The Role of Mortgage Liquidity Facility

in Housing Finance

Datuk Chung Chee Leong

President/Chief Executive Officer

35th AUHF Conference Cape Town, South Africa

5 November 2019

Agenda

1Cagamas Overview

2Cagamas as Mortgage Liquidity Facility provider in Malaysia

3

1

Business Overview

4About Cagamas

Cagamas Overview

2

Background

Entity Name Cagamas

ShareholdersCagamas Holdings Berhad, which is 20% owned by Bank Negara Malaysia (BNM), and 80% by commercial andinvestment banks

Credit Rating A3 Stable (Moody’s)

Date of Incorporation 2 December 1986

Objectives

▪ Established by Bank Negara Malaysia to support the national agenda of increasing home ownership and promoting thedevelopment of Malaysia’s capital markets

▪ Development and promotion of Islamic finance within Malaysia

Business Model

▪ Through the issuance of conventional and Islamic securities, Cagamas funds the purchase of housing loans and housefinancings through its Purchase With Recourse (PWR) and Purchase Without Recourse (PWOR) schemes

▪ Based on this business model, Cagamas is able to provide liquidity to financial institutions at a competitive cost,encouraging them to provide additional housing loans and house financings to new applicants at an affordable price

▪ The World Bank has regarded Cagamas Berhad as the largest and most successful liquidity facility in its publicationentitled “Housing Finance Policy in Emerging Markets” in 2009

3

Cagamas at a Glance

Cagamas as a Mortgage Liquidity Facility (MLF) provider in Malaysia

4

5

PURPOSE

Act as intermediary between primary mortgage lenders and capital market

investors

To support long term lending activities of mortgage lenders

OBJECTIVES

Reducing maturity mismatch between housing loans and sources of funds

Provide longer term funds to mortgage lenders

To develop the primary mortgage market by providing funds to mortgage lenders at

better rates and longer tenors, thus facilitating affordability

Promote keener competition & create a more level playing field among mortgage

originators: benefits home buyers

Description of Mortgage Liquidity Facility (MLF)

6

Lenders Homebuyers Govt and Economy

Hedge interest rate risks Obtain easy access to housing loans at reasonable cost

Helps to achieve its policy of encouraging home ownership

Obtain liquidity at competitive costs to originate more housing loans and

enhance lending operations

Obtain attractive and affordable housing loan packages

Potential liquidity policytool. 2nd lender of last

resort in times of liquidity crisis

Price loan products competitively Competition can spur more attractive mortgages offered by more lenders

Encourages property development and related spin-off effects

Improve RWCR if they sell on without recourse basis

Makes housing loans more affordable to the lower income group

Playing field is levelled whereby mortgage origination is no longer the exclusive

domain of stronger rated FIs

Benefits of MLF

7

In the mid-1980s, Financial Institutions (FIs) in Malaysia faced tight liquidity situation

Deteriorating loan to

deposit ratio

Funding mismatch – short term deposits to fund

long-term housing loans

No private debt security

market

Limited source of funding –

deposits & equity

Inability to source for long

term funding

FIs were reluctant to give out e.g. housing loans, particularly low & medium

cost houses – housing loans are deemed long-term illiquid assets

Background

8

As a direct result of the needs of market, Cagamas was set up in December 1986 as a

national mortgage corporation with 2 main objectives:

1. Accessibility to long-term funds to support home ownership

2. Spearhead development of the private debt securities market

Function as

intermediary between

primary lenders and

investors of long term

funds

Take on role of credible

issuer of mortgage

securities

Cagamas has entered into its first transaction on 16 October 1987 for the Pilot Purchase of housing loans

totaling RM110 million. Subsequently, the Subscription Agreement for the first issue of RM100 million

unsecured Cagamas bonds was signed

Background

Business Overview

9

The success of Cagamas’ business model has been recognised by other countries as well as the World Bank and the Asian Development Bank

