RHB FIC Credit Market Update - 26/10/15

26 October 2015

Credit Market Update

           

More Easing by PBoC and Prospects of Bigger QE by ECB to Prolong Support for Credits; Malaysia Sets Fiscal Deficit at 3.1% in 2016

APAC USD CREDIT MARKETS                                                    

¨      Dovish ECB and PBOC’s rate cut boosted credit markets at the expense of safe haven assets. The iTraxx AxJ IG tightened 3bps to c.135.6bps as Malaysia sovereign CDS slashed 10bps while China sovereign and SOEs declined c.2-4bps following ECB chief Draghi’s statement that more stimulus measures will be considered to increase inflation. Safe haven assets lose appeal post-China interest rate cut with benchmark UST yields widening c.4-7bps with 10y closing at 2.09%. Late last Friday, China eased monetary policy further in bid to spur its ailing economy to achieve the 7% 2015 GDP target by slashing one-year benchmark lending and deposit rates by another 25bps to 4.35% and 1.5% respectively, while reserve requirement ratio for banks was reduced by 50bps to 17.5%. We believe this would impact the Chinese banking sector adversely with further pressure on NIM and asset quality (more in Credit Update below).

¨      Recovery in Chinese housing market lifted China’s IG and HY property players; IG spreads and HY credits narrowed 3bps and 11bps to 154bps* and 9.08%* respectively.  APAC credit markets were supported by strengths seen in Chinese property names such as Franshion 21, Vanke 19, Yuexiu 23, Evergrande 18, Agile Property 17-20 and Sunac 17-19 following the fifth consecutive month of home prices increase in China whereby Sept new and existing home prices rose in 12 cities and 15 cities YoY respectively compared to Aug new and existing home prices increase in 9 cities and 7 cities.

¨      US’ new home sales today in focus while China’s Fifth Plenum convenes. Following last week’s better-than-expected housing data, market will turn their attention to Sept’s new home sales with market expecting a 0.4% drop compared to last month’s 5.7% gain. Closer to home, China’s top officials is set to begin discussion over 26-29 October whereby investors will pay close attention to China’s 13th Five Year Plan that maps its main economic and development initiatives for 2016-2020.

*based on RHBFIC internally-generated index.

SGD CREDIT MARKETS

¨      Better buying sentiment expected after further PBoC easing measures. The short-to-mid benchmark rates dipped, with the 2y and 5y closing at 1.70% (-2.5bps) and 2.26% (-1.5bps) respectively. Property names continued to be favoured, with CITSP, CAPITA, GALVSP closing tighter by 5-10bps (based on Bloomberg), with interest also seen in agri-commodity names like GGRSP and OLAMSP. Possibly better buying sentiment today after last Friday night’s PBoC 1y lending rate cut by 25bps (to 4.35%) and reserve requirement ratio cut by 50bps (to 17.5%). Singapore Sept CPI came in within consensus (actual: -0.6%; consensus: -0.6%) while investors will be awaiting for the Sept Industrial Production numbers later this afternoon (consensus: -4.5%; Aug: -7.0%). Sembcorp Marine (NR) and Keppel Corp (NR) also released their quarterlies ending-Sept which saw revenue decline YoY (-34% to SGD1.13bn and -23.4% to SGD2.4bn respectively) due to the sluggish oil market especially for ship and rig builders, though Keppel Corp has proven more resilient due to its diversified operations. (Further details in the Credit Update section below).

MYR CREDIT MARKETS

¨      Tighter yields in banking and AAA bonds amid lackluster flows. Corporate market gained last Friday amid quiet flows of MYR262m. Yields for Tier-2 banking bonds such as BMMB 6/21c16, CIMB Islamic 9/22c17 and RHB Islamic 5/24c19 slipped 0.4bps-7bps to 4.055%-4.668%. In the AAA-space, GIC 3/16 and Aman 5/24 tightened 3bps-4bps to 3.917% and 4.62% respectively.

