RAM Ratings reaffirms Cagamas’ AAA/P1 ratings

Published on 07 September 2012

RAM Ratings has reaffirmed Cagamas Berhad’s (“Cagamas” or “the Company”) respective long- and short-term corporate credit ratings, at AAA and P1. Concurrently, the respective AAA and P1 ratings of Cagamas’ RM40 billion Islamic and Conventional Medium-Term Note (“MTN”) Programme and RM20 billion Islamic and Conventional Commercial Paper (“CP”) Programme have also been reaffirmed, together with the AAA/P1 ratings of the Company’s RM5 billion Islamic MTN Programme and Islamic CP Programme. All the long-term ratings have a stable outlook.

Cagamas commenced operations in 1987 as the national mortgage corporation, to support the national objective of achieving widespread housing ownership and promoting the development of long-term capital market in Malaysia i.e. to convert illiquid housing loans in the books of financial institutions into liquid and tradable securities. Currently, the Company purchases loans from financial institutions, the Government of Malaysia and selected corporations - either on a “purchase with recourse” (“PWR”) or “purchase without recourse” (“PWOR”) basis. Under the PWOR scheme, Cagamas bears the full credit risk of the portfolio of loans and debts purchased.

The ratings reflect Cagamas’ systemically important position within the domestic capital markets, robust asset quality, and solid capitalisation. The Company plays the strategic role of a liquidity provider to various institutions, and is also the leading issuer of private debt securities in Malaysia. RAM Ratings believes that support, as implied by the shareholding structure of Cagamas Group, would be readily extended, if required.

Cagamas enjoys robust asset quality, premised on its highly rated counterparties within its PWR portfolio and direct salary deductions for financing facilities under its PWOR scheme. In fiscal 2011, some 89% of the Company’s PWR exposure involved entities with at least AA ratings. At the same time, there was zero impairment charge on its PWOR portfolio. Meanwhile, Cagamas’ capital base is viewed to be solid, underscored by its robust receivables profile and minimal impairment losses. The Company’s overall risk-weighted capital-adequacy ratio stood at 25.1% as at end-December 2011, mainly comprising common share equity and retained earnings.

At the same time, the ratio of its PWR and PWOR receivables stood at 52:48 compared to an even 50:50 a year earlier. As a result of its larger (and lower-yield) PWR portfolio, Cagamas’ net interest margin (inclusive of income from its Islamic operations) slipped to 1.5% while its return on assets came in at 1.3% for fiscal 2011 (fiscal 2010: 1.6% and 1.4%). We note that the Company’s profitability will remain market-driven, influenced by interest-rate cycles and liquidity conditions as well as its pricing strategies and risk-management policies.

Given the currently liquid domestic financial system, however, Cagamas’ role as a liquidity provider is less prominent as reflected in its declining acquisition of new loans and debts in the past 5 years. That said, its loan-acquisition schemes are still alternative avenues for banks that seek to diversify their funding bases, as well as for Islamic financial institutions in managing their liquidity and capital positions given the scarcity of Shariah-compliant hedging instruments. “While Cagamas may explore new business opportunities, we draw comfort from the management’s intention of exploring areas of growth that complement the Company’s core expertise,” notes Siew Suet Ming, RAM Ratings’ Head of Structured Finance Ratings.

Media contact

Lim Chern Yit

(603) 7628 1035

chernyit@ram.com.my