Subject: RHB FIC Credit Market Update - 23/9/14

23 September 2014

Credit Market Update

Continued Interest in APAC IG Credits Ahead of China PMI; Switch from HSBC 3/24 B3T2 to HSBC Pc24 B3AT1

REGIONAL

¨      Net IG buying ahead of China PMI release. The JACI Composite was unchanged (at 236.1bps) as the IG and HY saw opposing movement, with IG tightening by -0.9bps (to 168.1bps) while the HY broadened +2.9bps (to 463.2bps). We observed net IG buying activity in China centered on state SOEs such as CHRAIL and CHGRID ahead of today’ release of the HSBC China Manufacturing PMI where investors are expecting a slight decline (to 50.0) from previous numbers (Aug: 50.2). HK saw similar buying trends with HUWHY and banks/FI like CCB and CHOHIN leading the way. In Singapore, trades were a couple of bps tighter led by STSP and TEMASE. US Treasuries narrowed yesterday, with the 2y and 10y yields declining by -1.6bps (to 0.55%) and -1.1bps (to 2.56%) respectively as Fed Bank of NY president arguing for ‘patience’ on interest-rate increases.

¨      In the APAC primaries space, Nonghyup Bank is printing a REG S USD 5y (A1/A/-) at initial price of T+115bps while Zhejiang Energy is issuing a REG S USD 3y (A2/-/A) at initial price of T+160bps.

¨      Positive momentum on SGD rates may ease. SGD swap rates declined 4-7bps with the 3y/5y spread flattening to 64.6bps (from 66.4bps) yesterday. Meanwhile, in the credit space, we saw some interest in names like NCLSP 19, YLLGSP 19 and FCL Treasury (FNNSP) Pc19. In the pipeline, property developer Guocoland (NR) is eyeing SGD 4.5y bonds at 4.3% area. We expect the positive momentum on rates to ease today following a marginal decline in UST yields (-1bp) during the overnight session, amid weaker-than-expected US housing data (actual: 5.05m; consensus: 5.20m) and dovish ECB. SG inflation numbers will be out this afternoon, which is expected to be flattish on a y-o-y basis (prior: 1.2%; consensus: 1.1%).

MALAYSIA

¨      MGS flattened; Corporates gain on primary drought. Secondary market started the week on slow activities with MGS and PDS both registered below average trading activities of MYR395m and MYR289m respectively. MGS curve flattened where 10y-MGS (-1.3bps, 3.933%) outperformed 2y, 5y and 7y (+0.6 to +3.4bps, 3.337%-3.822%). Meanwhile, we saw good performance on the corporate space as yield traded downward in general on the lack of offerings from primary tap (last was Maybank AT1 MYR3.5bn issuance in 10-Sept). Among the top gainer were UEM 6/21 (-11.1bps, 4.688%, MYR30m), Cagamas 10/18 (-6.2bps, 4.0%, MYR31m) and IJM (-5.2bps, 4.598%, MYR30m).

TRADE IDEA: USD

Bond(s)

HSBC Holdings PLC (HSBC)

HSBC AT1 Perpetual c24 (Price: 102.25, YTM: 6.071%)

Comparable(s)

HSBC B3T2 3/24 (Price: 102.958, YTM: 3.8736%)

Relative Value

We recommend a switch to HSBC AT1 Perpetual c24 from HSBC B3T2 3/24 for a pickup of c.220bps. We view that the 220bps spread over its B3T2 is excessive if compare to the China Citic Bank and Maybank AT1-B3T2 spread of c.210bps and c.65bps respectively.

Fundamentals

HSBC possesses a healthy credit profile for its:

1.       Diversified business profile with a solid global footprint;

2.       Relatively high capitalization with a tier-1 capital ratio of 12.3% and 15.4%;

3.       Moderate asset quality, reflected by an NPL ratio of 3.19%; and

4.       Robust funding profile, evidenced by a loan-to-deposit ratio of 74.96%.

*all data as of June-14.