Co

nsu

me

r

Selling Institution Cagamas

Purchase with Recourse

Purchase without RecourseSelling Institution’s eligibility criteria

Cagamas’ stringent eligibility criteria

▪ The Selling Institution will have applied its own eligibility criteria in granting the loan / financing to the consumer

▪ Cagamas will have applied its own stringent eligibility criteria in determining that the loan / financing to be purchasedfrom the Selling Institution is of sufficient quality to maintain the high quality of Cagamas assets

Since the commencement of operations in 1987, Cagamas has been a global role model of how emerging countries can establish successful secondary mortgage liquidity facilities

10

Business Overview

Mortgage Originators

Liquidity Model

CAGAMAS

Investors

CAGAMAS MBS

Issues ABS

Securitisation Model

Sells Cagamas Bonds/Sukuk

$

Bond/Sukukproceeds

Purchase assets

withoutrecourse

$

Salesproceeds

Purchase assets with

recourse

$

Salesproceeds

Stru

ctu

reP

rod

uct Purchase with Recourse Programme

(PWR)

Composition of total assets: 73%

Net operating income FY2018: 24%

Composition of total assets: 27%

Net operating income FY2018: 76%

Co

nd

uit

fo

r Liquidity Management

Hedging

Capital Management

Risk Management

Portfolio Management

Guarantee Model

CAGAMAS SRP

Guarantee/ Wakalah Fee

Unfunded

Mortgage Guarantee Programme/ Skim Rumah Pertamaku

(My First Home Scheme)/ Youth Housing Scheme

Capital Management

Risk Management

Portfolio Management

Guarantee

Mortgages

Cagamas Berhad

Cagamas purchases loans and financing under 2 schemes – Purchase with Recourse and Purchase without Recourse

Investors

Purchase without Recourse Programme / (PWOR)

11

* Assets acquired under PWOR are potential securitisation asset at a future date

Cagamas Business Model

12

Originator CAGAMAS

1

2

4

31. Originator sells loans/financing

to Cagamas on a with

recourse basis

2. Cagamas pays cash or bonds

as consideration for

loans/financing

3. Post sale, Originator continues

to service customer and remits

repayments to Cagamas

4. Cagamas pays servicer fee to

Originator upon receipt of

loan/financing collection

5

5. Originator remains responsible

for any losses arising from

defaults by borrower and

obliged to repurchase the

loans/financing upon maturity of

the contract

In substance, Cagamas funds FI against security of the underlying loans/financing

