Thursday, May 25, 2017

Moody’s downgraded the ratings of 26 Chinese government-related issuers (GRIs) by one notch from their previous ratings following the sovereign downgrade (refer to Table 3). Elsewhere, S&P revised PT Chandra Asri Petrochemical Tbk’s outlook from positive to developing (affirming its ratin


25 May 2017


Credit Markets Update
                                               
FOMC Minutes Disappoints; Markets Brush Off China Rating Cut
MYR Credit Market:
¨      MYR and MGS brushes off the China downgrade.  The downgrade of China’s rating by Moody’s had little effect on most of EM Asia’s assets. The MYR followed the same shift as it retraced early reactions to end largely unchanged at 4.2930/USD (+0.01%). The MGS saw some profit taking as the 5y, 7y and 10y MGS ended the day higher at 3.57%, 3.80% and 3.88%, rising 1.8bps, 0.8bps and 1.5bps respectively, ahead of the release of the FOMC minutes. The results of the FOMC had been more dovish than many expected with little insight on a June hike. This should be supportive of yields and the MYR as the OPEC, which is to conclude today is expected to be further supportive of commodity exporters.
¨      Trading weaker after a strong performance. Trading in Malaysian govvies fell to MYR2.0bn traded. Trading was once more largely concentrated on the short end of the curve, as the 17s, 18s and 19s contributed to MYR224m, MYR317m and MYR637m respectively, accounting for more than half of all government bond trades. Trading in corporates remained strong as MYR365m changed hands. Most trades were concentrated in infrastructure names as PASB 16/06/17 saw MYR100m change hands while the recently issued YTL Power 27s saw another MYR40m, each traded at 3.43% (-5.1bps) and 4.98% (-0.4bps)  respectively.
¨      DanaInfra prints MYR4.5bn bonds. DanaInfra’s large issuance of sukuks which closed last week saw 7 tranches totalling MYR4.5bn issued after MYR2.68bn was issued in March. Maturities issued were for 5y, 7y, 10y, 15y, 20y, 25y and 30y with MYR750m, MYR700m, MYR500m, MYR700m, MYR350m, MYR780m and MYR720m respectively issued. Yields were issued lower compared to the issuance in March for the 5y-15y maturities where yields were 6bps to 19bps lower. The longer maturities of 25s and 30s saw higher yields between 7bps to 10bps, on the back of a noticeably heavier issuances at these maturities.
APAC USD Credit Market:
¨      Treasuries flattened across the curve on the back of the May Fed meeting minutes which indicated the cautious approach to interest rate hikes and the broad agreement to taper the Fed’s balance sheet by halting the reinvestment of principal of maturing securities. Futures implied pricing puts the June hike still firmly at 100%.  Benchmark 2y UST yields declined 2.1bps to 1.28%, while the 10y slide 3.0bps to 2.25%. On the data front, Apr existing home sales was weaker than expected at -2.3% MoM against expectation of -1.1% to 5.57m. Later today, investors will turn their attention to the OPEC meeting at Vienna.
¨      Asian bond markets held steady; with muted impact on credits following the China downgrade. IG credit spreads were marginally tighter at 174.8bps (-0.7bp), while average non-IG bond yields gained another 1bp to settle at 6.62%. Moving to the CDS space, the iTraxx AxJ IG was quoted slightly wider at 90.264, with little changes across most constituent members; China sovereign CDS compressed -0.6bps.
¨      The primary market was relatively quiet, with only one new issuance from CNRC Capital Ltd (issue rating: Baa2/NR/BBB+, guarantor: China National Chemical Corp). The company priced USD600m perp NC5 at 3.9% against its IPT at 4.2% area.
¨      Moody’s downgraded the ratings of 26 Chinese government-related issuers (GRIs) by one notch from their previous ratings following the sovereign downgrade (refer to Table 3). Elsewhere, S&P revised PT Chandra Asri Petrochemical Tbk’s outlook from positive to developing (affirming its rating at B+) as concerns grew on the parent company PT Barito Pacific Tbk’s leverage. The parent company’s debt increased to USD685m at end-Mar 2017 (USD537 at end-2016).



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Fed’s Gradual Balance Sheet Normalization Plan Well Received


