MARC has affirmed national mortgage corporation Cagamas Berhad's (Cagamas) debt issue ratings as follows:
- Conventional and Islamic Commercial Paper (CP/ICP) Programmes with an aggregate combined limit of RM20.0 billion at MARC-1/ MARC-1ID respectively;
- Conventional and Islamic Medium-Term Notes (MTN/IMTN) Programmes of up to RM40.0 billion at AAA / AAAID respectively; and
- ICP and IMTN Programmes with a combined aggregate limit of RM5.0 billion at MARC-1ID and AAAID respectively.
The outlook on the ratings is stable. The affirmed ratings reflect Cagamas' strong capitalisation, liquidity and credit profile. The ratings also incorporate Cagamas' systemic importance in the domestic financial system as the national mortgage corporation and as the country's largest domestic issuer of corporate debt securities. In addition, Bank Negara Malaysia's shareholding in Cagamas provides a strong assurance of a conservative approach to risk and at the same time underpins MARC's expectations that timely government support will be forthcoming if required.
Cagamas has faced challenges to build up its portfolio in recent years; however the sharp tightening of banking liquidity in 2014 provided an opportunity for loans and financing purchases. In 1H2015, Cagamas secured purchase with recourse (PWR) loans and financing amounting to RM949.8 million (2014: RM5.7 billion). However, MARC understands that Cagamas has secured further purchases in 2H2015 with PWR asset growth in 2015 expected to exceed the preceding year. In 2014, Cagamas' net outstanding loans and financing rose moderately by 9.2% y-o-y to RM27.7 billion following the purchase of RM5.7 billion worth of loans and financing (2013: RM8.2 billion). MARC notes that Cagamas' initiatives to geographically diversify abroad as well as its plans to purchase domestic loans and financing for SME and infrastructure projects are still at nascent stages.
As at end-June 2015, mortgages continued to dominate Cagamas' portfolio at 86%, followed by personal loans and financing at 8% and hire purchase loans and financing at 6%. The national mortgage corporation's portfolio remains fairly evenly distributed between Islamic and conventional assets. At the same time, PWR loans and financing increased in 2014 and 1H2015, resulting in a more balanced proportion of purchase without recourse (PWOR) and PWR in its portfolio, standing at 53:47 as at end-2014 and 54:46 as at end-June 2015 (2013: 61:39). MARC takes comfort that PWR asset risk is limited to the counterparty risk of the originating financial institutions and corporates. In this regard, Cagamas' strict eligibility criteria mitigates counterparty risk.
Conversely, 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 for PWOR assets, which remained low at 1.1% as at 1H2015 (2014: 0.8%). The increase in default rate in 1H2015 was largely due to administrative delays in updating payment records following a system migration by the public sector entities.
For 2014, Cagamas' pre-tax profit declined by 21.0% y-o-y to RM335.8 million on the back of lower net interest and net financing income. Accordingly, pre-tax return on assets and equity measures declined to 1.2% and 12.7% respectively (2013: 1.7%; 17.9%). In 1H2015, Cagamas' pre-tax profit decreased to RM161.6 million (1H2014: RM168.5 million), with the decline stemming largely from lower purchases and gradual run-down of loans and financing. Cagamas' capitalisation remains strong with core capital and risk-weighted capital ratios standing at 25.0% and 25.7% respectively as at end-June 2015 (end-2014: 23.6%; 24.3%). The national mortgage corporation's favourable access to the domestic debt market and demonstrated ability to structure its liabilities to match its loans and financing assets remain key factors supporting its strong and stable funding and liquidity profile.
Cagamas has also diversified its funding base by recently establishing a foreign currency bond programme through its wholly-owned funding vehicles: Cagamas Global PLC (for conventional Euro MTN (EMTN) programmes) and Cagamas Global Sukuk Berhad (for Islamic EMTN programmes). As of 1H2015, Cagamas Global issued bonds amounting to RMB1.5 billion in September 2014, HK$1.0 billion in November 2014, US$500 million in December 2014 and US$100 million in June 2015. MARC understands Cagamas hedges its exposure to foreign currency volatility by using cross-currency swaps. Domestically, Cagamas raised less new funds in 2014, amounting to RM3.8 billion (2013: RM9.9 billion) from 21 new issuances under the rated programmes and RM1.1 billion from two new issuances in 1H2015. As of end-June 2015, total securities outstanding stood marginally lower at RM26.0 billion (2014: RM26.6 billion), matching the contracted loan base with the loan-to-funding ratio improving slightly to 0.90 times (end-December 2014: 0.94 times).
The stable outlook reflects MARC's expectation that Cagamas will continue to maintain its strong credit and liquidity profile over the near term.
Contacts: Neoh Jiun Yan, +603-2082 2263/ jiunyan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.
© Press Release 2016
