.5%).

CGC maintains a stable liquidity profile, supported by strong cash balances and term deposits, albeit lower in 1H2020 at 19.0% of its total assets (2019: 25.5%). In terms of investments, the largest component of CGC’s investment portfolio was debt securities, which made up around 56.6% of its total investment portfolio as at 1H2020 (2019: 48.2%). Of these, around 77.4% comprised bonds rated AA and above.

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