25 May 2017


Rates & FX Market Update


Fed’s Gradual Balance Sheet Normalization Plan Well Received

Highlights

¨      Global Markets: The key takeaways from FOMC May meeting minutes were the high likelihood of a June FFR hike, along with a very gradual approach in which Fed would be normalising the balance sheet which would indicates the feasibility for FOMC to continue raising the FFR concurrently, should the recent economic slowdown prove to be transitory. The proposed approach would require the Committee to announce a set of caps on the amount for bonds that would be allowed to run off, with a revision on the caps set every 3 months. Barring large revisions to inflation outlook, we recommend for investors to continue positioning for a flatter UST curve, with FOMC’s gradual approach well received by investors; keep a neutral view on USTs. 
¨   AxJ Markets: BoK’s decision to hold rates at 1.25% remains within consensus expectations, underpinned by the prospect of 2H17 fiscal stimulus alongside the constrain from elevated household debt burden. Muted movements were seen on KTBs, where investors continue to await President Moon’s plans for fiscal stimulus, and its corresponding plans to fund looser fiscal budgets, which may pressure the longer end of the KTB curve as the new administration deviates from the comparatively tight fiscal budgets seen during the Park administration; keep a neutral duration view on KTBs over the near term. Singapore’s 1Q final GDP climbed to 2.7% y-o-y (previous estimate: 2.5%), bolstered by strong manufacturing growth. Lingering uncertainties stemming from rising trade protectionism alongside the likelihood for monetary tightening in China continue to underpin MTI’s decision to keep its full year GDP forecast between 1.0-3.0%, which could signal the prospect for MAS to maintain its current accommodative SGD NEER framework in the upcoming October meeting. SGD appreciated by 0.34% to 1.3846/USD yesterday, where we expect further appreciation on SGD vs regional peers to remain limited over the medium term as investors position for a status quo MAS decision.
¨   With strong government fiscal spending alongside improving exports supporting the Thai economy, BoT held rates at 1.50% yesterday, sustaining monetary accommodation amid risks of rising protectionism. BoT governor also highlighted the risk of yield seeking behaviour as Fed continues to raise the FFR, which limits our appetite for THB despite the improving economic outlook; USDTHB inched lower to 34.342 (-0.26%) yesterday on the back of softer USD movements, where we prefer to maintain a neutral view on THB.

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There is still time. The Minutes echoed what was revealed in the post-decision statement – that the slowdown in economic activity is acknowledged in the first quarter of the year BUT labour market conditions continued





Global Markets Daily
by Saktiandi Supaat


FX Research





There is still time. The Minutes echoed what was revealed in the post-decision statement – that the slowdown in economic activity is acknowledged in the first quarter of the year BUT labour market conditions continued to strengthen. “The fundamentals underpinning the continued growth of consumption remained solid, while business fixed investment had firmed”. However, there seems to be a consensus to “await additional evidence” to confirm that the economic slowdown is transitory before taking ...

RAM Ratings reaffirms Etiqa Insurance’s AAA/Stable/P1 ratings



Published on 25 May 2017.

RAM Ratings has reaffirmed the AAA/Stable/P1 insurer financial strength ratings (IFS) of Etiqa Insurance Berhad (EIB or the Insurer) as well as the AA1/Stable rating of its RM500 million Subordinated Bonds (2013/2023). The Bonds are rated 1 notch below EIB’s long-term IFS rating to reflect the status of the facility as an unsecured and subordinated obligation of the Insurer. 
The ratings reflect EIB’s favourable operating metrics, its robust capitalisation and strong market position in the domestic insurance industry. EIB is a leading composite insurer in Malaysia, with sizeable market shares in both the general and life insurance segments. Its business position benefits from the exclusive bancassurance with its ultimate parent, Malayan Banking Berhad (Maybank), providing the Insurer access to the latter’s extensive network and customer base.  
A corporate exercise is currently underway at EIB, in adherence with Bank Negara Malaysia’s requirement for composite insurers to legally segregate their operations into single-licence companies. Post-segregation, EIB’s balance sheet will shrink, reflecting the respective insurance fund that it will house. However, strategically, we believe the separate businesses will continue to be managed on a group-wide basis by Maybank Ageas Holdings Berhad, EIB’s immediate parent – a 69:31 collaboration between Maybank and Belgian-based Ageas. As such, EIB’s ratings will continue to remain supported by Maybank Ageas Group’s operational strength and synergies. 
Despite a dip in gross premiums, EIB’s overall profits grew 15% to RM444 million in FY Dec 2016  (FY Dec 2015: RM387 million), supported by better investment returns, the healthy growth of its in-force life business and the release of reserves from the Insurer’s general insurance fund. On a consolidated basis, EIB’s pre-tax profit margin and ROA had rebounded to a respective 29.1% and 3.3% in FY Dec 2016 (FY Dec 2015: 25.3% and 2.7%, respectively).
Although a sizeable contribution of single-premium policies subject the Insurer’s life fund revenues to some volatility, its focus on underwriting regular-premium policies has improved its earnings quality. Regular-premium products now make up a larger (56%) portion of EIB’s new business premiums (2013: 26%). This, together with an improving persistency rate, has supported the healthy growth of EIB’s in-force business, which expanded 9% in FY Dec 2016 (FY Dec 2015: +12%).
EIB’s net underwriting margin jumped 24% in fiscal 2016, due to significant reserves release, but going forward, underwriting performance is likely to remain closer to the historical average of sub-10%. The industry’s next phase of motor tariff liberalisation (effective 1 July 2017) may have a significant bearing on EIB’s underwriting performance, given its sizeable motor business line (45% of net earned premiums). While the outcome is uncertain at this juncture, the impact of the exercise is expected to be manageable. 
EIB’s reserve coverage stood at a satisfactory 121% as at end-December 2016 (end-December 2015: 131%). As general insurance reserve releases had contributed to a lower capital requirement for insurance risks, EIB’s capital adequacy ratio had soared to 349% as at the same date (end-December 2015:  283%).

Analytical contact
Siew Shwu Ying
(603) 7628 1071
shwuying@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
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