FW: RHB FIC Credit Market Update - 17/7/14

17 July 2014

Credit Market Update

Still-Dovish Fed to Provide Support to Asian Credits

REGIONAL                      

¨      Credits likely to trade firmer amid cautious trading; US housing starts release tonight. JACI Composite spread moved sideways (+0.8bps to 236.8bps) with IG and HY spreads ending +0.6bps (171.8bps) and +1.5bps (457.8bps) respectively. The long-end were better bid yesterday while selling pressure was apparent along the short- to mid-end. In the China/HK IG USD space, FRANSH 17, GRNLHK 16 and CINDBK 20 subdebt inched wider while OCBCSP 23c18 subdebt similarly traded wider in the Singapore space. Meanwhile, US Treasuries saw long-end yields declining 2bps on dovish Yellen’s testimony. Investors’ focus could be on US housing starts and jobless claims tonight, which may point towards sustainable economic recovery in US. Nevertheless, following eased concerns on Portugal’s largest bank and still-dovish Fed Chairperson, we opine that market could trade firmer today.

¨      On the primary front, we saw some activities on financial institutions with Mitsubishi UFJ Lease & Finance issuing USD500m 5y bonds (at T+135bps) and China Construction Bank printing USD200m 5y bond (at T+135bps). Meanwhile, IT-based company Rolta India and steel manufacturer Tata Steel are reportedly eyeing USD bonds.

¨      Mixed activity seen; new OLAM traded firmer after slow opening. Yesterday’s SGD swap rates ended 1-2bps wider across the belly in line with USTs retreating overnight on Yellen’s comments in the congressional testimony. On secondary SGD credits, we saw the new OLAMSP 19 trade firmly while there was buying seen across the spectrum in papers names like MDASP, SSREIT and UOBSP 26s.

MALAYSIA

¨      MYR PDS on belly trades. Secondary trades were generally range bound yesterday with above average trading volumes of MYR564m. We saw MYR55m trades of DanaInfra 4/21 closing lower at 4.25% (-5bps since 10-Jul), in line with the upcoming issuance which priced 7y at 4.23%. Meanwhile, we saw series of RHB old style T2 being traded with cumulative of MYR110m reportedly done, ending lower at 4.39%-4.59% (-4bps to -7bps) for maturity between 10/21-11/22, amid the mega merger news between CIMB and MBSB.

TRADE IDEA: MYR

Bond	CIMB Bank Berhad (CIMB) 12/25c20 B2 T2 (RAM: AA1/Dev; MARC: AA+/Sta) (MTM price: 98.96; MTM: 4.99%; MGS5Y+131bps)
Comparable(s)	CIMB 8/26c21 B2 T2 (RAM: AA1/Dev; MARC: AA+/Sta) (MTM price: 97.76; MTM: 5.08%; MGS7Y+128bps); AmBank (M) Berhad (AMMMK) AMMMK 12/23c18 (RAM: AA3/Sta) (MTM price: 100.75; MTM: 5.01%; MGS7Y+133bps)
Relative Value	We see value in adding CIMB 12/25c20, given the following factors: 1.     Attractive yield of 4.99% (based on MTM) and c.131bps spread over MGS. 2.     Appealing cash price of 98.96; 3.     Reasonable term to call of not more than 6 years and 6 months with high likelihood of call exercise; 4.     Top credit ratings within the bank subdebt space.
Fundamentals	We think CIMB remains a solid bank credit based on: 1.     Solid business position as the current third-largest commercial bank in Malaysia (based on loan size of c.15% of total loans). Additionally, a proposed merger with RHB Capital Berhad and Malaysia Building Society Berhad will create the largest banking entity in Malaysia with credit positive implications like greater economies of scale. 2.     Sound profitability and asset quality, with net interest margins of 2.35% and 2.26% respectively as of 31-Mar 14; 3.     Funding and liquidity remains healthy at a loan/deposit ratio of 86.23%; and 4.     Adequate capitalization with Tier 1 ratio at 9.10% and systemic importance to the local financial system. Our call is, however, moderated by the fact that asset quality and capitalization metrics are below industry peers’. Furthermore, the proposed merger could put a strain on capitalization metrics, funding and liquidity should CIMB have to raise a sizeable portion of debt.