RHB FIC Credit Market Update - 19/5/15

19 May 2015

Credit Market Update

Credit Held Firmly Amid Quality Supply from Bank Seniors; Decent Concession in New ICBC Senior

REGIONAL

¨      Heavy primary tap from FIs; Westpac and Beijing State-Owned Assets led flows. Asian credit costs held stable yesterday reflected by the iTraxx AxJ IG closing value of 105bps. Secondary volumes were subdued amid a spree of new bond sales, with yields generally adding 2-3bps. In the real estate space, IG yields closed 5bps wider on average despite slightly better data on China’s April property price movements, which showed new-home prices fell in 47 cities of the 70 tracked, compared to declines of 49 in March while prices rose in 18 cities compared to 12 the prior month; this likely reflects ongoing perceptions of sustained weakness in prices and markets yet to be convinced by the PBoC’s recent stimulus measures. In yesterday’s primary session, Westpac Banking Corp (Aa2/AA-/AA-) sold USD2.5bn seniors comprising USD1.0bn 3y notes at T+65bps (IPT: T+70bps), USD500m 3y FRNs at 3mL+43bps and USD1.0bn 5y notes at T+80bps (IPT: high T+80bps); Beijing State-Owned Assets (A2/A/A) tapped USD300m 5y notes at T+160bps (9x oversubscribed) and USD700m 10y notes at T+205bps (6.8x oversubscribed); Industrial and Commercial Bank of China Limited (ICBC, A1/A/A) tapped USD500m 5y seniors at T+120bps (IPT: T+145bps); China Aoyuan Property Group Ltd (B2/B/B+) sold USD250m 3y notes at 10.875% (IPT: 11.625%); Hsin Chong Construction Group (NR) sold USD50m 8.75% 2018 notes at 101.25. Today, we expect to see ICBC Singapore (A1/A/NR) price a USD 3y senior at an initial target of T+125bps. In the pipeline, Australia & New Zealand Banking Group Ltd Bank (Aa2/AA-/AA-) is planning a USD 5y Reg S covered bond (expected issue rating: Aaa/NR/AAA), while China Vast Industrial Urban Development (NR) is meeting bond investors from 21-May onwards. Meanwhile, the economic data lineup for the week includes US housing starts, jobless claims, home sales and inflation as well as China’s HSBC manufacturing PMI.

¨      SOR curve moved lower in Singapore. SOR curve inched 3bps lower with benchmark 3y, 5y and 10y yields decreased to 1.565%, 1.995% and 2.53%. On the supply side, Golden Agri Resources to retap SGD bond at 5.5%, maturing 2018.

MALAYSIA

¨      Corporate bonds ended mixed; MYDIN issued 3y at 4.2%. Local govvies moved sideways with activity were thin on the benchmarks. Meanwhile corporate market closed mixed amid active trading volume of MYR596m, above YTD daily average of MYR500m. Among the top traded were RHB B3T2 7/24c19 tightened 20bps to close at 4.51% on MYR80m trades; while PLUS 1/38 inched 0.6bps higher to 4.729%. On the primary side, MYDIN issued MYR55m 3y Danajamin-guaranteed bond at 4.2% (MGS3y+84bps), increase the total bond issuances from the issuer to MYR220m.

TRADE IDEA: USD

Bond(s)

Industrial and Commercial Bank of China (ICBC) New ICBC 2.625% 20 Senior (A1/A/A) (YTM: c.2.746%; T+120bps) (Amt o/s: USD500m)

Comparable(s)

China Construction Bank Corp, CCB 3.25% 19 (A1/A/A) (Price: 102.50; YTM: 2.605%; T+107bps) (Amt o/s: USD600m) Agricultural Bank of China, AGRBK 2.75% 20 (A1/A/A) (Price: 100.27; YTM: 2.692%; T+116bps) (Amt o/s: USD500m) Woori Bank, Woori 2.625% 20 (A1/NR/A-) (Price: 100.77; YTM: 2.466%T+94bps) (Amt o/s: USD350m)

Relative Value

We think the new ICBC 5y senior offers decent concessions against peers, priced at T+120bps and ytm of 2.746% is fairly attractively against the peers. On a duration and rating adjusted basis, we see potential pick-up of 5-9bps against similar China-based peers like CCB 3.25% 19 and AGRBK 2.75% 20, which now have tighter valuations, and as much as 28bps against Woori 2.625% 20.

Fundamentals

We consider ICBC to be fundamentally solid on these key considerations:

1)     China’s largest commercial bank by asset size, with a share of 12% of total system assets and leading shares of 13% and 14% in system loans and deposits respectively;

2)     Extreme likelihood of systemic support, considering ICBC’s effective 73% ownership by the state, its significant scale of operations and its importance to China’s financial system. ICBC is also classified as a domestic systemically important bank (D-SIB) that must meet stricter capital requirements than “non-D-SIB” banks, which on average have 230bps lower T1 ratios;

3)     Sound profitability amid interest rate rebalancing, with 1Q15 net interest margin and return on assets recorded at 2.65% (4Q14 industry average: 2.70%) and 1.35% (industry: 1.40%) respectively;

4)     Diversified loan base mitigates asset quality deterioration. Gross NPL ratio remains manageable after rising to 1.29% as of 31-Mar 15 from 0.97%, while loan loss coverage of 180.41% is still sizeable in our view; and

5)     Ample liquidity and good access to capital, supported by its strong deposit base and capital market access. In our view, ICBC’s liquidity position remains strong based on its current loan/deposit ratio of 68.59% (31-Mar 14: 66.79%) while considering its low wholesale funding reliance (incl. repos) of 3.72% of total funding as of 31-Mar 15.

*all financial data as of 31-Mar 15