RHB FIC Global Sukuk Markets Weekly - 17/8/15

17 Aug 2015

Global Sukuk Markets Weekly

Flight to Safety as Oil Stay Miserable; S&P Affirmed Abu Dhabi’s AA/Sta Rating; Reiterate DIBUH Pc3/19, Close TUFIKA 4/19

Highlights & Performance

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¨      Indices ended mixed on lack of fresh leads; yields flat at 2.28%. The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) added +0.12% W-o-W to 101.81 (week prior: +0.04% to 101.69), with average yields tightening -0.6bps to 2.284% (week prior: +2.1bps to 2.290%). Gainers were led by QATAR 1/23, QATAR 1/18, SECO 4/24, ISDB 9/19, and ISDB 3/19 gaining USD18.m in value; while underperformers included ISDB 10/18, ISDB 9/19, SECO 4/22, LBSUK 10/19, and GBHK 9/19 shaving USD17.2m in value. On the contrary, the Dow Jones Sukuk Total Return Index (DJSUKTXR) retracted marginally by -0.01% to 155.47 (week prior: +0.05% to 155.49), YTD returns flat at 1.95%.

¨      Flows seen into safer sovereign-backed sukuk. QATAR 18-23 and ISDB 15-20 topped gainers, tightening 8-19bps to 1.30%-1.70% and 3-17bps to 1.36%-1.83%, respectively, in yields. We also saw attempts to diversify with buying into GBHK 20 (-5bps to 1.95%) and GBP-denominated UKSUK 19 (-5bps to 1.95%); while ADIBUH Pc10/18 (-11bps to 4.65%) were taken up for cushy yields. On the other end, markets cashed out on DAMAC 19 (+38bps to 6.55%) ending its three-week top gainer streak. Also, better sellers were seen for Indonesian government INDOIS complex 18-23 (widening 4-11bps to 2.61%-4.23%) and corporate GARUDA 20 (+12bps to 5.98%) after weaker foreign reserve and GDP data last week; and some FIs like ADIBUH 15, TUFIKA 19, and FGBUH 16 (+6-21bps to 0.67%-4.07%).

¨      Risk for high-quality IG narrowed. CDS spreads narrowed for Gulf safe-markets like Qatar (-6.4bps to 53.6), Saudi Arabia (-3.2bps to 63.8), Abu Dhabi (-2.7bps to 53.9) – after S&P affirms ratings – and Bahrain (-3.4bps to 277) as it releases and tries opposition leader and lifts ban on pro-opposition newspaper. Turkey CDS rose to 16-month highs of 257 (+11.2bps) despite stronger IP and firm current account data. Similarly, Indonesia and Malaysia’s CDS rose to 17-month and 23-month highs of 207 and 172 after weaker foreign reserves, before retracing to 201 (ahead of better than expected current account deficit) and 168 (after firmer 2Q GDP and current account surplus), respectively.

¨      CNY devaluation to add headwinds. Sukuk yields initially narrowed tracking USTs after China’s c.2% currency devaluation, however this could eventually weigh on revenues from Chinese imports and tourists spending for sukuk issuers. To recap, sukuk yields have been flat (hence underperforming USTs) since oil prices dropped below USD50/bbl, though buying on lack of supply has offered support (refer to Chart of the Week).

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SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
Saudi Arabia (Aa3,Sta/AA-,Neg/AA,Sta)	Saudi Riyal 12-month forwards hit a six-year record high of 175 since 2008 as China devalued its currency.	Neutral. Yuan devaluation intensified concerns about a slowdown in Chinese economy, which has domino-effect to Saudi Arabia (as China is the largest oil trading partner for Saudi Arabian oil). However, we believe that this impact is to be mitigated by its large foreign assets (Jun-15: USD664.4bn) and low debt level (2014: 1.6% of GDP) in the foreseeable future. Yields for ISDB and SECO were mixed -1bps to 5bps WoW.
Abu Dhabi (Aa2,Sta/AA,Sta/ AA,Sta)	S&P reaffirmed sovereign credit ratings on Abu Dhabi to AA/-1+ with stable outlook.	Positive. Abu Dhabi has prudent fiscal and external positions, with general government liquid assets/GDP of 228.8% and net external lending/current account receipts of 133.7% in 2014. This would allow Abu Dhabi (derives 55% of GDP and 90% of government revenue from oil sector) to weather the pressure of oil prices decline if there is no major deterioration on their buffers and prolonged stretch of low oil prices.

