RHB FIC Credit Market Update - 23/6/15

23 June 2015

Credit Market Update

                                       

Risk Sentiment Improves on Greek Progress; Baidu and SingTel to Price USD Papers Today; New KTB B3T2 Priced Attractively

REGIONAL                                                                                      

¨      Risk aversion abates on positive Greece developments; Baidu and SingTel to price USD prints today. Risk sentiment improved a fair deal with the iTraxx AxJ IG declining 3.4bps further to 106.6bps while Chinese markets were closed for the Dragon Boat Festival. There was renewed optimism seen in regional equities markets, the Hang Seng and Nikkei recovering 1-2%, ahead of the Greece emergency summit, which subsequently turned out to be productive as EU leaders expressed confidence that Greece will eventually reach an agreement (with creditors) on reform proposals within 48 hours. Accordingly, the news along with better existing home sales data (May: 5.35m; prior: 5.04m) drove USTs down as the curve bear steepened 4-12bps. Meanwhile, secondary APAC credits ended softer, with average IG corporate and bank yields adding 4-5bps and 1-2bps respectively. Conversely, HY corporates benefitted from the increase in risk appetite as yields shed 2bps in general. In the news, China Shanshui Cement’s USD500m 2020 notes fell as new execs joined its board. On the primary front, we expect to see new deals from 1) Baidu (A3/NR/A) which is expected to price USD 5y and 10y notes today at initial price targets of T+160bps and T+200bps respectively; and 2) Singapore Telecommunications Ltd (Aa3/A+/A+) with a new 10y print starting at T+110bps. Separately, Tianjin Binhai (NR) will begin roadshows for its USD offering (expected rating: Baa1/BBB+/A-) guaranteed by Binhai Jiantou (Hong Kong) Development Ltd. On economic data, today’s key releases from the US include durable goods orders, new home sales and the Richmond Fed manufacturing index. In China, there was a slight pickup in the HSBC China Manufacturing PMI to 49.6 (consensus: 49.4; prior: 49.2).

¨      SOR volatility; ARTSP prints Pnc5. We saw a reversal in the SORs, with a corresponding widening by around 4bps (the 2y and 5y closed at 1.67% and 2.13% respectively). We saw some support yesterday as there was inkling of a Greece resolution, with some buying into property names like CITSP and FCLSP. In the primaries, Ascott Residence Trust (Baa3) is printing a Pnc5 at around 5%. It has an existing ARTSP PcOct-19 trading around 102.5.

¨                   

MALAYSIA

¨      Flattish credit yields; Krung Thai Bank priced Ringgit B3T2 10nc5 at 5.1%.  Credit market moved sideways on relatively strong activity of MYR727m. Perps from MAHB and DRB drew near to their previous respective levels of 5.09% and 7.147%. Elsewhere, top-traded power bonds were also flattish such as Malakoff 12/19 and SEB 7/29. Meanwhile, Govvies started the week on a positive tone despite a quiet Monday seeing just MYR2.3bn crossed. On the primary front, Krung Thai Bank priced MYR1bn 10nc5 B3T2s at 5.1% (rated AA2) while investors await the auction announcement for the 5y-GII 8/20 reopening, which is expected to come anytime soon.

TRADE IDEA: MYR

Bond(s)	Krung Thai Bank (“KTB”) KTB B3T2 7/25c20 (RAM: AA2) (Target issue date: 6-July; Price: 100; Yield: 5.1%; MGS5y+ 109bps) (Issue size: MYR1.0bn)
Comparable(s)	HLB B3T2 6/24c19 (RAM: AA2) (Last trade: 17-Jun; Price: 100.3; Yield: 4.717%; MGS5y+71bps) (Amt O/S: MYR500m) CIMB Thai B3T2 7/24c19 (RAM: AA3) (Last trade: 18-Jun; Price: 102.55; Yield: 4.897%; MGS5y+89bps) (Amt O/S: MYR400m)
Relative Value	We view that the new KTB B3T2 7/25c20 is priced attractively at 5.1%. Compared to the MYR peers, KTB B3T2 offer a pickup of 20bps-38bps over similarly rated HLB B3T2 and one-notch lower rated CIMB Thai B3T2, although KTB B3T2 is one year longer tenure.
Fundamentals	KTB’s credit profile is supported by the following: 1)     Strong linkage with the Thai government. KTB is owned by the Thai Government via The Financial Institutions Development Fund. The close linkage with the government is further demonstrated with significant representation on KTB’s board (where 7/11 of its board members are current/ex government employees). KTB is also involved in payroll, education and pension-fund disbursement services, as well as budgeting, accounting and procurement systems for the government. 2)     Systemic important bank. KTB is one of the top 4 banks in Thailand, controlling approximately 18% of deposit market shares and 15% of loan market shares. With strong government linkage on top of dominant domestic presence, we expect high likelihood of government support in time of stress. 3)     Healthy funding profile. LDR is manageable at 87%. Supported by operational ties with the government, 28% of KTB’s deposit base as of Dec-14 was derived from Government and SOEs. 4)     Strong capacity to absorb losses. KTB’s CET1, T1 and Total Capital stood at 10.4%, 10.8% and 14.1% respectively. NPL coverage ratio is robust at 115%. 5)     Weakening asset quality. NPL deteriorated to 2.7% in 1Q15 (FY14: 2.3%) amid the weak economic condition and high household debt. Nevertheless, we view that KTB has adequate capitalization and provisions to withstand the further pressures in asset quality. ¨                  *Financial data as at Mar-15 unless specified.