RAM Ratings reaffirms Cagamas’ AAA/P1 ratings

Published on 09 September 2013

RAM Ratings has reaffirmed Cagamas Berhad’s (“Cagamas” or “the Company”) corporate credit ratings, at AAA/Stable/P1. Concurrently, the respective AAA/Stable 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/Stable/P1 ratings of the Company’s RM5 billion Islamic MTN Programme and Islamic CP Programme.

The ratings reflect Cagamas’ robust asset quality, solid capitalisation and its strategic position within the domestic capital market as a liquidity provider to various institutions. As the Company is the largest issuer of private debt securities in Malaysia after the government, we are in the view that it has financial importance in the market. We do not believe that Cagamas would go unsupported in the event that it ever goes into financial distress.

Cagamas enjoys robust asset quality, premised on its highly rated counterparties within its “purchase with recourse” (“PWR”) portfolio and direct salary deductions for financing facilities under its “purchase without recourse” (“PWOR”) scheme. In fiscal 2012, some 95% of the Company’s PWR exposure involved counterparties with at least AA ratings. At the same time, there was a write back of RM5 million impairment charges on its PWOR portfolio. Cagamas’ capital base is also 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 24.4% as at end-December 2012, mainly comprising common share equity and retained earnings.

As a result of its larger (and lower-yield) PWR portfolio, Cagamas’ overall net interest margin (inclusive of income from its Islamic operations) slipped to 1.48% while its return on assets came in at 1.27% for fiscal 2012 (fiscal 2011: 1.54% and 1.34%). 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. Over the medium term, the Company’s NIM is expected to trend lower as its PWR portfolio continues to expand faster than its PWOR receivables.

Cagamas’ purchasing activity remained subdued in the recent years amidst liquid domestic financial system. Prior to 2012, its acquisition of new loans and debts has shown a general downward trend in the previous 4 years. However, there was an increase in loan and financing acquisition in fiscal 2012, driven by its PWR scheme as Cagamas continues to promote its Shariah-compliant hedging solutions to the Islamic financial institutions. The lack of Shariah-compliant hedging instruments in the market acts as a growth catalyst for Cagamas’ PWR funding solutions. While Cagamas’ new initiatives – regionalization, purchase of new asset classes under its PWR scheme, and an initiative to further develop the lower rated segment of the bond market – may introduce new risk elements to Cagamas’ business, RAM draws comfort from the Company’s historically conservative risk-management practices.

Media contact

Umar Marzuki

(603) 7628 1055

umar@ram.com.my