RHB FIC Credit Market Update - 21/7/15

21 July 2015

Credit Market Update

                                       

Rising Flows as China and Greece Concerns Subside; Hold KTB B3T2 7/25c20

REGIONAL                                                                                      

¨      Relatively stable market tone. Credit protection costs via the iTraxx AxJ IG traced lower to 104.5 as investor sentiment improves. Overnight, the UST bear flattened as yields widened 2-5bps on easing uncertainty given the initial payment for Greece’s debt, renewed concerns over a Fed rate hike, and heavy US corporate issuances (estimated c.USD15bn).  In the secondary markets, IG banks and corporate yields under our coverage widened 1-2bp to 2.18% and 3.37% respectively. With Brent oil prices dipping lower to USD56.5/bbl, IG O&G names moved sideways with notable trades including RILIN 25-49s, SWIPRO 16-22s, and CNOOC 16-21s. In the HY space, Chinese HY real estate names continue to see robust buying interest with yields tightening 8bps to 8.99% with notable gainers such as COGARD 19-23s, LNGFOR 19-23s, SHIMAO 22s, and GRNCH 18-19s (rating upgrade by S&P to BB/sta; the company is meeting investors for an exchange offer for its 18-19s for a new USD bond due 2020). On the other hand, Xinjiang Goldwind (A1) sold USD300m 3y Green bonds at 170bps (BTC 4.7x; IPT +180bps), taken up mainly by banks (70%), fund managers (17%) and sovereign wealth funds (10%); while CCB Leasing (A2/A/A) is to sell USD 5y bonds (IPT: +215 bps), likely to price today.

¨      Flows pick-up as Greece & China fears subside. The short-to-mid benchmark curve rose by around 7.5bps, with the 3y and 5y closing at 1.76% and 2.24% respectively, in tandem with Treasuries as Yellen has continually hinted at a higher likelihood of a 2015 rates lift-off. With fears from Greece and China largely abated at this moment, we saw better demand in short-dated property names (HKLSP, CITSP) and NUSSP while selling was observed in perpetuals like SPOST, OLAMSP and GENSSP.

MALAYSIA

¨      Govvies yields supported by improved Greece sentiment; weaker results from CIMB Thai (Credit Update). Local govvies ended on positive tone as risk sentiment improved on Greece developments. Notably, buying interests were seen in the 10y-MGS 9/25 which plunged 3bps to settle at 3.98% toward the end of the day. Meanwhile, corporate market stayed muted yesterday with only few names exchanged hands. Among the visible names were government-guaranteed BPMB 9/21 fell 1.5bps to 4.12%; while OCBC LT2 8/22c17 inched 4.8bps higher to 4.351%.

TRADE IDEA: MYR

Bond(s)	Krung Thai Bank (“KTB”) KTB B3T2 7/25c20 (RAM: AA2) (Last trade: 8-July; Price: 100.44; Yield: 4.999%; MGS5y+ 146bps) (Issue size: MYR1.0bn)
Comparable(s)	HLB B3T2 6/24c19 (RAM: AA2) (Last trade: 17-Jun; Price: 100.3; Yield: 4.717%; MGS5y+118bps) (Amt O/S: MYR500m) CIMB Thai B3T2 7/24c19 (RAM: AA3) (Last trade: 23-Jun*; Price: 102.18; Yield: 4.997%; MGS5y+146bps) (Amt O/S: MYR400m) *Non-odd lot trade.
Relative Value	We continue to see value in KTB B3T2 7/25c20 was last traded at 4.999%. Compared to the Malaysia peers, KTB B3T2 offer a pickup of 28bps over similarly rated HLB B3T2 and was trading at a similar level as one-notch lower rated CIMB Thai B3T2, although KTB B3T2 is one year longer in tenure. We opine the higher yield partly prices in the political risk of Thailand.
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)     Systemically 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 times 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 were 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.

CREDIT UPDATE

Company/ Issuer	Sector	Country	Update	RHBFIC View
CIMB Thai (RAM: AA2)	Banking	TH	Based on various news reports, CIMB Thai’s 1H15 NP -44% yoy to THB348m on the back of higher provisioning. NPL rose to 3.9% (FY14: 3.3%), near 5 years high. Slight decrease in loan loss coverage to 94.3% (FY14: 95.2%). Mild tightening in NIM to 3.05%.	Negative. Economic and political challenges in Thailand will continue to pressure the asset quality of Thailand banking system, particularly on smaller scale banks which generally have higher exposure in household and small-medium enterprise sector.