Purchase With Recourse (PWR) Structure

13

Features Benefits

• Structured as true sale of debts. However, the

structure does not qualify as Asset Backed

Securities (ABS) due to its recourse feature

• Sale is subject to a Credit Limit established for

each FI

• Purchases based on Cagamas rate i.e. Bond

Yield plus Cagamas’ margin

• Loans/Financing sold to Cagamas can still be

used for key indicative and market share

calculation purposes

• Hedge interest / profit rate risks

• Alternative funding to grow assets

• Able to price financing products competitively

• Proceeds from the sale are deductible from

Eligible Liabilities base

Purchase With Recourse (PWR) Structure

14

Originator CAGAMAS

1

2

4

3

1. Originator sells loans/debts

to Cagamas on a without

recourse basis

2. Cagamas pays cash or

bonds as consideration for

loans/debts

3. Post sale, Originator

continues to service

customer and remits

repayments to Cagamas

4. Cagamas pays servicer fee

to Originator upon receipt of

loan/debt collection

5

5. Originator saves on Capital

Charge after loans/debts

sold to Cagamas

Purchase Without Recourse (PWOR) Structure

15

Features Benefits

• Outright sale to Cagamas, with no recourse for

default risk

• Purchases based on Cagamas rate i.e. Bond

Yield plus Cagamas’ margin

• Standardised structure and documentation

• Pricing from par to premium, depending on

quality of assets

• Cash purchase or settlement by

bond/Cagamas Islamic securities

• Excess spread paid to FI as servicer fee

• FI will be appointed as servicer for

loans/financing sold. FI/servicer remits

collections to Cagamas

• Transfer of credit risk

• Full capital relief

• Management of portfolio concentration risk

• Shift to fee based income

• Improve Return on Asset/Return on Risk

Weighted Capital

• Improves earning stability

• Purchase at premium – locking in profits to

the Seller

• Stabilising marketing strategy

• No transaction cost

• Fast turnaround time

• Flexible transaction

Purchase Without Recourse (PWOR) Structure

16

PWR PWOR

• Cash receipt from sale of loans

• Not an “outright” sale – liability created in

FI’s balance sheet as a recourse

obligation/repurchase commitment

• No reduction in loan asset in balance sheet

• No transfer of credit risk – no capital relief

benefits

• Cash receipt from sale of loans

• True sale – no liabilities created

• Reduction in asset in balance sheet

• Complete transfer of credit risk – Full

capital relief benefits from assets sold

Accounting Treatment – PWR & PWOR

17

• A type of asset-backed security that is secured by a mortgage or collection of

mortgages.

• Cagamas MBS Berhad (CMBS), a wholly-owned subsidiary of Cagamas Holdings

Berhad was incorporated as a limited-purpose entity to solely purchase the

Government’s staff housing loans and to issue RMBS

• From the perspective of the Seller, the benefits and accounting treatment of RMBS

mirrors that of PWOR

Residential Mortgage-Backed Securitisation (RMBS)

0

50

100

150

200

250

300

350

400

0

5

10

15

20

25

30

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MYR BillionMYR billion

Annual Sukuk Issuances Annual Bonds Issuances Cumulative Issuances

*

*

**

*

Cagamas plays a systemically

important role in the domestic financial

system, underscored by its dual function as liquidity provider and as a leading issuer of

conventional and debt securities and

Sukuk

• Provide credit and portfolio risk management solutions

• Cagamas Group has issued papers worth MYR335 billion to the financial market and has successfully redeemed MYR294 billion with not even a single technical default as at 31 October 2019

• Provide capital management solutions

• Conduit to remove systemic risk in the financial sector

• Conduit for best practices & setting up of standards – development of conforming financing standards

* Less than MYR 150 million

Sukuk issuances by Cagamas

Asian financial crisis

US sub-prime / global

financial crisis

18

Annual Issuance of Cagamas Bonds and Sukuk

19

▪ Promoting access to longer tenure housing loans

▪ Generating strong competition among FIs to grant housing loans

▪ Providing liquidity to the financial sector

▪ Strengthening the financial sector

▪ Enhancing the quality of the Malaysian capital market

▪ Providing an alternative form of investment in high quality Private Debt Securities (PDS)

