Cagamas Bhd - 2011

MARC has affirmed its AAA/AAAID and MARC-1/MARC-1ID ratings on Cagamas Berhad’s (Cagamas) Conventional and Islamic Medium Term Note Programme of up to RM40 billion (MTN Programme) and its Conventional and Islamic Commercial Paper Programme of up to RM20 billion (CP Programme) respectively. MARC has also affirmed its MARC-1ID and AAAID ratings on Cagamas’  Islamic Commercial Paper Programme (ICP Programme) and Islamic Medium Term Note Programme (IMTN Programme) with a combined aggregate limit of RM5 billion. The long-term ratings carry a stable outlook. The ratings factor in Cagamas’ very strong asset quality, stable earnings profile and its strong capitalisation.

Cagamas was established in 1986 to promote home ownership and the growth of the secondary mortgage market in Malaysia. Cagamas purchases mortgages from banks and other originators and funds them through the issuance of conventional and Islamic debt securities. While Cagamas remains one of the country’s largest private debt issuers, its footprint in the mortgage market has been reduced in recent years as a result of banks’ decreased dependence on the national mortgage corporation to provide liquidity to the secondary mortgage market. Consequently, Cagamas has broadened its activities beyond its original objectives as the national mortgage corporation and expanded its asset portfolio to encompass non-mortgage related asset classes such as hire purchase debts and Islamic personal financing. MARC takes comfort from the robust risk management framework and sound corporate governance the company has established to meet new or additional risks associated with changes in business activities.

As at June 30, 2011, Cagamas’ mortgage and financing portfolio amounted to RM20.5 billion (FY2010: RM20 billion) on its balance sheet, of which 69% was accounted for by housing loans. Cagamas uses recourse arrangements with banks and originators to lay off the credit risk of acquired mortgages and financing. Mortgages and financing acquired under its Purchase With Recourse (PWR) scheme were valued at RM9.9 billion at end-1H2011 (FY2010: RM11.1 billion). Meanwhile, mortgages and financing acquired under its Purchase Without Recourse (PWOR) scheme stood at RM10.5 billion as at end-June 2011. Cagamas’ exposure to credit risk for its PWOR assets is mitigated as repayments on any relevant mortgage or financing are made through deductions at source. Defaults in Cagamas’ mortgage and financing portfolio have been historically low. At end-1H2011, defaulted loans and debts under its PWOR scheme  remained  modest  at  0.64% as a  percentage of  its gross  receivables  (FY2010: 0.66%) while

repurchase activity due to default of its PWR assets remained low at 0.9% of total PWR assets during the first six months of 2011   (FY2010: 1.8%). In addition to the low credit risk profile of mortgages and financing acquired, MARC notes that the originators of the majority of its PWR assets are financially strong institutions rated AA and above.

During the first six months of 2011 (1H2011), Cagamas purchased only RM636 million in loans and debts compared to RM6.1 billion for the full year of 2010; of this 91%, were purchased under its PWR scheme and the remaining 9% under its PWOR scheme. This trend of lower mortgage and refinancing acquisition activity is likely to persist into 2012 given the uncertainty in the current economic and financial environment and associated implications for new mortgage and personal financing originations.

Cagamas has largely sustained its earnings performance in 1H2011 with a half-year net profit of RM120.3 million compared to RM240.7 million for the full year 2010 amid a slight moderation in its net interest income. Income from its Islamic operations has also held up relatively well at RM55.6 million. MARC expects Cagamas to continue to exhibit good profitability, supported by low credit costs and stable net interest margins. The rating agency also expects Cagamas to keep costs under control, noting that the cost-to-income ratio was up slightly at 11.7% in 1H2011 from FY2010’s 11.0%. 

MARC views Cagamas’ capitalisation to be very strong relative to its risk profile, with its core capital and risk-weighted capital ratios of 20.1% and 20.8% respectively as at end-FY2010. Its capital buffer is expected to remain strong in light of its earnings retention and the generally muted outlook for risk-weighted assets growth. Meanwhile, Cagamas’ favourable access to the domestic debt market and its demonstrated ability to structure its liabilities to match its mortgage and financing assets remain key positives for its liquidity and funding management.

The stable outlook on Cagamas’ ratings is underpinned by its steady financial metrics, good capitalisation and strong support framework. MARC opines that support in the unlikely event of need is likely to be extended by the government, considering Cagamas’ status as one of the country’s largest private debt issuers and Bank Negara Malaysia’s ultimate 20% shareholding. 

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Challenges/Risks