MARC has assigned preliminary short-term ratings of MARC-1/MARC-1ID to Cagamas Berhad’s (Cagamas) proposed Conventional and Islamic Commercial Paper (CCP/ICP) programmes respectively with an aggregate combined limit of RM20 billion. Concurrently, MARC has affirmed its long-term Conventional and Islamic debt ratings of AAA/AAAID and its short-term conventional and Islamic debt ratings of MARC-1/MARC-1ID respectively on corporate debt issuances by Cagamas; the full list of these issuances is highlighted at the end of this rating announcement. The outlook on the ratings is stable. The proceeds raised from issuances under the proposed programmes will be utilised by Cagamas as part of its working capital, for its general corporate purposes and to refinance any CCP/ICPs on the respective maturity dates.

The ratings incorporate Cagamas’ strong capitalisation, healthy earnings track record, stable funding and liquidity profile and sound asset quality. The ratings also factor Cagamas’ systemic importance in the domestic financial system as the national mortgage corporation and as the country’s largest domestic issuer of corporate debt securities, accounting for 7% of total outstanding corporate debt securities as at end-December 2013. In addition, the 20% equity interest in Cagamas held by the central bank, Bank Negara Malaysia, provides strong assurance of a conservative approach to risk and at the same time underpins MARC’s expectations that timely government support will be forthcoming if required.

MARC observes that Cagamas’ net outstanding loans and financing as end-December 2013 rose sharply by 16.9% year-on-year to RM25.4 billion following the purchase of RM8.2 billion of loans and financing in 2013 (2012: RM3.2 billion). The purchase mainly consisted of Islamic mortgages acquired on a purchase without recourse (PWOR) basis amounting to RM6.8 billion. MARC also expects securing loan purchases from financial institutions to remain fairly challenging over the next 12 to 18 months primarily due to the ample liquidity and competitive environment in the domestic banking system.

The aforementioned notwithstanding, the enlarged loan base as a result of the loan and financing acquisition in 2013 led to a significant increase in Cagamas’ profitability; pre-tax profit rose by 45.0% y-o-y to RM424.8 million due to higher net interest and financing income and improved margins. The net interest margin increased to 1.14% (2012: 0.96%) due largely to the higher interest fees that PWOR assets command, while pre-tax return on assets and equity measures stood higher at 1.7% and 17.9% respectively (2012: 1.3%; 13.6%). MARC observes that although the proportion of PWOR assets to purchase with recourse (PWR) assets in Cagamas’ loan and financing portfolio has increased to 61:39 (2012: 46:54), the higher credit risk associated with PWOR assets is mitigated by the repayment mechanism via non-discretionary salary deductions. This is evident from the historically low default rate for PWOR assets which further declined to 0.6% in 2013 (2012: 1.2%) due in part to an increase in the loan base. In respect of PWR assets, which are mainly purchased from Islamic banks, the outstanding loan amount continued its declining trend, falling by 15.6% to RM9.9 billion as at end-2013 due to lower purchases and the gradual run down of loans and financing, particularly for Islamic personal financing. Cagamas registered lower PWR transactions of RM1.4 billion in 2013 (2012: RM3.1 billion). MARC takes comfort that PWR asset risk is limited to the counterparty risk of the originating financial institutions and corporates; this risk is mitigated by Cagamas’ strict eligibility criteria and stringent monitoring of exposures.

Mortgages continue to dominate the portfolio at 77%, followed by hire purchase at 16% and personal loans at 7% as at end-2013. The national mortgage corporation’s portfolio remains evenly distributed between Islamic and conventional assets. Cagamas’ capitalisation continued to be strong with its core capital and risk-weighted capital ratios standing at 23.7% and 24.3% respectively as at year-end 2013 (2012: 23.8%; 24.4%). MARC expects the company’s capitalisation to remain strong going forward, supported by its good internal capital generation.

The corporation’s favourable access to the domestic debt market and its demonstrated ability to structure its liabilities to match its loans and financing assets remain key factors for the stability of its funding and liquidity profile. Cagamas’ funding level increased by 19.1% y-o-y to RM24.9 billion in line with higher outstanding loans and financing while the loan-to-funding ratio remained stable at 0.92 times at end-2013 (end-2012: 0.94 times). The company successfully raised RM9.9 billion (2012: RM4.9 billion) from 39 new issuances under the rated programmes, including the country’s largest single Sukuk Commodity Murabahah of RM3.8 billion in 2013. MARC views the proposed setting up of the new RM20 billion CCP/ICP programmes will ensure continued availability of a short-term funding source.

The stable outlook reflects MARC’s expectation that Cagamas will continue to maintain strong financial metrics and capitalisation, prudent risk management as well as a high likelihood of systemic support in the event of financial stress.

The full list of Cagamas’ corporate debt issuances rated and affirmed by MARC with a stable outlook is as follows:

• Conventional and Islamic Medium-Term Notes Programmes of up to RM40 billion affirmed at AAA/AAAID;
• Conventional and Islamic Commercial Paper Programmes of up to RM20 billion affirmed at MARC-1/MARC-1ID; and
• Islamic Commercial Paper Programme and Islamic Medium-Term Notes Programme with a combined aggregate limit of RM5 billion affirmed at MARC-1ID and AAAID respectively.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.