MARC has assigned ratings of AAA/AAAID and MARC-1/MARC-1ID, respectively, to the Conventional and Islamic Medium Term Note Programme of up to RM40.0 billion (“MTN Programme”) and the Conventional and Islamic Commercial Paper Programme of up to RM20.0 billion (“CP Programme”) (collectively known as the “Programmes”) to be issued by Cagamas Berhad (Cagamas). The ratings are based on Cagamas’ strategic role as the national mortgage corporation, implicit government support that is underpinned by its housing finance mission, strong financial flexibility, its solid capitalization, capable management team and ownership structure.

Cagamas’ business activities are entrenched in the purchase of mortgage loans and HP debts from financial institutions (FIs) and non-FIs under its Purchase With Recourse (PWR) scheme. Should defaults on the underlying loans and/or debts occur, the defaulted loans and/or debts are either replaced with performing loans and/or debts or repurchased by the seller. Purchases of loans and debts rebounded in 2006 amounting to RM5.8 billion representing a 61.9% increase after a subdued 2005. Nevertheless, the amount is substantially lower than the purchases undertaken in 2002 and 2003 as FIs were generally disinclined to sell their loans and debts to Cagamas due to excess liquidity in the banking sector. The situation of excess liquidity and stable interest rates are expected to continue well into 2007, thus bringing forth challenges such as pricing pressure, narrowing spreads between average yield on assets and borrowing costs, and decreasing number of new mortgage loans available for purchase. Cagamas’ ability to generate revenue from the purchase and securitization of mortgage loans and HP debts hinges on its ability to acquire a steady flow of loans from the originators.


In FY2006, 72.4% (FY2005: 74.3%) of loans or debts were repurchased on the review date while only 3.1% (FY2005: 4.1%) were repurchased due to defaults, reflecting the good quality of loans purchased. As at financial year ending 31st December 2006, total outstanding loans and debts held by Cagamas decreased to RM21.1 billion (-11.4%), with decreases in all asset classes with the exception of Islamic hire purchase (IHP) debts. Cagamas has increased its purchase and securitization of loans that pose a higher credit risk due to the current competitive dynamics of the mortgage market. Housing loans have ceased to dominate the composition of Cagamas’ total outstanding loans and debts this year, representing only 43.9% (FY2005 : 50.6%) of the outstanding portfolio with hire purchase (HP) and leasing debts assuming the lead at 56.1% (FY2004 : 49.3%). Its recently launched Purchase Without Recourse (PWOR) scheme will also increase Cagamas’ exposure to credit risk, going forward.

Cagamas’ profitability has declined in recent years due to narrowing margins contributed by lower yielding assets and higher costs of funding brought about by the increase in market liquidity and the change in the regulatory treatment of Cagamas’ securities in 2004. Interest income from mortgages and HP debts declined in 2006 by 16.9% and 15.2% to stand at RM435.5 million (FY2005: RM523.9 million) and RM355.4 million (FY2005: RM418.9 million), respectively, due to the smaller portfolio of outstanding mortgage loans and conventional HP and leasing debts held. It also incurred higher personnel costs arising from its asset securitization and capacity expansion program. However, these were offset by the significant increase of 151.9% in income from its Islamic operations to RM14.7 million (FY2005: RM5.8 million), the bulk of which is composed of income from deposits and placements with financial institutions. Cagamas’ efforts geared towards expanding its securitization activities may result in a shift in its income composition going forward, possibly resulting in a higher composition of fee-based income.

Cagamas continues to have good access to capital and money markets and remains an active issuer in the bond market in 2006. Cagamas manages interest rate risk by matching its funding mix closely with the different interest rate profiles of loans and debts purchased. Issuances under the CP/MTN programmes are expected to meet all future funding needs of the company, thus consolidating its debt issuances under a single facility and reducing overall funding costs. Furthermore, the dual nature of the programmes in catering to both conventional and Islamic issuances will facilitate the company’s plans to expand its Islamic product offerings and capitalize on the phenomenal growth in this segment. Cagamas is actively seeking to source for innovative funding structures aimed at lowering its cost of funding. Cagamas’ capitalization is solid, increasing for the third consecutive year to RM1.4 billion (+6.5%) resulting in core and risk weighted capital ratios improving to 28.8% as at end-December 2006 (FY2005: 24.5%). Cagamas continues to be involved in various securitization transactions, including the securitization of government staff housing loans and landmark issues such as the synthetic securitization of small medium enterprise loans.