MARC AFFIRMS CAGAMAS BERHAD’S BONDS AND SUKUK ISSUES RATINGS AT AAA/MARC-1 AND AAAIS/MARC-1IS

MARC has affirmed national mortgage corporation Cagamas Berhad’s (Cagamas) bonds and sukuk issues ratings as follows:

·         Conventional and Islamic Commercial Paper (CP/ICP) Programmes with an aggregate combined limit of RM20.0 billion at MARC-1/ MARC-1_IS respectively;

·         Conventional and Islamic Medium-Term Notes (MTN/IMTN) Programmes of up to RM40.0 billion at AAA / AAA_IS respectively; and

·         ICP and IMTN Programmes with a combined aggregate limit of RM5.0 billion at MARC-1_IS and AAA_IS respectively.

The outlook on all ratings is stable. The affirmed ratings continue to be driven by Cagamas’ systemic importance in the domestic financial system, and its strong capitalisation and liquidity position. MARC continues to regard Cagamas’ status as the national mortgage corporation and the country’s largest domestic issuer of corporate bonds and sukuk as factors for timely government support if necessary.

For half-year financial period ended June 30, 2016 (1H2016), Cagamas secured purchase with recourse (PWR) loans and financing amounting to RM3.5 billion, leading to a 23.6% y-o-y increase in total outstanding loans and financing to RM32.6 billion. Mortgages continued to dominate Cagamas’ portfolio at 90%, followed by personal loans and financing at 6% and hire purchase loans and financing at 4%. MARC notes that the increased proportion of PWR in Cagamas’ portfolio over purchase without recourse (PWOR) at 59:41 as at end-June 2016 (2015: 55:45) is largely attributed to the well-capitalised domestic banking sector.

MARC takes comfort from Cagamas’ strict eligibility criteria and stringent monitoring of credit exposures to mitigate counterparty risk in the originating financial institutions and corporates selling PWR assets. Meanwhile, the higher credit risk associated with PWOR assets is mitigated by the repayment mechanism via non-discretionary salary deductions of borrowers employed in public sector entities. This is evident from the historically low default rate on PWOR assets, which stood at 1.2% as at 1H2016 (2015: 1.1%). The slight increase in default rate in 1H2016 was largely due to minor reporting glitch by Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA), the servicer appointed following the passing of the Public Home Financing Board Act 2015. MARC notes that while Cagamas has put in place the relevant framework for the purchase of infrastructure and small and medium enterprise (SME) loans, progress in diversifying into these new asset classes may take time to materialise.

For 1H2016, Cagamas recorded a 10.0% y-o-y growth in pre-tax profit to RM177.7 million, attributed to higher net interest income and net financing income on the back of the increase in loans and financing purchased. Its capitalisation remains strong with core capital and risk-weighted capital ratios standing at 21.7% and 23.6% respectively as at end-June 2016 (2015: 21.6%; 23.6%). Cagamas maintains a stable funding and liquidity profile, attributable to its favourable accessibility to debt markets and demonstrated ability to structure its liabilities to match its loans and financing assets. During 1H2016, Cagamas raised RM3.8 billion from 11 new issuances of conventional and Islamic medium-term notes (2015: RM7.1 billion). As of end-June 2016, Cagamas’ funding base increased by 7.9% to RM32.3 billion with the loans-to-funding 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, supported by sound policies.

Contacts: Norehan Ikhlas, +603-2082 2257/ norehan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

January 19, 2017