CAGAMAS BERHAD - 2019

MARC has affirmed its ratings on national mortgage corporation Cagamas Berhad’s bonds and sukuk issues as follows:

• Conventional and Islamic Commercial Papers (CP/ICP) programmes with a combined aggregate limit of RM20.0 billion at MARC-1/ MARC-1_IS ; and
• Conventional and Islamic Medium-Term Notes (MTN/IMTN) programmes of up to RM60.0 billion at AAA / AAA_IS

The outlook on all ratings is stable. The affirmed ratings are premised on Cagamas’ sound capitalisation and liquidity position, and the national mortgage corporation’s strategic importance in the domestic financial system as a facilitator of the secondary mortgage market and the largest domestic issuer of corporate bonds in the country. The stable outlook reflects MARC’s expectation that Cagamas will continue to maintain its strong credit and liquidity profile as well as prudent risk management.

Cagamas currently acquires loans and financing under two schemes: purchase with recourse (PWR) under which it takes on counterparty credit risks; and purchase without recourse (PWOR) under which it absorbs all the credit risks of the purchased loans and financing. In 2018, Cagamas’ net outstanding loans and financing rose sharply by 11.0% y-o-y to RM41.7 billion following the purchase of RM12.1 billion worth of loans and financing (2017: RM14.1 billion). The purchase mainly comprised conventional and Islamic mortgages on a PWR basis, which continued to be a preferred option by financial institutions (FI). There were no purchases of loans and financing under the PWOR scheme in 2018. As a result, the proportion of PWOR to PWR assets declined further to 27:73 as at end-2018 (2017: 32:68). MARC views the increased proportion of PWR assets in Cagamas’ portfolio as positive given the full recourse to the originators.

MARC takes comfort from the low counterparty risk of the originating FIs and corporates given that 87.0% of the PWR assets were purchased from originators rated AA and above as at end-2018. In respect of the PWOR assets, credit risk is mitigated by the non-discretionary salary deductions of borrowers employed in public sector entities as reflected by the historically low default rate of the PWOR assets, which stood at 0.9% as at end-2018 (2017: 0.7%).

Of late, the full implementation of the net stable funding ratio (NSFR) under Basel III has boosted PWR asset growth for Cagamas. This notwithstanding, Cagamas’ business growth is expected to be challenged in the near term by the slower loan growth of the banking industry, low interest rates and the healthy liquidity in the financial system.

As a strategy to diversify its product range, Cagamas has sought to include infrastructure and SME loans under its PWR scheme. Cagamas is also exploring the feasibility of purchasing loans and financing related to green or social impact projects via the issuance of sustainability bonds and sukuk. Although the expanded product range may weigh upon Cagamas’ credit risk profile, the rating agency derives comfort from the national mortgage corporation’s conservative risk management policies and stringent eligibility criteria.

In 2018, Cagamas recorded lower pre-tax profit of RM315.9 million, mainly attributed to decreasing contribution of net income from the higher-yielding PWOR Islamic assets, in tandem with the declining Islamic PWOR portfolio. Overhead expenses have also been increasing over the years and as a result, its cost-to-income ratio rose to 15.6%. The increase in overhead expenses was mainly driven by increased costs associated with higher issuances during the year as well as system upgrades and implementation of a core banking system. Nonetheless, the cost-to-income ratio remains well below the banking industry average.

Cagamas raised RM15.8 billion from 38 new debt issuances in 2018 (2017: RM15.3 billion; 31 new issuances). Meanwhile, its funding base rose by 9.4% y-o-y to RM40.9 billion with the loans-to-fund ratio at 1.02x. Cagamas’ capitalisation remained strong with a core capital ratio of 28.3% (2017: 20.9%) while its decision to adopt a local rating scale led to a higher risk-weighted capital ratio of 29.9% as at end-2018 (2017: 22.3%).

The rating agency also notes the adoption of the MFRS 9 standard beginning 2018 did not materially impact Cagamas’ capitalisation base as impairment allowance, which experienced a small decline comprised only 1.4% of Cagamas’ total capital base. Funding and liquidity remain stable and strong, attributable to prudent liquidity management, demonstrated ability to structure its liabilities to match loans and financing assets, and favourable accessibility to the domestic and international debt markets.

Major Rating Factors

Strengths

• Strategic importance in the domestic financial system;
• Strong capitalisation relative to risk profile; and
• Stable funding and liquidity position.

Challenge/Risk

• Executing diversification plans.