RHB FIC Global Sukuk Markets Weekly - 24/4/15

24 April 2015

Global Sukuk Markets Weekly

Returns Lag Behind Stronger Oil and Geopolitical Risks; Noor Bank Printed USD500m at MS+130

Highlights & Performance

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¨   Sukuk returns lag behind stronger oil and geopolitical risks. The Bloomberg Sukuk Market Return Index (BMSSUTR) fell by 0.09% W-o-W (vs. +0.17% in week prior) to 120.06, bringing YTD returns to 1.58% (vs. 1.67% in week prior). The Dow Jones Sukuk Total Return Index (DJSUKTXR) flattened, up 0.02% W-o-W (vs. +0.08% in week prior) to 155.78, bringing YTD returns to 2.15% (vs. 2.05% in week prior). Despite the rise in US jobless claims to 295k, market perceived job market remain healthily below the 300k mark. Stronger 1Q15 company results in the gulf, oil prices rebound and regional tensions limit the rally seen earlier. The bottom 5 movers in the BMSSUTR during the week were PETMK 20, QATAR 23, MALAYS 21, GBHK 19 and SECO 24 shedding market value by USD2.4bn.

¨   Risk premiums generally eased in the GCC (ex-Dubai) despite Bahrain and Turkey touching one-year highs during the week. Bahrain 5y CDS ended 7.7bps lower at 305bps despite reaching a 52-week high of 320bps last Friday after Moody’s downgraded its sovereign ratings to Baa2/Neg. Similarly, CDS for Turkey touched one-year highs of 233bps before closing 1.9bps lower at 229bps after the country’s central bank kept interest rates at 7.5%; while other GCC members were stable despite airstrikes in Yemen during the week with CDS closing 1bp-5bps lower for Saudi Arabia (to 71bps), Abu Dhabi (61bps), and Qatar (63bps) while Dubai rose 1bp to 198bps. Elsewhere, risk premiums rose around 3bps in Indonesia and Malaysia to 160bps and 125bps respectively.

¨   UAE banking sector show resilience in 1Q15 financial results, with most banks showing growth in assets and profits, in addition to improving asset quality indicators. Abu Dhabi based First Gulf Bank (FGB) and Abu Dhabi Commercial Bank (ADCB) both reported a rise in net income increase of 7% and 13% respectively, and both reporting improving results on non-interest income by 13% and 19% respectively. Gulf banks indicate resilience despite the oil rout and geopolitical heat in the region, and we think that increased demand for financing ahead of large scale projects should support lending growth in the region. Nevertheless, we still think sovereigns will continue to dominate USD-denominated sukuk issuance this year in preparation for infrastructure needs leading up to international events in the medium term. Despite reserves declining (e.g. Saudi Arabia: -4.4% since June 2014 to USD714bn) reserves are still large enough to support fiscal pressures in the region, for now (refer to Chart of the Week).

Macroeconomics and Sovereign Comment

Country/Issuer	Update	RHBFIC View
Malaysia Sovereign Sukuk Bhd (A3/A-/NR)	·         Moody’s reaffirmed USD Sukuk at A3	Neutral. The affirmation gives comfort, balancing out Fitch’s negative ratings outlook and criticisms over Malaysia’s weakening financials and mounting debts. MALAYS complex bear flattened with shorter end rising 7bps against the longer end’s 2bps.
Turkey (Baa3/NR/BBB-)	·         Held overnight borrowing rate at 7.5% ·         Reduced forex depo lending rate by 50bps to 4% for USD and 2% for EUR ·         Increased rate it pays bank on Lira reserves by 50bps	Positive. We believe yields benefitted from the decision, with Turkey Complex rising 1bps over the week, as inflation remains elevated on rising food prices; while other measures taken by Turkish central bank will support its currency which has depreciated more than 15% against the USD this year.

CREDIT BRIEF

Company/Issuer	Sector	Country	Update	RHBFIC View
Noor Bank (NR/NR/A-)	Bank	UAE	·         Issued debut 5y USD senior sukuk of USD500m at 2.788% (MS+130), 10bps inside the initial price guidance; ·         Bid-to-Cover at 4.3x	Positive. The bank benefits from the low pricing mainly due to its strong probability of support by the Dubai government which owns around 70% in NOORBK. We opine that the issuance will provide opportunity for the bank in terms of diversifying its funding sources to support growth from its existing 1.4% market share of banking system loans.

TRADE IDEA

¨                  NOORBK fair to rich against other UAE banks

Bond	NOORBK 2.788% 28/4/2020 (NR/NR/A-) (YTM: 2.8%; z-spread: 129.57bps) (Amt o/s: USD500m)
Comparable	ALHILA 3.267% 8/10/2018 (A1/NR/A+)  (YTM: 2.1%; z-spread: 90.07bps) (Amt o/s: USD500m) DIBUH 4.752% 30/5/2017 (Baa1/NR/A) (YTM: 2.1%; z-spread: 126.91bps) (Amt o/s: USD500m)
Relative Value	We find NOORBK 20 senior to be priced fair to rich against larger peer UAE banks like the ALHILA 18 and DIBUH 17 seniors which have higher ratings, shorter durations, longer track records, and better asset quality and capitalisation.
Fundamentals	We are comfortable with NOORBK’s credit profile given: 1.     High likelihood of government support due to close ties and ownership links (70%) with the Dubai government and history of support in the UAE; 2.     Moderate profitability with NIM of 2.8%, ROAA of 1.7%, and cost to income of 44.3% (peers: 3.5%, 1.8%, 45.7%); 3.     Adequate asset quality and capitalisation with NPL ratio of 6.7%, LDR of 81.4%, and Tier-1 ratio of 12.5% (peers: N/A, 86.4%, 14.5%). *Average include Noor Bank, Al Hilal Bank and Dubai Islamic Bank; all financials as at Jun-2014