MARC has affirmed its long term and short term conventional and Islamic debt ratings of AAA/AAAID and MARC-1/MARC-1ID respectively on Cagamas Berhad (Cagamas) with a stable outlook.

MARC has affirmed its long term and short term conventional and Islamic debt ratings of AAA/AAAID and MARC-1/MARC-1ID respectively on Cagamas Berhad (Cagamas) with a stable outlook. A full list of these issuances is given at the end of this press announcement.

The ratings reflect the institution's continued sound asset quality, profitable operations, strong capitalisation, prudent management of liquidity risk and excellent access to the domestic debt capital market. The ratings also incorporate Cagamas' systemic importance in the domestic financial system as the country's largest issuer of PDS which are broadly held by banks and institutional investors. Additionally, the central bank remains a 20% owner in Cagamas, providing strong assurance of its soundness and continued conservative approach to risk. Accordingly, MARC expects timely support to be forthcoming from the government if required.

Cagamas was established in 1986 as the country's national mortgage corporation to promote further expansion of residential housing financing and the development of the secondary mortgage market. Cagamas purchases loans and financing on a recourse basis ('purchase with recourse' or PWR) as well as on a non-recourse ('purchase without recourse' or PWOR) basis from originating financial institutions, corporate and the government, and issues debt securities to fund its purchases. Cagamas' original mandate of promoting home ownership continues to be reflected in the composition of its outstanding loans and financing portfolio. As of end-2012, housing loans and financing accounted for 65% of its outstanding loans and financing portfolio, while hire purchase and leasing debts stood at 18%. Personal loans and financing, and industrial loans and financing accounted for the remaining 17%. Favourable regulatory treatment of securities issued by Cagamas, meanwhile, continues to assist the institution in expanding the range of private debt securities (PDS) in the domestic market through active issuance of bonds and sukuk. As at end-2012, outstanding debt securities issued by Cagamas accounted for 8% of total outstanding corporate debt securities in Malaysia.

A key challenge for Cagamas is the banking system's decreasing reliance on the institution as a funding source for housing finance in recent years, as evidenced by a fairly consistent pattern of decline in total purchases of housing loans and financing in recent periods compared to 2008. The ample liquidity in the banking sector and improved capital adequacy of banks has reduced the need for banks to offload their loans and financing for liquidity purposes. Cagamas is looking to broaden its original mandate with new initiatives which entail the expansion of its product offerings to include new asset classes and client base, as well as the pursuit of cross-border opportunities in markets such as Indonesia and Thailand. Ongoing growth initiatives may affect Cagamas' credit risk profile in the longer run, however, MARC expects the limited risk characteristics of Cagamas' business to continue to underpin the affirmed ratings in the more immediate term.

As at end-2012, the proportion of PWR to PWOR assets in Cagamas' portfolio of outstanding loans and financing rose to 51:49 from 48:52 a year ago. In 2012, Cagamas managed to grow its PWR assets by 5.3% while its PWOR assets reduced further on account of lower purchases and the gradual run down of mortgage assets. Overall, outstanding loans and financing declined marginally by 1.27% to RM23 billion. The growth in PWR assets was largely driven by purchases of Islamic assets, which, in turn, was fuelled by Islamic financial institutions' (IFIs) need to hedge profit rate risk on their financing assets. The purchase of PWR assets provides Cagamas with full recourse to the originators for default risk, and is viewed positively from an asset quality and the current context of rising household indebtedness. Compared to end-2011, the default rate of Cagamas' PWOR assets rose, in part due to the shrinking asset base, but remains satisfactory at 1.2% as at end-2012. Cagamas continues to rely on its prudent loan and financing purchase eligibility criteria to mitigate its exposure to default risk on PWOR assets.

Cagamas remains a profitable operation despite the continuing downward trend in its return on assets and equity measures. The institution posted a lower pre-tax profit of RM293.0 million due to its declining outstanding loans and financing, which was partly offset by higher treasury income and loan loss provision write-backs. Its cost-to-income ratio for 2012 remained healthy at 11.8% in spite of narrowing net interest margins and rising operating costs. The institution also remained strongly capitalised as at end-2012 with core capital and risk-weighted capital ratios of 23.8% and 24.4% respectively.

The stable outlook reflects MARC's expectation that Cagamas' sound asset quality and capitalisation, historically resilient operating profitability and prudent risk management will allow it to withstand a period of higher volatility in the housing and financial markets and continue to support the ratings.

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 Note Programme of up to RM40 billion affirmed at AAA/AAAID;

             Conventional and Islamic Commercial Paper Programme of up to RM20 billion affirmed at MARC/MARCID; and

             Islamic Commercial Paper Programme and Islamic Medium Term Note Programme with a combined aggregate limit of RM5 billion affirmed at MARC-1ID and AAAID respectively.

Contacts: Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my; Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my.

October 24, 2013