RAM Ratings reaffirms Sabah Credit Corp's ratings

KUALA LUMPUR: RAM Ratings has reaffirmed the respective long- and short-term ratings of Sabah Credit Corporation’s (SCC) RM500 million Commercial Papers/Medium-Term Notes (CP/MTN) Programme (2007/2014), at AA1 and P1 with a stable outlook.

In a statement Tuesday, July 12, RAM Ratings said the ratings reflected the strong commitment and support from the state government of Sabah.

The SCC is wholly owned by the state government and operates under the purview of the Sabah State Ministry of Finance, and provides financing to employees of both the state and Federal governments via direct salary deductions.

RAM Ratings said that given its close relationship with the state government, the SCC had been allowed the privilege of making direct salary deductions for state employees’ repayments on personal loans via the State Treasury.

Support from the state government is further demonstrated by its board representation as well as the subordination of SCC’s existing and future loans from the State Government (both principal and interest) to the Corporation’s debt securities, it said.

SCC has also received approval from the state government to convert the latter’s loan of up to RM100 million into share capital at the option of the Corporation, it said.

RAM Ratings said that in FY Dec 2010, SCC recorded a 3.2% year-on-year (y-o-y) growth in its personal financing portfolio - its largest lending sector - following a contraction the year before.

The financing growth was largely supported by the introduction of its Islamic personal-financing product and the reduction of effective profit rates on personal financing facilities to draw customers, it said.

As at end-December 2010, SCC’s gross non-performing-loan ratio had edged up from 8.6% to 9.0% y-o-y, after having abolished its policy of deducting 2 months’ salary in advance for new personal financing since 2009 due to keen competition, it said.

“Overall, the credit quality of its personal-financing portfolio has remained manageable due to the deployment of a direct-salary-deduction mechanism.

“Meanwhile, SCC remains exposed to concentration risk, with almost 78% of its loans extended to this segment as at end-December 2010,” it said.

The rating agency said SCC recorded a respectable profit performance in fiscal 2010, with a pre-tax profit of RM42.3 million that was largely due to lower loan-loss provisions.

“Given the lower profit rates on its personal financing (contracted at fixed rates) and its higher cost of funds, SCC’s net interest margin narrowed from 5.4% to 5.0% y-o-y.

“In line with the current uptrend in interest rates, we anticipate its net interest margin to narrow further as almost all of its lending assets comprised fixed-rate facilities as at end-December 2010,” it said.