RHB FIC Credit Market Update - 20/3/15

20 March 2015

Credit Market Update

Widespread Gains on Credits Post FOMC; Rating Upside in CINDBK 6/20 B2LT2

REGIONAL                                                                                      

¨      Tighter CDS, credits gained post-FOMC. Credit protection costs lowered as iTraxx AxJ narrowed to 103.1bps (-2.7bps).  Asian USD credits saw the ripple effect from dovish Fed as yields declined across the curve. We saw tightening on papers like HAIAIR 20, CHOHIN 20 subdebt and CNOOC 23 in the HK/CN space. Elsewhere, the positive sentiment was similarly reflected on papers like TELMAL 25, BOCAVI 17-23 and BBLTB 20 senior which tightened a couple of bps. Nevertheless, USTs erased some gains in the overnight session (+5bps to +8bps along the 2y-10y benchmarks), likely due to profit taking activities following post-FOMC sharp rallies. In the pipeline, Shinhan Bank (A1*+/A/A) has hired banks for investor meetings in Asia and Europe commencing from 26-Mar.

¨      The SOR curve bull steepened yesterday, with 3y and 5y rates tightening 3.20bps and 3.10bps to 1.783% and 2.125%respectively. The secondary market saw good activity with overall better buying following Singapore’s claim as the world’s highest-yielding AAA sovereign debt, breaking Australia’s 6y streak, with gains led by AREIT 17, TGRSP Pc20 and CCTSP 17, while NUSSP 18, AMTENG 19c17 and PUBLSP 22 traded wider.

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MALAYSIA

¨      MGS/GII rallied post dovish FOMC; Credit yields edged lower; more issuances from Cagamas and Prasarana. Local govvies rallied yesterday as yields fell in the UST the day earlier following a dovish FOMC stand. The 3y-10y benchmark MGS yields inched 0.4bps-6.0bps lower to close in between 3.357%-3.901%. Similarly, the Islamic side also moved 1bps south, ending the day at 3.487%-4.083%. We also saw strong demand for the new 15.5y-GII 9/30 with BTC of 3.43x, yield averaged at 4.245%. Meanwhile, investors looking forward for the new 7.5y-MGS auction next week. In the corporate space, total volume decreased by 21% to MYR627m (Wed: MYR794m), albeit still above YTD average of MYR407m/day. Corporate yields generally tightened across sector and duration. Some banking bonds exchanged hands – PIBB B3T2 6/24c19 settled flat at 4.618% (MYR60m); while short-term Korean banks tightened by 1bps-7bps (IBK 2/17, Woori 2/16 and KDB 2/16). Elsewhere, long-duration DanaInfra and Prasarana complex decreased 1bps-8bps, in line with the sovereign trend.

¨      On the primary side, we note a total of MYR2.5bn printed. AAA-rated Cagamas issued MYR500m MTN with tenure of 1y (MYR60m, 3.75%) and 3y (MYR440m, 3.95%). Meanwhile, Prasarana printed MYR2bn Sukuk with maturity of 5y (MYR700m, 4.02%), 10y (MYR200m, 4.38%) and 15y (MYR1.1bn, 4.64%). Primary issuances in the 1Q15 were relatively quieter at c.MYR7.6bn, compared to MYR21.6bn in 1Q14.

TRADE IDEA: USD

Bond(s)	China CITIC Bank International Limited (CINDBK) CINDBK 6.875% 6/20 B2LT2 (Ba1/NR/BBB-) (Price: 111.9; 4.31%; Z+272.7bps) (Amt O/S: USD500m)
Comparable(s)	Bank of China Limited (BCHINA) BCHINA 5% 11/24 B3T2 (Baa3/BBB+/BBB+) (Price: 105.88; YTM: 4.24%; Z+227.4bps) (Amt O/S: USD3.0bn)
Relative Value	We close out our trade idea on BCHINA 11/24 B3T2 dated 13-Nov 14, which has narrowed 59bps in yield for a total return of 6.12%, and suggest adding CINDBK 6/20 B2LT2 on potential rating upside in the latter. Following Moody’s announcement on its review of global bank ratings dated 18-Mar 15, CINDBK’s subordinated ratings have been placed on review for possible upgrade. We expect at least a one-notch upgrade to bring CINDBK bank’s T2 ratings to investment grade (Baa3). From a technical standpoint, we think the reduction in tenure by at least 4 years also makes CINDBK 6/20 a worthwhile pick despite its smaller size.
Fundamentals	We are comfortable with CINDBK’s credit profile base on: 1)     Respectable profit metrics, based on NIM and ROA of 1.98% and 1.36% respectively in the first half of FY14; 2)     Manageable impaired loans ratio, which stood at 0.33% as of 30-Jun 14 (31-Dec 13: 0.32%) coupled with loan loss coverage of 103.8%; 3)     Easing mainland lending exposure, as evidenced by a reduction to 31.6% of total advances from 34.7% between 30-Jun 14 and 31-Dec 13; and 4)     Stable and adequate capitalization, reflected by CET1, T1 and CAR of 10.2%, 11.6% and 17.2% respectively. Moderating factors to our call are 1) CINDBK’s relatively small market estimated market share of at least 2% by asset size; 2) CINDBK’s weaker-than-average loan/deposit ratio of 81.8% versus the industry average of 72.7%; and 3) CINDBK’s still material exposure to mainland China loans. *Latest financial data as of 30-Jun 14