Cagamas Bhd - 2012

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 outlook of the ratings is stable.

The affirmed ratings reflect Cagamas’ strong credit profile and its role of supporting the domestic housing finance industry and the development of Malaysia’s residential mortgage-backed securities (RMBS) market. Additionally, Cagamas is one of the country’s largest private debt issuers. It issues debt securities to finance its purchase of housing loans and other consumer receivables from financial institutions, selected corporations and the government. Cagamas continues to exhibit a strong financial standing with high capitalisation and good asset quality with strict eligibility criteria for loan purchase. Its credit strength and strong implicit support from Bank Negara Malaysia continues to back its favourable access to the debt market.

Cagamas’ prominence as a liquidity provider to primary lenders of housing loans has been declining due to the ample liquidity in the banking system and low interest rates. In financial year ended December 2011 (FY2011), Cagamas only purchased RM2.9 billion (FY2010: RM 6.2 billion) in mortgages and financing, 52.8% lower than the preceding year. This resulted in a 1.4% decline in total outstanding loans and debt to RM21.7 billion (FY2010: RM 22.0 billion) during the year, after taking into account loan repayment. MARC observes that credit tightening policies introduced earlier this year are taking effect on household loan approvals. Hence, the rating agency believes that the trend of slower credit growth and refinancing activity would continue to persist in the near term and pose challenges to efforts on the part of Cagamas to address its shrinking portfolio of loans and financing debts.

As at end-FY2011, loans and financing debts purchased with recourse to the originator constituted 51.5% (FY2010: 50.6%) of Cagamas’ mortgage and financing portfolio and the remaining 48.5% (FY2010: 49.4%) was accounted for by loans and financing debts purchased without recourse to the originator. MARC observes that the default rates of the ‘Purchase Without Recourse’ (PWOR) loans and financing debts have held steady at low levels (FY2011: 0.75%; FY2010: 0.66%).

In FY2011, the company’s pre-tax profit declined by 6.1% to RM304.3 million (FY2010: RM324.1 million) on the back of reduced net interest income and net financing income.  Net interest income decreased by 10.4% to RM230.4 million (FY2010: RM257.1 million) due to lower outstanding loans and financing and lower net interest margin. Net financing income from Islamic operations declined by 4.2% to RM107.5 million (FY2010: RM112.2 million). Moderating the overall decline in profitability was a reduction in operating cost, particularly personnel cost, resulting in a slightly lower cost-to-income ratio of 10.8% in FY2011 (FY2010: 11.0%). In line with lower levels of profitability, both return on assets and return on equity for FY2011 declined to 1.34% (FY2010: 1.43%) and 15.18% (FY2010: 17.52%) respectively.

Cagamas’ capitalisation continued to strengthen, with its core capital and risk-weighted capital ratio improving to 24.4% (FY2010: 20.1%) and 25.1% (FY2010: 20.8%) respectively as at end-FY2011. Cagamas’ capitalisation level is expected to remain strong, supported by internal capital generation and slow asset growth.

The stable outlook on the ratings incorporates MARC’s view that Cagamas will continue to maintain strong financial metrics with good capitalisation and asset quality and the rating agency’s perception of a very high likelihood of systemic support in the event of financial stress. 

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