FW: RHB FIC Credit Market Update - 14/8/14

14 August 2014

Credit Market Update

APAC Credits Marginally Firmer; Value in Maybank 1/24c19 B3T2

REGIONAL                      

¨      General buying into APAC credits; USTs gain on weak US retail data. The JACI Composite tightened 1.4bps (to 250.4bps) led by the HY with 3.8bps (to 477.1bps) and IG by a lesser 0.8bps (to 182.2bps). The possibility of more accommodative US monetary policy (post weak US retail sales data) drove gain in APAC credit spread. In China/ HK, we saw firmer trades on oil benchmarks (SINOPE, CNOOC) and HK property names (SWIRE, WHARF, SUNHUN). In Singapore, we saw buying into long-dated TEMASE papers while some selling was observed in short-to-mid dated bank/FI names such as UOBSP and DBSSP. The 2y and 10y UST concurrently tightened by -2bps (to 0.41%) and -3bps (to 2.41%) respectively as US retail sales was flat in July (vs consensus’ 0.2%), the worst performance in six months. The 10y UST auction (USD24bn) also achieved the lowest yield so far this year at 2.439%.

¨      The SGD swap curve rose by c.2bps at the long end. Meanwhile, 3y/5y spread stood flat at 62.3bps, hardly changing over the week (vs last Friday: 62.6bps). In the credit space, we continued to see better buying amongst PBs in usual names such as CMASP 22, OLAMSP 19, MDASP 16 and SWIBSP 17. On the primary front, G8 Education (GEMAU) retap the SGD from its 4.75% May-17 at par. We opine that the reoffer from the childcare service provider to be slightly attractive to the existing GEMAU 4.75% 17, quoted at 100.20/100.50 currently.

MALAYSIA

¨      MYR corporate space ended flat; quiet primary market promotes secondary flows. Local credit registered above average trading volumes of MYR796m, amid lack of primary issuances. Celcom Network 8/17 once again topped the activities chart with MYR175m trades closing flat at 4.101%.  This is followed by Cagamas 8/17 and 5/17 on cumulative transaction of MYR90m to conclude the day at 3.966% (+0.2bps) and 3.946% (-1.5bps) respectively. Prasarana 3/19 saw MYR60m tighten marginally by 0.4bps to 3.965%. Overall, we continue to see investors trading heavily on good credit AAA-rated and government guarantee bonds.

TRADE IDEA: MYR

Bond	Malayan Banking Berhad (Maybank) MAYBANK 4.90% 1/24c19 B3T2 (price: 100.59; yield to call: 4.75%)* (RAM: AA1/Sta)
Comparable(s)	PUBLIC SUB-NOTES 4.73% 11/23c18 B3T2 (price: 100.56; yield to call: 4.58)* (RAM: AA1/Sta) CIMBBANK 4.77% 10/23c18 B3T2 (price: 100.28; yield to call: 4.69%)* (RAM: AA1/Sta) MAYBANK 4.25% 5/24c19 B2T2 (price: 98.73; yield to call: 4.55%)* (RAM: AA1/Sta) *Prices and yields based on MTM levels
Relative Value	We prefer MAYBANK 4.90% 1/24c19 over comparable AA1-rated B3T2 bonds. Based on an MTM yield to call of 4.75%, MAYBANK 1/24c19 is 15.5bps discounted to the indicative 5y rate (c.4.595%) for FIs. Against peers CIMBBANK 10/23c18 and PUBLIC SUB-NOTES 11/23c18, MAYBANK 1/24c19 is roughly 3.84bps and 15.46bps cheaper after adjusting for tenor differences (7.5bps/year). In addition, the bond offers a c.22.1bps PONV premium over MAYBANK 5/24c19 B2T2, which is adequate in our view.
Fundamentals	Maybank’s robust credit quality is supported by the following factors: 1)     Largest domestic commercial bank: Maybank continues to benefit from its strong franchise, supported by strong connections with corporate borrowers and its firm market position, reflected by 19.7% and 17.8% shares of system loans and deposits respectively. 2)     Healthy asset quality. Maybank has a below average gross NPL ratio of 1.52% as at 31-Mar 14, reflecting a healthy loan profile. The bank’s provisioning remained high at 107% in 1Q14. 3)     Strong capitalization reinforces credit stability. With a Tier 1 and total capital ratio of 12.5% and 15.3% (industry: 12.8%, 14.5%), Maybank possesses adequate buffers to absorb a significant amount of asset quality deterioration. 4)     Moderate funding and liquidity profile. The Group’s loan-to-deposit ratio of 92.5% is higher than industry average of 81%. However, as a flagship banking group, we opine that Maybank has strong capability to retain and attract deposit funding which constituted about 92% of funding base. CASA deposits remained stable at c.39% in 1Q14. 5)     Likelihood of systemic support still seen as high. Given its size and the importance of Maybank to the Malaysia’s financial system, we view that systemic support remains very likely. In addition, Maybank is owned by government related entities- ASB, EPF and PNB.