FW: RHB FIC Credit Market Update - 14/5/14

14 May 2014

Credit Market Update

APAC Credit Markets Narrowed; USTs Tighten on Slower Retail Sales; MYR Flows Skewed to AA Mid-Duration Papers

REGIONAL                      

¨      APAC credit markets narrowed; USTs tighten on slower retail sales. The APAC credit market saw buying activity as the JACI Composite narrowed 3.3bps to 256.3bps as the IG and HY also tightened by a corresponding 3.1bps and 4.2bps respectively. China/HK saw general buying pressure with attention on papers such as CHGRID 5/24 (-c.6bps to 3.97%), CNOOC 4/24 (-c.9bps to 4.10%), TENCNT 5/19 (-c.2.5bps to 3.03%) while the recently issued Cinda CCAMCL 5/19 tightened c.3bps to 4.29%, though wider since reoffer. Meanwhile, China’s econ data released yesterday were below expectation as the industrial production numbers rose by 8.7% y-o-y in Apr (exp: 8.9%; March: 8.8%) with the same trend seen in retail sales at 11.9% in Apr y-o-y (exp: 12.2%; 12.2% in March). USTs continued to be supported with the 10y benchmark UST tightening by 5.22bps to 2.61% as US April retail sales rose by less than expected (act: 0.1%; exp: 0.4%) signaling a slower US recovery and potentially longer Fed support.

¨      Perusahaan Gas Negara has issued a REG S 10y USD1.35bn (Baa3/BB+/BBB-) at 5.25% (T+259.5bps) while Bharti Airtel (NR/BBB-/NR) printed USD1bn of 10y at 5.35% (T+270) and EUR750m at 3.375% (MS+245), 30bps and 20bps inside initial guidance given to strong demand for India Investment-grade (IG) credit. The new issues were well received by the investors from US/Europe and Asia given to strong visibility of telco sector and potential from India’s reforms stories.  Meanwhile, the Industrial and Commercial Bank of China is printing a REG S USD 3.5y (A1/NR/NR) at initial guidance of T+195bps.

¨      Singapore saw quiet market activity with yields broadly tightening by c.1-2bps in-line with overall APAC credit trends. Tightening activity was seen in papers such as TEMASE 11/39 (-c3bps to 4.31%), OCBC 24c19 (-c.2.5bps to 3.92%) and DBSSP 37c17 (-c.1bp to 4.70%).  

¨      The SGD primary market was quiet on Monday with Wesak Day a public holiday on Tuesday.

¨      S&P has removed CLP Power Hong Kong (CLP Power) off the Credit Watch Negative on the completion of the acquisition of additional 30% shares in Castle Peak Power Co. (CAPCO), a power producer in HK, and the remaining 51% interest in Hong Kong Pumped Storage Development for a reported total of HKD14bn in Nov 2014. The rating has been affirmed as A/Neg due to the strain of the debt-funded acquisition on CLP Power’s financials over the next two years, though this has been mitigated in part by CLP Power’s strong business profile as the de facto monopoly in Kowloon and the New Territories and stable HK regulatory and operating conditions.

¨      Reserve Bank of India (RBI) suggests forming financial resolution authority with statutory bail-in powers; a credit negative for systemically important banks’ bondholders. This effort by RBI follows Hong Kong Monetary Authority’s (HKMA) first move in Asia Pacific in outlining a resolution regime for financial institutions. In RBI’s report dated 2-May 14 and titled “Report of the Working Group on Resolution Regime for Financial Institutions”, the central bank proposes various methods of resolution (stabilization, with respect to the financial system) including the ability to enforce losses on senior unsecured creditors (statutory bail-in) among others. Thus far, these proposals are targeted at global systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs). Our view: In the event of a bank’s distress, bondholders up to the unsecured senior creditor level could potentially see their holdings subject to enforced losses and/or conversion to equity. We also note that, under such a resolution regime, old-style subdebt will see the possibility of systemic support removed, which will effectively render their risk profiles similar to new-style subdebt.

