MARC Ratings has affirmed its financial institution (FI) rating of AAA on Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank). Concurrently, the rating agency has affirmed its ratings of AAAIS/MARC-1IS on the bank’s Islamic Medium-Term Notes (IMTN) Programme of up to RM3.0 billion and Islamic Commercial Papers (ICP) Programme of up to RM1.0 billion with a combined aggregate limit in nominal value of up to RM3.0 billion. The ratings outlook is stable.
The ratings affirmation is driven by SME Bank’s status as a wholly government-owned development financial institution (DFI) with a mandate to develop small and medium enterprises (SMEs) in the country. The DFI is regulated by Bank Negara Malaysia (BNM) and supervised by Kementerian Pembangunan Usahawan dan Koperasi (KUSKOP), underscoring its key role in the growth of SMEs. MARC Ratings notes that in executing the mandated role, SME Bank continues to benefit from funding support from the government and government-related entities, which has accounted for 62.5% of its funding profile as at end-2022.
For 2022, SME Bank’s financing portfolio expanded moderately by 5.9% y-o-y to RM8.8 billion with growth mainly coming from its manufacturing and transportation, storage and communications portfolios. This, coupled with the continued offering of restructuring and rescheduling programmes, led to a lower gross impaired financing (GIF) ratio of 16.9% (end-2021: 18.4%), albeit still weak. At bank level, GIF ratio was also lower at 13.2% (end-2021: 14.3%). Relief programmes accounted for about 39.6% of its total portfolio. While the bank remains accommodative in providing financial support, these programmes will continue to pose significant credit risk. We expect GIF ratio to stay elevated with the gradual winding down of relief measures in the next 12-18 months.
SME Bank’s capitalisation levels provide some headroom to absorb unexpected losses. As at end-2022, core capital ratio and risk-weighted capital ratio stood at 12.8% and 18.9% (end-2021: 12.9% and 19.2%), slightly below those of its DFI peers. While capitalisation is expected to remain broadly stable over the next 12-18 months, we are cognisant of SME Bank’s weak internal capital generation which could narrow its buffers if impaired financing were to rise sharply. That said, given its developmental role, we opine that capital support from the government would be forthcoming if required.