RHB FIC Credit Market Update - 16/4/15

16 April 2015

Credit Market Update

Malaysia’s USD1.5bn Sukuk 6x Oversubscribed; AMMB 8/19 MYR Senior Stays Attractive

REGIONAL                                                                                      

¨      CDS market largely unchanged as premiums saw a slight uptick of 0.5bps to 107bps amid new bond sales of USD3.07bn yesterday. Credit markets opened to a supportive UST curve, which bull flattened overnight by 1-3bps ahead of weaker US industrial production of -0.6% MoM (prior: 0.1%). In the secondary market, we noted sharp yield compression (10-50bps) in Korean policy banks ahead of Industrial Bank of Korea’s new bond sale today, led by EIBKOR 16,-25, and KDB 15-21s. On the primary front, Malaysia’s Global Sukuk drew a strong response of USD9.0bn in orders (BTC: 6.0x), with participation in the 10y sukuk by investors in Malaysia (28%), Middle East (24%) and Asia ex-Malaysia (22%). The final print was USD1.0bn 10y and USD500m 30y sukuk at T+115bps (IPT: T+135bps) and T+170bps (IPT: T+185bps) respectively. Meanwhile, new sellers expected today are China China Cinda (HK) Holdings Co. (NR/BBB+/NR) with 5y and 10y bonds at IPTs of T+215bps and T+265bps respectively; and Industrial Bank of Korea (Aa3/A+/AA-) with 5y bonds at an IPT of T+90bps.

¨      SORs bull steepened as USTs outweigh strong domestic retail sales. Swap curves bull steepened with the 3y closing 2bps lower at 1.42% while 7y stood at 1.78% mirroring USTs which tightened 1-3bps despite domestic retail sales surging 15.8% yoy in March (prior: -5%, consensus: 3%). There was continued interest in CHEUNG Pc16 and GEMAU 17, while CENCHI 17 saw some selling pressure. In the primaries, Indus Gas (NR) priced its SGD100m 3y at 8%, and Sinar Mas (NR) is in the pipeline for a potential multicurrency bond of about SGD1bn to fund expansion plans in Indonesia. Meanwhile, Guthrie (NR) offered to buy back its SGD125m 3.7% 2018 bond at 101.85 and amend terms to include call option to redeem notes at 100 plus 1.85% prepayment fee of nominal amount and interest accrued.

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MALAYSIA

¨      Relatively quiet Ringgit market as focus was on Malaysia Global Sukuk. The government sold 10y (USD1bn) and 30y (USD500m) Sukuk at T+115bps and T+170bps respectively, approximately 8bps-14bps tighter than existing PETMK comparables. Meanwhile, secondary flows for govvies stayed quiet at MYR2bn, with benchmark yields generally moved sideways. On the corporate front, total activity breached MYR1bn, mainly concentrated in long-duration bonds. The top traded bonds mostly ended in positive territory – notably 1bps-9bps tightening in Telekom ‘23 and ‘24s on combined MYR125m. We also saw yields narrowed marginally in banks T1 and T2 from Maybank, Public and RHB; although Maybank LT2 12/23c18 widen 2bps to settle at 4.549%.

¨      On the primary market, a total of MYR1.1bn issued - Point Zone printed MYR900m non-rated sukuk (6y-8y, 5.75%-5.95%) and RHB Investment Bank issued MYR200m B3T2 4/25c20 at 4.95% (AA3). Separately, Bank Islam and UOBM set up new MYR1bn Subordinated Programme; while Maybank to sell Samurai Bond at IPT: 3y (swap + 15bps-20bps) and 5y (Swap + 20bps-25bps).

TRADE IDEA: MYR

Bond(s)	AMMB Holdings Berhad (AMMB) AMMB 8/19 Senior (RAM: AA3) (last price: 98.828, MTM-ytm: 4.683%; last done: 4.778%; 5y-MGS+112bps) (O/S Amount: MYR500m)
Comparable(s)	AmIslamic Bank Bhd (AISL) AISL 3/24c19 B3T2 (RAM: AA3) ( last price: 100.74, MTM-ytc: 4.802%; last done: 4.857%; 5y-MGS+120bps ) (O/S Amount: MYR150m) AmBank (M) Bhd (AmBank) AmBank 4/17 Senior (RAM: AA2) (price: 103.29, MTM-ytm: 4.133%; last done: 4.13%; 3y-MGS+78bps) (O/S Amount: MYR225m)
Relative Value	We reiterate our preference for AMMB 8/19 Senior based on its existing valuation and spread versus subdebt. We note that the bond bears one of the highest absolute yields for a senior debt among domestic, non-government-owned commercial banks. On its own curve, AMMB 8/19 looks at least 25bps wide in terms of yield against AmBank 4/17 Senior after adjusting for tenor (10bps/year), rating (10bps/notch) and structural subordination (10bps). In addition, the senior-subdebt spread against its Islamic division’s AISL 3/24c19 B3T2 is only 8bps, favouring AMMB 8/19 from seniority angle. We also note that AMMB 8/19’s larger outstanding size of MYR500m offers better liquidity.
Fundamentals	We are comfortable with AMMB’s credit profile after considering its: 1)     Diversified business portfolio and strong franchise in retail and SME lending; 2)     Significant non-interest income contribution, approximately 35% of total income; 3)     Support from strategic shareholder, Australia and New Zealand Banking Group Ltd (ANZ), which has benefited its risk management practices and kept impaired loans ratio at bay at 1.88% (LCR: 106.0%); 4)     Solid capitalization metrics, reflected by CET1, Tier-1 and total capital ratios of 10.4%, 11.8% and 16.1% repsectively; and 5)     Moderate-to-high likelihood of support as the sixth largest bank in Malaysia, from both the government and ANZ; Our view on AMMB also considers its weaker liquidity in terms of loans-to-deposits of 95.3% versus peers (industry: 81.8%). In addition, AMMB’s asset quality is slightly weaker than the industry average of 1.66%, with its credit exposure to retail and SME lending being more sensitive to economic cycles. *All financial data as of 31-Dec 14