CREDIT UPDATES

Company/Issuer	Sector	Country	Update	RHBFIC View
Noor Bank (NOORBK, NR/NR/A-,Sta)	FI	Dubai, UAE	·   1H15 net profit grew 26% YoY to USD74.03m and reached 16.8% in ROE (1H14: 11%), on the back of stronger loan and deposit growth of 21% and 24% respectively (from Dec-14); ·   1H15 provisioning of NPL improved to 5.1% (1H14: 6.7%) while loan coverage remains solid at 109%.	Positive. We expect Noor Bank’s improved asset quality, robust capitalisation (Dec-14: 18.1% in CAR), healthy liquidity position (1H15: 74% in loan-to-deposit) and high probabilities of state-backing will continue to support its credit profile. Yield on NOORBK 20 widened 4bps to 3.02% over the week.
Abu Dhabi Islamic Bank (ADIBUH, A2,Sta/NR/A+,Sta)	FI	Abu Dhabi, UAE	·   Proposed rights issue of up to AED504m (or 168 million new shares), starting 16-Aug till 10-Sep; ·   The additional share capital will be utilised to finance its business growth, reflected by growing number of customers by 31.9% YoY.	Neutral. The right issue will increase its total equity by 3.67% to AED14.2bn and lower asset/equity from 8.29x to 8.09x (based on 2Q15 financial statements). Yields on ADIBUH 15 and 16 widened 4-21bps WoW to 0.67% and 1.38% respectively.
Emirates NBD PJSC (EIBUH, Baa1/NR/A+)	FI	Dubai, UAE	Plans to become the largest share in financing new development projects in Suez Canal, Egypt.	Neutral. We are mixed on the expansion given potential geopolitical risks in the region that may weigh on its profitability for unlocking the new opportunities. EIBUH 17 and 18 yields widened 2-3bps WoW to 1.78% and 2.38% respectively.

TRADE IDEA

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¨                  Reiterate DIBUH Pc3/19, lock-in profit for TUFIKA 4/19

Sukuk	Dubai Islamic Bank DIBUH 6.25% Pc3/19 (NR) (YTC: 4.963%; z-spread: 358.2bps) (Amt o/s: USD1.0bn)
Comparable	Dubai Islamic Bank DIBUH 6.75% Pc1/21 (NR) (YTC: 5.410%; z-spread: 368.3bps) (Amt o/s: USD1.0bn) DIBUH 4.752% 30/5/17 (Baa1/NR/A) (YTM: 1.854%; z-spread: 97.9bps) (Amt o/s: USD500m) DIBUH 2.921% 3/6/20 (Baa1/NR/A) (YTM: 2.924%; z-spread: 126.7bps) (Amt o/s: USD750m) Al Hilal Bank (parent ratings: A1/NR/A+) ALHILA 5.5% Pc6/19 (NR) (YTC: 4.828%; z-spread: 337.8) (Amt o/s: USD500m) Abu Dhabi Islamic Bank (parent ratings: A2/NR/A+) ADIBUH 6.375% Pc10/18 (NR) (YTC: 4.646%; z-spread: 336.6) (Amt o/s: USD1.0bn) TF Varlik Kiralama AS (Obligor: Turkiye Finans Katilim Bank) TUFIKA 5.375% 24/4/19 (NR/NR/BBB,Sta) (YTM: 4.08%; z-spread: 267.4bps) (Amt o/s: USD500m)
Relative Value	We reiterate our preference for DIBUH Tier-1 Pc3/19 for absolute yield pick-up of 13.5bps over ALHILA Pc6/19 and 31.7bps over ADIBUH Pc10/18, while having shorter duration to DIBUH Pc1/21. We see strong case for our call given that DIBUH (while being lower-rated) has improving Tier-1 ratio and CAR of 16.8% and 17.1% at Jun-15 (Dec-14: 14.7%, 14.9%), while ADIBUH’s Tier-1 ratio has been dropping to 13.5% as at Jun-15 (Dec-13: 16.4%) and ALHILA is privately owned. Concurrently, we lock-in profit on Turkiye Finans Katilim Bankasi’s TUFIKA 4/19 as Turkey’s sovereign credit profile continues to deteriorate amid its parallel battles against Islamic State and Kurdish militants, political election uncertainties, and worsening stagflation. To re-cap, DIBUH Pc3/19 has tightened 91bps since our initiation on 17-Oct-2014; and TUFIKA 19 has tightened c.31bps since 31-Oct-14.
Fundamentals	We are comfortable with DIBUH’s credit profile given: 1.     Systemic importance to UAE given fifth largest bank assets, first and largest Islamic bank in the UAE, and is c.28% owned by the Dubai government; 2.     Growing balance sheet and sound liquidity with gross loans at AED94.4bn and deposits of  (+27.5% YoY) and deposits of AED109.2bn (+15.2% YoY); 3.     Adequate and improving capitalisation with Tier-1 ratio and CAR of 16.8% and 17.1% (Dec-14: 14.7%, 14.9%); 4.     Better earnings with NIM of 4.39% (vs range of 2.1%-4.0% since 2011); 5.     However has considerable centration in real estate related assets, historically c.30% of loan book. * Financials as at Jun-15, unless otherwise specified.