CREDIT ANALYSIS REPORT

CAGAMAS BERHAD - 2020

Report ID 60564 Popularity 181 views 9 downloads 
Report Date Jul 2020 Product  
Company / Issuer Cagamas Bhd Sector Finance - Others
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Rationale
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-1IS; and

Conventional and Islamic Medium-Term Notes (MTN/IMTN)
        programmes of up to RM60.0 billion at AAA / AAAIS.

The ratings outlook is stable. The affirmed ratings continue to be driven by Cagamas’ status as the national mortgage corporation and its strategic role in the domestic financial system, as well as its sound capitalisation and liquidity position.

In 2019, Cagamas acquired only RM5.0 billion worth of purchase with recourse (PWR) assets compared to RM12.1 billion in 2018. This has been largely attributed to the availability of sizeable liquidity in the banking system that is likely to increase further following the relaxation of the net stable funding ratio (NSFR) requirement from 100% to 80% as well as the rate cuts in 2020. With respect to new business, Cagamas’ proposal for an affordable housing scheme for B40 homebuyers is in the pipeline. It is also actively exploring new business models. MARC understands that the initiatives are still at the preliminary stage. 

Cagamas recorded slightly higher pre-tax profit of RM318.0 million in 2019 (2018: RM315.9 million), mainly due to higher recognition of accretion of discount from its Islamic Purchase Without Recourse (PWOR) portfolio and lower operating expenses. Interest income declined in line with the lower outstanding loans and financing due to lower purchases during the year. Meanwhile, net interest and financing margin increased slightly to 1.02% (2018: 1.01%). Cagamas margins will remain under pressure in view of the decreasing contribution of net income from the higher-yielding PWOR assets, in tandem with the reducing PWOR portfolio. Cost-to-income ratio improved to 14.3% in 2019 and stood well below the banking industry average. 

Cagamas’ capitalisation level remained strong as reflected by the high total capital ratio of 30.7% (2018: 29.9%) as at end-2019. The capital base consists of mainly common share equity and retained earnings, and reflects a high core capital ratio of 29.3%. This would support the company’s future asset diversification strategy into new businesses. Cagamas’ funding and liquidity remain stable and strong, attributable to its prudent liquidity management, demonstrated ability to structure its liabilities to match loans and financing assets, and favourable access to the domestic and international debt markets. 

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, amid slower loan growth and a low interest rate environment.

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. 



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