RHB FIC Credit Market Update - 15/5/15

15 May 2015

Credit Market Update

Credits Resilient on Active Flows; AGRBK Sold USD1.25bn Seniors, Preference for 5y Note                                       

REGIONAL                                                                                      

¨      Credits resilient on active flows; Agricultural Bank of China (“AGRBK”) taps for USD1.25bn. The iTraxx AxJ IG moderately widened 1.3bps to 108bps amid active flows. Despite selling in USTs, particularly in the 7y and 10y where yields rose 2.9-4.4bps, Asian credits were sturdy as yields shed 1-2bps on average. New issues Huawei 25 and CHGDNU 25 gained further by tightening 5-10bps in yield. We also witnessed ongoing interest in mid-dated Indian seniors including ICICI 16, UNBKIN 17 and CBKIN 18, with yields compressing 2-3bps. On the primary front, China Minsheng Bank (NR/BBB/BB+) tapped its first USD600m 3y notes priced at T+145bps (IPT: T+165bps) while Agricultural Bank of China (New York) (ultimate parent rating: A1/A/A) sold a series of senior notes including USD500m 3y at T+115bps, USD250m 3y FRNs at 3mLIBOR+91bps and USD500m 5y at T+130bps. We find the 5y fixed-rate seniors to be better positioned than the 3y (see Trade Idea below). On economic data, US initial jobless claims data was positive as the print declined to 264K (consensus: 273K; prior: 265K); today’s data releases include industrial production, consumer sentiment and inflation prints. In China, we noted a significant jump in foreign direct investment of 10.5% YoY versus market estimates of 2% and a prior figure of 2.2%.

¨      Active SGD primaries as SORs decline. The short-to-mid swaps continued to narrow yesterday, with the 3y and 5y tightening by -8.5bps (to 1.63%) and –5.25bps (to 2.08%) respectively. We saw mixed flows in the REITs and property space ahead of the primaries, some of which are from this sectors. The primary sector was active yesterday, with China Metallurgical Group Corp (Baa3/BBB-/-) printing a SGD300m 2y at final price of 3% with demand driven mostly from funds (80%), Soilbuild Business Space REIT (BBB-) printing a SGD100m 3y at final price of 3.45% while Hotel Properties (NR) issued a mini-print SGD65m 6y at 3.85%.

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MALAYSIA

¨      3y-GII priced at 3.508%; Robust corporate flows amid quiet primary. On the govvies front, investors were focused on the newly issued MYR4bn 3y-GII 5/18, which ended on strong BTC of 2.6x, averaging at 3.508%. Secondary transactions were relatively quiet at MYR2.6bn as investors were staying sidelines ahead of 1Q GDP data to be released today. On the corporate market, a total of MYR691m exchanged hands, led by Cagamas complex on combined MYR190m trades settling at 3.414%-4.334%. Elsewhere, YTLPI 8/18 tightened 4bps to 4.289% with MYR35m reportedly done. On the primary side, DRB Hicom issued MYR50m Pc20 at 7.48% while Sunway printed 5y at 7% (MYR100m), both rated at A2.

TRADE IDEA: USD

Bond(s)	¨                  Agricultural Bank of China (New York) (AGRBK, ultimate parent ratings: A1/A/A) ¨                  AGRBK 2.75% 20 (yield: 2.647%; T+115bps) (o/s amount: USD500m) ¨                  AGRBK 2% 18 (yield: 1.926%; T+100bps) (o/s amount: USD500m)
Comparable(s)	Woori 2.625% 20 (yield: 2.44%; T+94bps)(A1/NR/A-) (o/s amount: USD350m) ANZ 1.65% 19 (yield: 2.50%; T+159bps)(Aa2/AA-/NR) (o/s amount: USD15.8m) ANZ 1.81% 18 (yield: 2.307%; T+139bps)(Aa2/AA-/NR) (o/s amount: USD35.8m)
Relative Value	We prefer the new AGRBK 2.75% 20 senior over the AGRBK 2% 18. AGRBK 20 trades 60bps wider than AGRBK 18 in adjusted yield (5bps/year for tenor), while also trading 20bps wider and offering better liquidity than the Woori 20 senior. In addition, AGRBK 20 is reasonably priced compared to ANZ 19, which is a significantly smaller issue. On supply risk, we expect expanding overseas operations for Chinese state banks to continue and for more senior supply to follow suit; however, we think demand for Chinese seniors looks sustainable on generally tight valuations within the USD senior space.
Fundamentals	AGRBK possesses a strong credit profile via its holding company, Agricultural Bank of China Ltd:  1)     Extremely strong government support, based on the state’s 82% ownership and track record of government support for the bank. The bank’s strategic importance to China in terms of financial inclusion reinforces our view that systemic support will be forthcoming; 2)     Robust profitability, generating net interest margins of 3.56% on the back of highly favourable funding costs; 3)     Modest asset quality, given that NPL ratio is the highest among major Chinese banks at 1.65%, although this is cushioned by substantial allowances for loan losses of 268%; 4)     Decent capitalization, reflected by CET1, T1 and CAR of 9.38%, 10.1% and 13.5% respectively; and 5)     Stable funding and sufficient liquidity, evidenced by a loan/deposit ratio of 64.2%, supported largely by its extensive network in rural areas.    ¨                    ¨                  *All financial data as of 31-Mar 15