MARC says the stable outlook reflects its expectations that government support for CGC will remain and that the DFI will continue to maintain its financial fundamentals. (Pic from CGC’s website)

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

MARC said as a development financial institution (DFI), CGC plays a public policy role to facilitate access to financing for small and medium enterprises (SMEs) by providing credit guarantees on loans extended by financial institutions.

It is majority-owned by Bank Negara Malaysia.

MARC said it considers these key factors as the basis for incorporating high systemic support uplift from CGC’s standalone credit profile.

It said the stable outlook reflects MARC’s expectations that government support for CGC will remain and that the DFI will continue to maintain its financial fundamentals.

For six months ended June 30, 2017, CGC’s net loans guaranteed grew by 21.9 per cent year-on-year (y-o-y) to RM6.6 billion, with the growth mainly concentrated in portfolio guarantees (PG) which accounted for 76.3 per cent of the total new guarantee amount during the period.

The PG scheme which is undertaken with participating financial institutions (PFI) allows CGC to share its guarantee risks with PFIs.

CGC’s direct financing accounted for only about nine per cent of total new loans and guarantees.

Besides that, CGC’s guarantee scheme’s gross non-performing loans (NPL) ratio declined to 12.6 per cent as at end-June 2017 (end-2016: 13.9 per cent).

MARC said the current NPL ratio is well below the historical trend of above 30 per cent, owing to significant clean-up since 2016, which entails write-offs and winding down old guarantee schemes.

MARC said CGC has also strengthened its risk management process by establishing a collection unit in 2017 which performs first level follow-up with customers, complemented by periodical site visits.

It said CGC’s capitalisation remains strong with a capital adequacy ratio of 35.2 per cent as at end-June 2017 on a comparable Basel II basis.

In addition, the DFI operates well below its maximum guarantee cover value-to-shareholders’ funds ratio of six times at 2.1 times.

For the first half 2017, MARC said CGC’s operating income rose by 12.3 per cent y-o-y to RM203.9 million on the back of higher guarantee fees and increased investment income which benefitted from investments in higher yield instruments.

In respect of funding and liquidity, MARC said CGC maintains a stable profile, supported by strong cash balances and term deposits, which account for 26.7 per cent of its total assets as at end-June 2017 (end-2016: 31 per cent).

CGC increased its holdings of fixed income securities as part of its efforts to enhance investment returns; nonetheless, over 90 per cent of debt securities in its investment portfolio are rated AA and above.

Its strategy in allocating a small portion of investment funds to fixed income securities in the A rating band is not expected to compromise the overall credit quality of its investment portfolio, it said.