RHB FIC Credit Market Update - 2/4/15

2 April 2015

Credit Market Update

Downgrades on Chinese Credits Drove CDS Wider; Active MYR Space; Hold HLBANK B2T2 MYR

REGIONAL                                                                                      

¨      Interest seen on longer-tenured papers; China’s official PMI at 50.1. CDS hardly moved with iTraxx AxJ tilted wider to 110.8bps (+0.4bp). The Asian credit space reflected higher risk appetite with better buying on O&G names such as RILIN 40, PETMK 22-26 and real estate names like China Resources Land (CRHZCH) 24, SINOCE 20 and CHIOLI 42. Meanwhile, FI names tilted wider, such as CINDBK22 subdebt, DBSSP 21c16 and BBLTB 18 senior. We expect trading to remain firm following China’s stronger-than-expected manufacturing PMI of 50.1 (consensus: 49.7), and positive overnight lead from USTs (-2bps to -7bps), which rallied amid weaker-than-expected March ADP employment change (actual: 189k, consensus: 225k) and ISM manufacturing (actual: 51.5, consensus: 52.5). Meanwhile, Fitch downgraded Chinese O&G equipment and services company Honghua to BB-/neg. Looking ahead, investors may watch out for nonfarm payrolls tomorrow, which may remain strong (i.e. >200k) and hence, potentially capping bond gains.

¨      O&G names dragged SGD credits as Brent stays low. Yesterday saw a mild steepening of the short-to-mid curve, with the 3y and 5y narrowing by -2.8bps (to 1.76%) and -1.7bps (2.07%) respectively. Oil & gas names traded a couple of bps wider as Brent oil prices have languished lower at c.USD56/bbl, while some selling was seen in YLLGSP after it was downgraded by S&P from BB-/Neg to B+/Sta. The SG Mar PMI will be released in the afternoon, with projected sluggish industrial production expectations (consensus: 49.6; Feb: 49.7) after the sluggish SG Feb IP of -3.6% (consensus: -2.2%).

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MALAYSIA

¨      MYR bonds gained 0.09% amid robust trading activity on the first day of GST. The local bond market ended strongly yesterday where the TR MYR All Bond Index gained by 0.09% led by the govvies and quasi-government bonds. Buying momentum extended in the sovereign front where the benchmark yields fell by 1bps-4bps, amid robust trading volume of MYR7bn, perhaps on the prospects of fiscal improvement from the successful implementation of Goods & Services Tax (GST) yesterday. Similarly, investors were active in the credit space with trading volumes surpassing MYR1bn, slanted toward mid-to-long tenure bonds.  Notably, yields tightened 0.5bps-7.1bps across the 7y-20y DanaInfra complex on combined volume of MYR286m. Meanwhile, we saw MYR255m of short-dated Cagamas 4/15-3/18 crossed in between 3.390%-3.921%.

TRADE IDEA: MYR

Bond(s)	Hong Leong Bank Berhad (HLB) HLB B2T2 4.5% 6/24c19 (Trade date: 19-Mar; Price: 98.26; Yield: 4.957%; MGS5Y+139bps) (RAM: AA2) (Amt O/S: MYR1.5bn)
Comparable(s)	RHB Islamic (RHBA) B3T2 4.95% 5/24c19 (Trade date: 30-Mar; Price: 101.08; Yield: 4.658%; MGS5Y+109bps) (RAM: AA3) (Amt O/S: MYR500m) Ambank B3T2 5.2% 12/23c18 (Trade date: 11-Feb; Price: 100.67; Yield: 5.006%; MGS5Y+144bps) (RAM: AA3) (Amt O/S: MYR400m) HLB B3T2 4.8% 6/24c19 (Trade date: 26-Mar; Price: 99.13; last yield: 5.026%; MGS5Y+146bps) (RAM: AA2) (Amt O/S: MYR500m)
Relative Value	We reiterate our switch from RHBA B3T2 5/24c19 to HLB B2T2 6/24c19. At 4.957%, HLB B2T2 6/24c19’s pickup over RHBA B3T2 5/24c19 remains significant at 30bps before adjusting for the latter’s 1-notch lower rating. In addition, we note that similar tenured B3T2 notes like Ambank 5.2% 12/23c18 and HLB 4.8% 6/24c19 currently offer just 5-7bps yield pickup over the HLBANK B2T2, too narrow in our opinion for added PONV risk. We maintain our preference for the old-style paper given its lack of PONV writedown features, lower extension risk and greater scarcity value.
Fundamentals	We remain comfortable with HLB’s credit profile, supported by following key credit drivers: 1)      Sizeable market position as the fifth-largest Malaysian commercial bank, with 8% estimated market shares in both system loans and deposits; 2)      High asset quality, reflected by its gross impaired loans ratio of 0.98% (industry: 1.66%) and fairly high proportion of secured mortgage loan assets (45% of gross loans); 3)      Decent profitability metrics, having a net interest margin of 2.06% (industry: 2.20%); 4)      Sound liquidity, as evidenced by its loan/deposit ratio of 81.3% (industry: 81.8%); and 5)      Adequately capitalized, based on CET1, T1 and total capital ratios of 10.8%, 12.2% and 14.7% (industry: 12.4%, 13.1%, 15.1%) respectively. *All financial data as of 30-Dec 14