Moody’s Places Positive Outlook on DIB; IDB Prints USD1.25bn Deal

05 December 2016

Global Sukuk Markets Weekly

Moody’s Places Positive Outlook on DIB; IDB Prints USD1.25bn Deal

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index relatively flat at 104.0 (-0.02%) and 160.3 (-0.01%) respectively. The index yields rose 7.6bps to 2.873%, led by INDOIS 9/24-3/26 (+14-15bps to 4.24-4.53%), JAFZSK 6/19 (+15bps to 2.88%), ALDAR 12/18 (+13bps to 2.58%) and EIBUH 5/21 (+12bps to 3.33%). OPEC agreed to cut supplies by 1.2m b/d (or about 1% of global output) to 32.5m b/d, sending oil prices soaring to USD50.47-54.46/bbl range. The deal is to last six months starting Jan-17, extendable if the group intends to lengthen the cuts on 25 May. On 9 Dec, the group plans to meet again with non-OPEC producers. Oil prices have continued to rally on expectations of renewed Iran sanctions by the US Senate of another 10 years.

¨   Bank Negara Malaysia (BNM) announced a range of measures to enhance liquidity of the foreign exchange market which includes: (1) requiring exporters to convert a minimum 75% of export proceeds in foreign currency into MYR (from previously 100%), with moderately attractive special deposit rate of 3.25% vs. fixed deposit rate of around 3%, (2) some additional restrictions on FX investments; and (3) more liberalised onshore ringgit hedging. Bank Indonesia (BI) expects loan growth to be at 7-9% in 2016 and 10-12% in 2017, while economic growth to be at 5% in 2016 and 5-5.4% in 2017. On the other hand, Saudi Arabia’s M3 money supply growth was relatively flat at 0.6% YoY in Oct-16 (from -4.0% YoY in Sep-16), with its net foreign assets falling 2% to SAR2.0bn in Oct-16. Turkey’s trade balance deficit tightened to USD4.16bn in Oct-16 from USD4.36bn in Sep-16.

¨   Turning to USD primaries, Islamic Development Bank (IDB, Aaa/AAA/AAA) priced USD1.25bn 5y sukuk at 2.263%. The deal was priced at a lower spread of MS+45bps compared with Mar-16 issuance of MS+50bps. Elsewhere, Moody’s revised Dubai Islamic Bank (DIB)’s outlook to positive from stable, on expectations that the bank will (1) sustain improvement in asset quality and loan loss coverage as reflected in its non-performing financing ratio of 4.5% as at Sep-16 (from 14.7% as at Dec-12) and (2) improve risk management and control infrastructure.

SOVEREIGN/CORPORATE UPDATE

Country/Issuer	Update	RHBFIC View
South Africa (Baa2/Neg; BBB-/Neg; BBB-/Neg)	South Africa’s ratings were left unchanged by Moody’s at Baa2/Neg, while Fitch revised its outlook to Neg from Sta with ratings left unchanged at BBB-. S&P left its ratings unchanged on its sovereign rating review (2-Dec) at BBB-/Neg, but warned that political interference in government policy could lead to a downgrade.	Neutral. South Africa remains fragile given its weak growth, and interest rate increases may risks debt levels stabilising by FY 18/19. Political uncertainty remains a concern, as well as the government’s unclear economic reforms. South African President Jacob Zuma has been accused of corruption since taking office in 2009. SOAFSK 6/20’s yield widened 7bps during the week to 3.4%.
Islamic Development Bank (IDB) (Aaa/Sta; AAA/Sta; AAA/Sta)	IDB priced its 5y USD1.25bn sukuk at 2.263% (MS+45bps; IPT+50bps). This issuance is under the EMTN programme with a limit of USD25bn. This will make it IDB’s 2nd sukuk deal this year. In terms of final allocation, it was well diversified with 72% allocated to MENA region, 25% to Asia, and 3% to Europe. Central banks and official agencies were allocated 90% followed by the 10% to banks.	Positive. We feel that the newly mandated ISDB 2021’s IPT MS+45bps is fair, offering a slightly more attractive rate than the last issuance in March 2016 (ISDB 1.775% 3/21), priced at MS+50bps. Fundamentals of ISDB remains strong, given its: ·      high liquidity levels (liquidity assets/adjusted total assets: 26%), ·      remaining well diverse with only 35% of concentration of top 5 exposures to total loans versus the peer average of 63% (includes IBRD, AfDB, IaDB, and AsDB), ·      high profitability rate compared to other MDB peers with its net income to average adjusted asset at 1.0 compared to a peer average of -0.2, ·      high capitalisation rate of (equity/assets: 49%) versus the peer average of 25.6%, ·      NPLs have been stable in the last few years with its NPLs to operating assets at 0.96% in 2015 (2014: 1.16%), and provisions to NPLs at 244% (2014: 239%).