Small Business Corporation (SBCorp), the financing arm of the Department of Trade and Industry (DTI), was assigned an Issuer Credit Rating of PRS A minus (corp.) by the Philippine Rating Services Corporation (PhilRatings). The assigned rating has a Stable Outlook.
SBCorp is the government financial institution (GFI) tasked by Republic Act (RA) 9501 to implement various programs that would assist micro, small and medium enterprises (MSMEs) in all areas, including finance and information services, training and marketing.
A company rated PRS A (corp.) is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than higher-rated corporates. Still, the obligor has an above average capacity to meet its financial commitments relative to that of other Philippine corporates. The “minus” further qualifies the assigned “A” rating.
A Stable Outlook, on other hand, is assigned when a rating is likely to be maintained or to remain unchanged in the next 12 months.
In assigning the rating, PhilRatings took into account the following major considerations: (1) SBCorp management’s solid experience in and deep understanding of the MSME sector; (2) expectations of strong government support, at least in the short-term, given the agency’s significant role in government efforts to assist pandemic-stricken MSMEs; and (3) SBCorp’s weak profitability.
PhilRatings’ ratings are based on available information and projections at the time that the rating review was performed. PhilRatings shall continuously monitor developments relating to SBCorp and may change the rating at any time, should circumstances warrant a change.
SBCorp has long played a significant role in government efforts to strengthen and grow the MSME sector in the country. SBCorp is under the policy and administrative supervision of the Micro, Small and Medium Enterprise Development (MSMED) Council. The management of SBCorp consists of officers who are seen to have deep familiarity and solid background on the MSME sector, given their long tenure with the company. Management’s solid experience has allowed SBCorp to effectively carry out its day-to-day operations, notwithstanding changes in its Board leadership and composition. Led by its highly experienced management, SBCorp’s vision is to be the leader in building financing alternatives for the country’s MSMEs by 2025. This vision encompasses seven target MSME segments: a) micro and small agri and aqua enterprises; b) micro retailers; c) small island economies; d) MSMEs requiring rehabilitation from disaster; e) Islamic MSMEs; f) indigenous people (IP)-owned enterprises; and g) first-time small businesses.
The quarantine measures put in place to curb the spread of COVID-19 has greatly impacted the MSME sector. According to the DTI, 52.66% of the country’s MSMEs stopped or closed their operations due to the pandemic while 12.55% had limited operations. As the financing arm of the DTI, SBCorp is seen to play a significant role in the government’s aggressive efforts to help these pandemic-stricken Page 2 of 2 MSMEs. As of report writing date, SBCorp has taken the following actions to assist its clients: a) moratorium on loan payments during the imposition of the enhanced community quarantine (ECQ), starting 17 March 2020; and b) development of new products to aid enterprises affected by the COVID-19 pandemic. The strong relevance of SBCorp’s mandate in government plans for the recovery of the MSME sector creates expectations that government support provided to the agency will remain, at least during the term of the current administration.
PhilRatings noted the downtrend in SBCorp’s income from its core operations over the recent years. In 2018, operating income declined by 6.8% to P17.6 million, as minimal growth in core revenues was offset by double digit growth in expenses. While loan releases increased in 2018, average interest spread for microfinance and wholesale loans dipped, as SBCorp adopted a policy rate of only 2% per annum (p.a.) for its conduits under the Pondo sa Pagbabago at Pag-asenso (P3) Program as part of government efforts to help reduce the financing cost of micro enterprises. This resulted in an almost flat growth in interest income. Personnel services expenses, on the other hand, went up by 19.8% to P180.5 million, given the adoption of the third tranche of the Modified Salary System (MSS) as approved by the Government Commission for GOCCs (GCG).
In 2019, income from core operations further dropped by 36.1% to P11.3 million. Revenues increased by 11.5% to P371.6 million. Expenses, however, grew by 14.2% to P360.4 million. Such was driven by hikes in personnel services expenses, as SBCorp implemented the fourth tranche of the MSS, and in maintenance and other operating expenses (MOOE). MOOE increased given the insufficient mobilization fund provided for by the government subsidy for the P3 Program, thus resulting in a total of P21.5 million being shouldered by SBCorp out of its corporate earnings.
SBCorp ended the first half of 2020 (1H2020) with a net loss of P37.9 million, translating to a return on assets (ROA) of -0.5%. PhilRatings noted that operating cost alone (P131.3 million) – which accounted for 85.0% of total operating expenses – exceeded operating revenue (P114.3 million). The net loss experienced for the first half of the year reflected the impact of the COVID-19 pandemic on SBCorp’s operations. Operational adjustments are constantly being undertaken by the management to mitigate the adverse effects of the pandemic.
On a positive note, net income inclusive of government subsidy had been on an uptrend, increasing to P988.9 million in 2018 and to P1.3 billion in 2019. In 1H2020, net income inclusive of subsidy amounted to P875.1 million. Net subsidy from the national government reached P933.4 million in 2018, P1.2 billion in 2019 and P964.9 million in 1H2020. This is indicative of the government’s strong financial support to SBCorp.