Published on 08 Nov 2019.
RAM Ratings has reaffirmed Cagamas Berhad’s (the Company) global, ASEAN and national-scale corporate credit ratings, together with its various issue ratings, as listed in the table below. The affirmation is premised on Cagamas’ strong credit metrics, as reflected by its excellent asset quality and robust capitalisation. The national mortgage corporation is also considered systematically important to the domestic capital markets. It is the largest domestic issuer of corporate bonds and sukuk, and a liquidity provider to the Malaysian financial system. We anticipate government support to be readily extended in the event of financial distress.
Cagamas Global P.L.C.:
USD2.5 bil Multicurrency MTN Programme
Cagamas Global Sukuk Berhad:
USD2.5 bil Multicurrency Sukuk Issuance Programme
Given its primary role as a liquidity provider to the secondary mortgage sector, Cagamas acquires loans/financing assets from financial institutions (FIs), the Government of Malaysia (GoM) and selected corporations - under purchase-with-recourse (PWR) and purchase-without-recourse (PWOR) schemes. In FY Dec 2018, Cagamas’ debt issuance hit a high of RM15.8 bil, with RM12.1 bil of PWR purchases. This is reflected in the 10.9% rise in its gross receivables to RM41.7 bil as at end-December 2018.
The better performance had been mainly driven by FIs’ need to comply with the liquidity requirements under the Basel III Guidelines. In 9M FY Dec 2019, Cagamas issued RM5.9 bil of debt securities to finance about RM2.0 bil of loan purchases. The balance had been utilised to refinance its short-term papers.
Overall, Cagamas’ asset quality is deemed robust, as illustrated by the strong credit profiles of its counterparties within its PWR portfolio, with 87% carrying at least AA ratings as at end-December 2018. The gross impaired loan (GIL) ratio of the Company’s PWOR portfolio also stayed healthy at 0.85%, albeit higher y-o-y. The ratio compares well against the Malaysian banking system’s 1.10% for residential property mortgages. As at end-June 2019, the Company’s PWOR GIL ratio had improved to 0.62%.
Although Cagamas has been relying solely on the wholesale market for funding, Cagamas enjoys ready access to the domestic capital markets in view of its perceived quasi-government status. Going forward, Cagamas’ growth prospects are envisaged to be pressured as most domestic FIs are well capitalised and adopting a wait-and-see approach amid speculation about another interest rate cut. Besides the challenges faced in product pricing and variety, the Company also needs to diversify its client base beyond the primary FIs.
Meanwhile, Cagamas’ new asset class, i.e. infrastructure and SMEs, has taken longer than expected to gain traction due to challenges in finding the right opportunities for its business model. That said, we derive comfort from the Company’s ongoing efforts to innovate and diversify its product range to broaden its client base.
Without the acquisition of higher-yielding PWOR assets and given the run-down of this portfolio, Cagamas’ overall margins are expected to remain under pressure. In fiscal 2018, the Company’s net interest margin narrowed to 1.0% (fiscal 2017: 1.1%). That said, its total capital ratio (TCR) improved from 22.3% to 29.9% following the adoption of a local risk rating scale. The Company’s robust capital base was further underpinned by its common-equity tier-1 capital ratio of 28.3% (fiscal 2017: 20.8%), as it mainly comprised common share equity and retained earnings. Amid the further run-down of its PWOR portfolio, Cagamas’ TCR continued improving to 32.8% in 1H FY Dec 2019.
Teoh Tze Yit
(603) 3385 2531
(603) 3385 2577
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Ratings on Cagamas Berhad