Published on 25 Oct 2023.
RAM Ratings has affirmed Cagamas Berhad’s (Cagamas or the Company) corporate credit ratings, together with its issue ratings, as tabulated below. As RAM no longer provides public coverage of global/ASEAN issue ratings, we have concurrently withdrawn the gA2(s)/Stable ratings of the USD2.5 billion Multicurrency MTN Programme and USD2.5 billion Multicurrency Sukuk Issuance Programme under Cagamas Global P.L.C. and Cagamas Global Sukuk Berhad, respectively, which were last rated on 12 December 2022.
The rating affirmations reflect Cagamas’ robust credit metrics, underscored by prudent and conservative business practices. This is despite various business plans/efforts to remain relevant to the market that may entail higher risk over the near to medium term. As Malaysia’s national mortgage corporation, we believe Cagamas will receive government support in the event of financial distress considering its strategic position as a liquidity provider to the domestic financial system and one of the largest issuers of corporate bonds and sukuk.
Cagamas primarily acquires loans/financing assets from financial institutions, the Government of Malaysia and selected corporations on a purchase with recourse (PWR) or purchase without recourse (PWOR) basis, thereby providing liquidity to the secondary market for mortgage loans. Owing to growing competition for deposits among banks, demand for Cagamas’ PWR purchases soared 40% y-o-y to RM19.3 bil in FY Dec 2022 (FY Dec 2021: RM13.8 bil), the highest recorded to date. There were no PWOR purchases during the year. For 1H Dec 2023, Cagamas bought RM9.9 bil worth of receivables via its PWR scheme.
Cagamas’ overall asset quality is still robust in view of the significant proportion of highly rated counterparties for its PWR portfolio and minimal impairment losses from the PWOR portfolio. Notably, 81% of the Company’s PWR counterparties carry at least AA ratings. As at end-June 2023, the PWOR portfolio’s gross impaired loans ratio was an improved 0.38% (end-December 2022: 0.47%), much lower than the banking industry average of 1.38% for residential mortgages.
Moderating the ratings is the challenging business environment in which Cagamas operates, given the limited customer base as well as banking system’s healthy capital and liquidity buffers. While some financial institutions will still utilise Cagamas schemes to meet liquidity requirements as the schemes remain an easier and convenient option, the Company is challenged to make its product more cost-competitive against the funding costs of highly rated banks. As it is solely dependent on the wholesale market for funding, Cagamas’ competitiveness depends on the pricing of its debt securities that are highly sensitive to exogenous factors. That said, the Company enjoys ready access to domestic capital markets because of its perceived quasi-government status. Liquidity and refinancing risks are seen to be minimal in view of the Company’s prudent asset-liability management.
Cagamas’ net interest margin of 0.8% for FY Dec 2022 was largely unchanged y-o-y. As the PWR portfolio is expected to remain the Company’s main earnings source and the contribution from newer products such as its Capital Management Solution and Reverse Mortgage is still small, earnings will stay under pressure in the near term. As at end-June 2023, both total capital and common equity tier-1 ratios remained superior despite easing to 34.9% and 34.0%, respectively, due to a larger loan/financing base. These levels are expected to be adequate to support its purchases and new business plans.
Lim Chern Yit
(603) 3385 2528
Sean Lim, CFA
(603) 3385 2550
(603) 3385 2500
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Ratings on Cagamas Berhad