RHB FIC Global Sukuk Markets Weekly - 15/5/15

15 May 2015

Global Sukuk Markets Weekly

Sukuk Unperturbed by Treasuries; Hong Kong, Indonesia in the Pipeline; We Prefer GBHK 19

Highlights & Performance

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¨   Market unperturbed by selling in US Treasuries. Global sukuk yield (weighted by amount outstanding) under our coverage tightened 1.8bps to 2.861% (average duration: 4.321y) during the week, led by DPWDU 17, DAMACR 19 and MALAYS 15. The Bloomberg Sukuk Market Return Index (BMSSUTR) inched up 0.06% W-o-W (vs. -0.08% in week prior) to 119.90, bringing YTD returns to 1.44% (vs. 1.38% in week prior). Whereas, the Dow Jones Sukuk Total Return Index (DJSUKTXR) declined 0.08% W-o-W (vs. -0.12% in week prior) to 155.18, bringing YTD returns to 1.76% (vs. 1.84% in week prior). Modest improvements in jobs data (i.e. NFP, unemployment rate and initial jobless claims) left investors anxious over timing of the first Fed hike resulting in a UST curve steepener over the week. Meanwhile, risk sentiments eased in EU with Greek’s repayment to IMF and the Conservatives winning the UK elections. The top 5 gainers in the BMSSUTR during the week were SECO 17, SIB 18, QIIK 17, ISDB 16 and TAMWEE 17 bringing a total market value gain of USD3.6bn.

¨   Risk premiums continued to ease as oil prices rise c.2% W-o-W to USD66.93/bbl. Overall, 5y CDS of countries within our coverage have tightened due to the rise in oil prices, easing fiscal balances. In the Middle East, Bahrain tightened the most by 6bps W-o-W to 280.8bps while in the UAE, Dubai and Abu Dhabi tightened by 5bps to 193.12bps and 1bp to 60.07bps respectively. In Turkey, the 5y CDS tightened 10bps W-o-W to 212.43bps after President Erdogan visits Germany this week to build stronger economic ties, despite weaker current account data released and political uncertainty during the week. Malaysia and Indonesia risk premiums remained stable.

¨   In the latest Malaysia Islamic Finance Centre (MIFC) report on the first quarter of 2015, it stated that the weakness in sukuk issuances in the first quarter may be temporary, in line with our earlier view. There have also been a growing interest in “green sukuk” or otherwise known as Socially Responsible Initiative (SRIs) as Khazanah announced plans to issue a the country’s first social impact sukuk. This is also in addition to projected global growth by the IMF at 3.5% in 2015 from 3.4% in 2014 due to low inflation, accommodative monetary conditions and sustained global trade. In our view, we believe corporates will continue to tap the market, nevertheless more so sovereigns in 2015 (refer to Chart of the Week).

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
Hong Kong (Aa1/AAA/AA+; Sta)	·         Announces USD1bn 5y sukuk, having the same tenor and size as its debut sukuk which pulled in 4.7 times (x) bid-to-cover (BTC) in September 2014. ·         Moody’s assigns (P)Aa1 to the sukuk issued by Hong Kong Sukuk 2015 Ltd, the special purpose vehicle (SPV) established by the Hong Government sukuk. ·         Proceeds to be directed for no less than 34% of the lease assets (a Wakalah portfolio managed by the Hong Kong government), and the remaining can hold not more than 66% to enter into a commodity murabahah (CM) arrangement.	Positive. Given the strong demand for the Malaysia USD sukuk (c. 5-6x BTC), this issuance should be well received. The first Hong Kong issuance that was issued in September last year was priced at 2.005% (c.23 bps above 5y USTs), and we believe that pricing could be tighter given the indication in previous sukuk issuances this year so far. The GBHK ((P)Aa1/AAA/NR) (YTM: 1.85%; z-spread: 35.69bps) yield was relatively unchanged during the week (-4bps W-o-W).

CREDIT BRIEF

Company/Issuer	Sector	Country	Update	RHBFIC View
Qatar International Islamic Bank (QIIB, A2/NR/A+; Sta)	Banking	Qatar	·         Moody’s upgrades QIIB’s long term issuer rating to A2 from A3 mainly due to: ·         Improved and consistently strong asset quality performance (NPL - 2014: 1%; 2010: 4%) ·         Solid capitalization, liquidity and funding profile; tangible common equity to risk weighted assets at c. 20% in 2014, capitalization levels at 17% vs. peer median at 12%. However weighed by: ·         High borrower and sector concentrations (real estate concentration: 38% of financing book) ·         Risk management challenges from sharp financing growth ·         Margin pressures due to decline in profitability ·         QIIB’s rating is also supported by four notches due to systemic support	Positive. QIIB maintained strong metrics despite falling oil prices, however the net profit margin has been on a declining trend, from 3.4% in 2010 to 2.2% in 2014, in addition to being lower than the peer average of 2.5%. This also led the fall in net income to tangible assets to 2.2% in 2014 from 3.1% in 2010. Nevertheless, 1Q15 already showed a 4% Y-o-Y growth in net profit, showing a promising start to the year. 1Q15 also showed NPL ratio below 1%, the lowest in the banking sector. QIIK 2.688% 10/17 (A2/NR/A+) (YTM: 1.7%; z-spread: 73.82bps) yield tightened 6bps W-o-W.

TRADE IDEA

¨                  We prefer GBHK 19 vs. ISDB19

Bond	GBHK 2.005% 9/19 ((P)Aa1/AAA/NR) (YTM: 1.85%; z-spread: 35.69bps) (Amount: USD1bn)
Comparable	ISDB 2.111% (Aaa/NR/AAA) (YTM: 1.80%; z-spread: 30.17bps) (Amount: USD1.5bn)
Relative Value	We like GBHK 19 vs. ISDB 19 due to its higher yield (+5bps), z-spread pick-up of 5.52bps and shorter duration by 0.24 months.
Fundamentals	The Hong Kong government is one of the most open economies and business-friendly environments in the world. Real GDP has doubled in the last two decades, while GDP per capita has reached USD39,994 making it among the highest in Asia. Hong Kong’s stock market is the third largest in Asia after Tokyo and Shanghai, with a total market capitalization of HK25trn. The economy is highly reliant on services (93% of GDP) mainly in the import/export, wholesale and retail trades (c.25% of GDP) and financing & insurance (16.5% of GDP). Hong Kong aims to become Asia’s Islamic financial hub, issuing its second sovereign sukuk, as well as preparing the Ningxia province for an USD1.5bn sukuk issuance as early as this year.