▪ Developing the Islamic Finance and Sukuk market

Impact on Setting up Cagamas

20

“The largest and most

successful liquidity

facility has been

Cagamas Berhad in

Malaysia” – World

Bank

The World Bank Report

For further information, please visit Cagamas website

www.cagamas.com.my

THANK YOU

21

About Cagamas

For Information

22

Bank Negara20%

Commercial Banks77%

Investment Banks

3%

CAGAMAS HOLDINGS BERHAD

23

20.0%

16.5%

14.2%

8.6%

8.0%

7.0%

6.0%

4.1%

3.7%

3.1%

2.9%

2.2%

2.0%

0.3%

0.2%

0.2%

Note: SIBB Berhad 0.3%

0.2%

0.5%

Shareholding structure for Cagamas Holdings

Healthy asset growth with sustained profitability

Profit Before Tax Asset Size Shareholders’ Fund

Net Tangible Asset per share Core Capital Ratio Risk Weighted Capital Ratio

425

336 343 332 321 316

151

0

100

200

300

400

500

2013 2014 2015 2016 2017 2018 1H19

MYR million

27.629.5

33.135.5

41.1

44.842.6

20

25

30

35

40

45

2013 2014 2015 2016 2017 2018 1H19

MYR billion

2,527

2,754

3,015

3,216

3,422

3,637 3,787

2,000

2,300

2,600

2,900

3,200

3,500

3,800

2013 2014 2015 2016 2017 2018 1H19

MYR million

16.78 18.30

20.05 21.34

22.70 24.10

25.10

10

12

14

16

18

20

22

24

26

2013 2014 2015 2016 2017 2018 1H19

MYR

23.7 23.6

21.622.3

20.9

28.3

31.3

15

17

19

21

23

25

27

29

31

2013 2014 2015 2016 2017 2018 1H19

%

24.3 24.323.5 23.6

22.3

29.9

32.8

15

18

21

24

27

30

33

2013 2014 2015 2016 2017 2018 1H19

%

24

Summary of Financial Highlights

Cagamas consistently achieves strong and resilient profit since its inception, demonstrating that business is managed in both prudent and profitable manner

(MYR million) (%)

*Source: The World BankDepartment of Statistics Malaysia

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

0

50

100

150

200

250

300

350

400

450

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cagamas' PBT Cagamas' PAT Malaysia GDP growth *

25

Sound and Resilient Financial Profile

1987

• Purchase with Recourse• Housing loans on fixed

rate basis• Fixed rate bonds

1992

• Housing loans on floating rate basis

• Floating rate bonds

1996

• Islamic house financing• Sukuk Mudharabah• Industrial property loans

1998• Staff housing loans from selected

corporations• Hire purchase and leasing debts

2004

• Securitisation of Government staff housing loans

• Residential Mortgage-Backed Securities (RMBS)2005

SukukMusyarakahRMBS

2007

• Purchases without Recourse

• Synthetic Securitisation of small medium enterprise loans

• Secured Credit Linked Notes

• RM60 billion CP MTN Programme

2008

• Mortgage Guarantee• Islamic personal

financing• Rahn financing• Personal loans• Sukuk Commodity

Murabahah

2010

• RM5 billion ICP IMTN

• Sukuk Al AmanahLi Al-Istithmar

• Variable Rate Sukuk Commodity Murabahah

2011

Skim RumahPertamaku(My First Home Scheme)

2013

• MYR3.80 billion Multi-tenor Sukuk

• MYR2.20 billion Multi-tenor conventional MTN

2014

• USD2.5bn Conventional and USD2.5bn SukukMulti-Currency MTN Programme

• RMB1.5bn Tiger EmasBond

• USD500mn benchmark Issue

• HKD1.0bn private placement

2015

• SGD100mn issuance• SGD162.75mn Sukuk• Two reopening of 3-year

MTN

2018

• USD350mn benchmark Issue

• Dual re-opening• EMTN Floating

Rate Note• AUD100mn

issuance

2017

• First USD denominated FRN26

Innovative Products and Market Development

Recent Awards and Accolades

27

Awards and Accolades

Recent Awards and Accolades

28

Awards and Accolades

29

This presentation was prepared exclusively for the benefit and internal use of the recipient. This presentation

does not carry any right of publication or disclosure to any other party. Neither this presentation nor its content

may be used for any other purpose without prior written consent of Cagamas Berhad (157931-A) (“Cagamas”).

The information in this presentation reflects prevailing conditions and our views as of this date, all of which are

accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without

independent verification, the accuracy and completeness of any information available from public sources.

Except as required by law, Cagamas and their officers, employees, agents and advisers do not accept any

responsibility for or liability whatsoever in respect of any loss, liability, claim, damage, cost or expense arising as

a consequence (whether directly or indirectly) of reliance upon any information or any statement or opinion

contained in this document, nor do they make any representation or warranty (whether expressed or implied) as

to the accuracy or completeness of this documents or its contents. This presentation is not an offer documents

and cannot give rise to any contract.

Disclaimer