MARC affirms AAA rating on CGC

KUALA LUMPUR: The Malaysian Rating Corp Bhd (MARC) has affirmed its AAA financial institution (FI) rating on Credit Guarantee Corp Malaysia Bhd (CGC) with a stable outlook.

The rating reflects CGC’s public policy role as a development financial institution (DFI) for which the government through Bank Negara Malaysia (BNM) has continued to provide support. In its role, CGC provides credit guarantees on loans and financing extended to SMEs by FIs. 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. The rating is also underpinned by CGC’s sound capitalisation, stable liquidity profile and conservative investment policy,” MARC said in a statement.

As at end-June 2018, CGC’s net loans guaranteed rose 7.5% to RM8.0 billion from end-2017, with the growth mainly coming from portfolio guarantee (PG) schemes, which accounted for about 80.1% of the total new guarantee amount during the period.

The strong growth of net loans guaranteed since 2016 following a clean-up exercise in that year has also been aided by an improved accessibility to financing through a simplified and structured approval process with participating financial institutions (PFIs). The approval process incorporates an integrated core credit evaluation process to improve turnaround time. MARC expects CGC’s growth momentum to continue over the near term, supported by PFIs transferring part of the risk on SME loans to the DFI.

Gross non-performing loans ratio has continued to improve, standing at 9.4% as at end-June 2018, lower than comparable peers within the DFI space. This stood well below past levels of above 30%, benefiting from the aforementioned clean-up exercise which entailed write-offs and winding down of old guarantee schemes.

Nonetheless, as a DFI mandated to support the development of SMEs, CGC will continue to be exposed to the higher risk associated with SME financing. Mitigating this risk is CGC’s strong capitalisation with a capital adequacy ratio of 32.5% as at end-June 2018 on a comparable Basel II basis. Its guarantee cover value-to-shareholders’ funds ratio stood at a healthy 2.5 times as at end-June 2018, well below the maximum permitted level of 6.0 times.

Operating income rose sharply by 24.4% year-on-year (y-o-y) to RM253.6 million in 1H2018 on the back of higher investment income as well as higher guarantee fees in line with the increase in guaranteed loan base. MARC also notes that the sharp growth of PG schemes has increased the proportion of guarantee fee income to total income, standing at 29.6% as at end-June 2018. Net profit grew by 35.2% y-o-y to RM114.4 million, leading to an improvement in annualised return on assets and return on equity to 4.8% and 7.1% for 1H2018.

CGC continues to maintain a stable liquidity profile, supported by strong cash balances and term deposits, which collectively accounted for 23.2% of its total assets as at end-June 2018.

“MARC notes that while CGC has increased investment funds allocated to fixed income securities in the A-rated and unrated band for yield enhancement, the DFI adheres to a conservative investment policy. Of its significant holdings in fixed income securities, about 88.2% of its debt securities were rated AA and above,” it said.

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