MARC has affirmed its ratings on national mortgage corporation Cagamas Berhad’s (Cagamas) bonds and sukuk issues as follows:
· Conventional and Islamic Commercial Paper (CP/ICP) Programmes with a combined aggregate limit of RM20.0 billion at MARC-1/ MARC-1IS respectively;
· Conventional and Islamic Medium-Term Notes (MTN/IMTN) Programmes of up to RM40.0 billion at AAA / AAAIS respectively; and
· ICP and IMTN Programmes with a combined aggregate limit of RM5.0 billion at MARC-1IS and AAAIS respectively.
The outlook on all ratings is stable. The affirmed ratings are premised on Cagamas’ strong credit profile, as reflected by its sound capitalisation and liquidity position, both of which are underpinned by a prudent approach to risk. The ratings also incorporate Cagamas’ systemic importance in the domestic financial system, arising from its status as the national mortgage corporation and the largest domestic issuer of corporate bonds.
For the financial year ended December 31, 2016 (FY2016), Cagamas’ total outstanding loans and financing rose by 7.1% y-o-y to RM32.5 billion with the acquisition of loans and financing of RM5.7 billion which was on a purchase with recourse (PWR) basis. Loans and financing under the purchase without recourse (PWOR) scheme have not been available for acquisition since 2015. As a consequence, the proportion of PWOR to PWR assets has continued to decline to 40:60 as at end-December 2016 (2015: 45:55). This notwithstanding, the increased proportion of PWR assets in Cagamas’ portfolio is viewed positively given the full recourse to the originators.
MARC takes comfort from the low counterparty risk of the originating financial institutions and corporates given that 86.8% of the PWR assets were purchased from originators rated AA and above as at end-2016. In respect of the PWOR assets, credit risk is mitigated by the non-discretionary salary deductions of borrowers employed in public sector entities. This is evident from the historically low default rate of the PWOR assets, which stood at 1.0% as at end-2016. Mortgage assets continued to dominate Cagamas’ portfolio at 95%, followed by personal loans and financing at 3% and hire purchase loans and financing at 2%. Cagamas’ plans to diversify its portfolio to include infrastructure and small- and medium-enterprise (SME) loans is at a nascent stage.
For 2016, Cagamas recorded a 3.3% y-o-y contraction in pre-tax profit to RM332.0 million, attributable to lower net interest and financing income. The net interest margin fell to 0.80% (2015: 0.93%) due largely to the decline of higher-yielding PWOR assets as opposed to PWR assets. Correspondingly, Cagamas’ pre-tax return on assets and equity measures declined to 1.0% and 10.7% in 2016 from 1.1% and 11.9% respectively in the previous year. The company’s capitalisation remained strong with core capital and risk-weighted capital ratios standing at 22.3% and 24.1% respectively as at end-December 2016.
Cagamas’ favourable accessibility to the domestic and international debt market and its demonstrated ability to structure its liabilities to match loans and financing assets remain key factors in the stability of its funding and liquidity profile. During 2016, Cagamas raised RM7.4 billion from 21 new debt issuances (2015: RM7.1 billion; 22 new issuances), enlarging its funding base by 7.4% y-o-y to RM32.2 billion as of end-2016. This matches Cagamas’ expanded loan base, which saw the loans-to-funds ratio maintained at 1.01 times (2015: 1.01 times).
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.
Contacts: Cheah Wan Kin, +603-2717 2932/ firstname.lastname@example.org; Sharidan Salleh, +603-2717 2954/ email@example.com
August 7, 2017