RAM Ratings has reaffirmed the AAA/Stable/P1 financial institution ratings of Small Medium Enterprise Development Bank Malaysia Berhad (SME Bank). The ratings reflect our expectation of strong government support, underscored by its strategic role in the Government of Malaysia's (GoM) socio-economic agenda of developing 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. SMEs are a critical component of the Malaysian economy, having 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 increasing the GDP contribution of SMEs to 41% by 2020. SME Bank primarily extends financing to the unserved or underserved sub-segments of the SME sector and acts as a conduit of the GoM in the development of targeted sub-segments of the SME sector through specific financing programmes. 

The conversion of RM500 million of government borrowings into equity in fiscal 2017 had underscored the GoM's support for SME Bank. More than 70% of the Group's profit-bearing funds were sourced from the GoM/government-related entities or guaranteed by the GoM as at end-March 2018.

In view of its public policy role and focus on SMEs, SME Bank's financing portfolio inherently carries a higher level of credit risk, which leads to an elevated gross impaired-financing ratio. The need to manage high credit costs also constrains the Group's capacity to improve its loan loss coverage, which will likely remain at sub-40% in the near term. Although the Group's financing is largely collateralised, its low GIF coverage is a concern as a fall in collateral value could necessitate additional provisions. As such, SME Bank is viewed to be relatively undercapitalised given the nature of its lending business and low provision coverage. As at end-March 2018, the Group's core capital ratio stood at 18.7%.nalytical contact
Chan Yin Huei
(603) 7628 1180
[email protected]

Media contact
Padthma Subbiah
(603) 7628 1162
[email protected]

 

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Published by RAM Rating Services Berhad
? Copyright 2018 by RAM Rating Services Berhad

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