RAM Ratings assigns AAA to SME Bank

KUALA LUMPUR: RAM Rating Services has assigned the AAA/Stable/P1 financial institution ratings to Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank). 

It said on Wednesday the ratings reflected its expectation of strong government support, underscored by its strategic role in the Government of Malaysia’s (GoM) socio-economic agenda to develop the SME sector. 

“A development financial institution (DFI) wholly owned by the GoM, SME Bank has been mandated to support SMEs through the provision of financing and advisory services,” it said.

RAM Ratings pointed out SMEs contributed 36.6% of the country’s GDP and 65.3% of its employment in 2016. 

Under the SME Master Plan (2012-2020), the GoM targets to increase SMEs’ contribution to GDP to 41% by 2020. 

As for SME Bank, it accounts for around 40% of SME financing among DFIs, though its overall market share is small. 

Apart from bridging the financing gap of the unserved or underserved SMEs, SME Bank is also the GoM’s conduit in developing the targeted sub-segments of the SME sector through specific financing programmes. 

RAM Ratings noted that government support for SME Bank followed the recent conversion of RM500mil of government borrowing into equity as well as continuous funding support from the GoM, through lending, deposit placements and guarantees. 

About 83% of SME Bank’s profit-bearing funds were sourced from the GoM/government-related entities or guaranteed by the GoM as at end-March 2017.

“Given its public-policy role and focus on SMEs, SME Bank’s financing portfolio inherently carries a higher credit risk, which leads to an elevated gross impaired-financing ratio. 

“While SME Bank’s financing is largely collateralised, a sharp decline in collateral values or the non-recoverability of collateral could necessitate additional provisions given its low provision coverage. 

“Besides, SMEs are more vulnerable to adverse developments. As such, the uneven economic recovery presents further risks to SME Bank’s asset quality,” it said. 

RAM Rating said the recent conversion of RM500mil of government borrowing into equity will improve SME Bank’s loss-absorption buffer, albeit still sensitive to provisioning risk. Its Basel I core-capital ratio will be lifted to above 18% on a pro forma basis.