¨      China’s credit levels decline; regulators said to be drafting plan to handle bank failure risks. China’s aggregate financing fell 25% to CNY1.55trn in April (March: CNY2.07trn), reflecting the government’s campaign to manage financial system risk amid a slowing economy. Meanwhile, the Chinese government is said to be drafting rules to help manage bank failure under which such banks deemed to have failed will be allowed to cease operations. Our view:  While declining credit reflects banks’ generally weaker performance, we think that lower credit levels in the financial system will impose less future stress on banks at this point of the credit cycle. On Chinese authorities drafting rules for bank failure, we anticipate that we will see resolution methods in the first publication similar to the ones in HKMA and RBI’s proposals.

¨      Woori Finance Holdings Co. (Woori) 1Q14 YoY revenue down 23%, net profit up 54%. South Korea’s largest banking group, Woori, reported lower revenue of KRW4.3trn from KRW5.6trn in the corresponding quarter of FY13 as well as a lower net interest margin of 1.6% compared to Dec 13’s 1.73%. On the flipside, the group reported higher net earnings of over KRW323bn on lower credit costs (provisions for loan losses) and operating expenses. In addition, the group registered a strong regulatory tier-1 capital ratio of 10.1% as well as a non-performing loan ratio of 2.6%.

     

MALAYSIA

¨      MYR credit volumes down pre-Wesak holiday; interest skewed to mid-duration AA-rated names. Monday’s credit activity waned 56% to MYR204m from MYR460m (on Friday), as investor participation took a break for Wesak day. Similarly, MGS flows were subdued at MYR717m and trading was generally range-bound. In addition, we saw better YoY industrial production numbers for March of 4.3%; while this is credit positive, the impact to market sentiment was minimal as investors were mostly away. Meanwhile, secondary levels among the day’s top-traded names generally realigned upwards as MGS levels widened sharply last Friday. These top-traded names included bank subdebt and construction sector names such as CIMBBank 8/21c16 old-style T2, widening 12bps to 4.30% (since 27-Feb 14) on MYR40m traded; WCT 6/14, tightening 5bps to 3.50% since 24-Apr 14 on MYR30m traded; Gamuda 10/18, widening 5bps to 4.60% since 28-Apr 14 on MYR30m traded; IJM 4/21, tightening 4bps to 4.77% since 30-Apr 14 on MYR20m; and RHBBank 10/21c16 old-style T2, widening 16bps to 4.41% since 2-Dec 13 on MYR20m traded. We expect flows to be milder this week and for part of the market to be sidelined ahead of the 1Q14 GDP data to be released this Friday, where we expect to see slightly better numbers.

TRADE IDEA: MYR

Bond	Reiterate value on Hong Leong Bank (HLBank) 6/24c19 (price: 98.42; ytc: 4.85%; spread: MGS5Y+115.5bps) in AA2 subdebt space
Comparable(s)	AmBank Sub-Notes 12/23c18 new-style; HLBank 5/21c16; HLBank 8/20c15
Relative Value	HLBank 6/24c19 old-style T2 is still priced below par at a decent yield pick-up (c.13bps) to our relative AA2 subdebt curve. We think it also offers good carry against lower-rated subdebt. As an old-style T2, the likelihood of being called is higher due to de-recognition (20% per year) on old-style capital and its embedded regulatory call option. In addition, the bond can be called on coupon dates within the 5 year period prior to maturity.
Fundamental	We reiterate on HLBank’s healthy capitalization, profitability and asset quality in addition to possessing strong liquidity (ref. table below).

Financial Year	NPL Ratio (%)	Trailing 12-month NIM (%)	Tier 1 Capital Ratio (%)	Loans-to-Deposits (%)
1HFY14	1.33	1.91	11.84	79.90
FY13	1.40	1.69	11.93	78.63
FY12	1.69	1.83	11.58	73.61

Source: Bloomberg

 

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