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 ;
• Conventional and Islamic Medium-Term Notes (MTN/IMTN) programmes of up to RM40.0 billion at AAA / AAA_IS ; and
• IMTN programme of RM5.0 billion at 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 systemic 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. 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.

The stable outlook reflects MARC’s expectations that Cagamas will continue to maintain its strong credit and liquidity profile as well as prudent risk management.

As at end-December 2017, Cagamas’ total outstanding loans and financing stood at RM37.6 billion, having increased by 15.6% y-o-y. The purchases were mainly conventional mortgages on a PWR basis, which continued to be a preferred option by financial institutions (FI). The acquisition of loans and financing under the PWOR scheme remains low at about 1% in 2017, leading to a decline in the proportion of PWOR to PWR assets to 32:68 as at end-2017 (2016: 40:60). 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 84.5% of the PWR assets were purchased from originators rated AA and above as at end-2017. 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 0.7% as at end-2017 (2016: 0.8%).

Mortgage assets continued to dominate Cagamas’ portfolio at 98.8%, followed by hire purchase loans and financing at 0.8%, and personal loans and financing at 0.4%. As a strategy to diversify its asset class, Cagamas has sought to include infrastructure and SME loans under its PWR scheme. These efforts are still at a nascent stage.

For 2017, Cagamas’ pre-tax profit declined marginally by 1.0% y-o-y to RM320.8 million on excluding impairment write-backs of RM8.1 million in 2016. The decline in pre-tax profit was mainly due to higher overhead expenses, resulting from increased costs associated with higher issuances during the year. Accordingly, the cost-to-income ratio rose to 14.9% (2016: 13.5%). Cagamas’ capitalisation remained strong with a core capital ratio of 20.9% and a risk-weighted capital ratio of 22.3% as at end-2017 (2016: 22.3%; 24.1%).

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. During 2017, Cagamas readily raised RM15.3 billion from 31 new debt issuances (2016: RM7.4 billion; 21 new issuances) while its funding base increased by 16.2% y-o-y to RM37.4 billion with the loans-to-fund ratio maintained at 1.01 times. MARC also notes that Cagamas’ ICP programme under its ICP and IMTN programme with a combined aggregate limit of not exceeding RM5.0 billion had expired on August 19, 2017.

Contacts:
Lee Kar Xuan, +603-2717 2964/ karxuan@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.