¨      MGS rallied post lower inflation number; Ringgit to be weighed by China’s monetary easing. Govvies ended firm last Friday amid the slower-than-expected inflation number of 2.6% (consensus: 2.9%). The 3y-10y MGS benchmarks slipped 1bps-4bps to 3.58%-4.13%. Top traded was 7y-MGS which concluded 4bps lower to 4.04%, from average auction yield of 4.081%. Ringgit strengthened to 4.22/USD last Friday following mild improvement in foreign reserves number of USD94.1bn. However, China’s 25bps policy rate cut likely to exert pressure on the export- and commodity- currencies, including the Ringgit, which is trading at 4.25/USD this morning.

¨      Among the key highlights from last Friday 2016 Budget – Ministry of Finance expects the country’s GDP growth to be slower at 4%-5% next year, from 4.5%-5.5% estimated for 2015. Budget deficits improved mildly to 3.1% of GDP for 2016 (2015: 3.2%), although still above the initial expectation of 3%. Taking into account the budget deficit of MYR38.8bn and next year govvies maturity of MYR48.7bn, we expect MGS/GII/SPK supply to range between MYR86bn-89bn next year, which imply net supply to be approximately flat YoY(MYR37bn-40bn). Overall, we view that the Budget is unlikely to have a significant impact on the rates and FX market, given a token consolidation of only 0.1% of GDP. We expect external environment to have a greater influences (refer to RHBFIC’s “Malaysia Budget 2016: Happy Headlines, Heavy Balance Sheet” publication today for further analysis)

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
China’s Banking Sector	Banking	CN	PBOC eased monetary policy further as China strives to achieve its 7% 2015 GDP target with: ·          25bps cut in the one-year benchmark lending rate to 4.35%; ·          25bps cut in the one-year deposit rate to 1.5%; and ·          50bps reduction in banks’ reserve requirement ratio to 17.5%, with an additional 50bps cut for certain banks in bid to support China’s SME and agricultural sectors.	Maintain marketweight on the Big Five Chinese banks but mild underweight on the sector as a whole. The reduction in lending rate will result in lower asset yields, translating into further NIM compression. Between Dec-14 and Jun-15, interest rate were cut 100bps which resulted in an average NIM compression of 6bps and 11bps for the sector and the Big Five banks to 2.45% and 2.50% respectively. Although cumulative CNY loans have grown by c.29% YTD, we note the continued decrease in asset quality as seen in average NPL ratio in 1H15 of c1.32%, a c.20bps increase from FY14. However, we expect the Big Five banks to remain stable due to strong capitalization and being predominantly owned by the State.
Agricultural Bank of China (“AGRBK”) (A/A1/A; Sta)	Banking	CN	Poor 3Q15 results by AGRBK despite a 3.6% YoY operating income growth to CNY410bn as net profit only grew a meagre 0.6% while NIM compressed to c.2.64% from 1H15’s 2.78%. Asset quality deteriorated as NPL ratio rose to 2.02% from 1.83% and NPL coverage dropped to 218% from 239%. Capitalisation remains strong – 3Q15 CET1 and CAR of 9.72% and 13.21% respectively, compared to 1H15’s 9.30% and 12.95%.	Maintain marketweight. The poor quarterly earnings are expected given the cut in interest rates by PBOC and the continued drag from the manufacturing and real estate sector of China, as indicated by slumping asset quality. We expect continued pressure on NIM and asset quality moving forward following PBOC’s further easing on 23 Oct. Nevertheless, we remain comfortable with the credit given its robust balance sheet, still adequate NPL coverage, systemic importance and support from the State (80% owned by Central Huijin and MOF) and high likelihood of involvement in major national projects, including the “One Belt One Road” initiative. AGRBK Senior 10/20 was last priced at 2.62%/2.57%, T+120/115bps and Z+121/161bps.
Sembcorp Marine (NR)	O&G	SG	3Q15 revenue fall by 34% YoY to SGD1.13bn while net profit dipped 76% to SGD32m due to reduction in rig deliveries and lower ship repair revenue.	Maintain marketweight, with rating under review. The O&G rig and ship builder’s credit metrics have weakened since FY2014, with Total Debt/ EBITDA at 3.87x (FY2014: 2.07) and EBITDA Interest Coverage at 7.7x (FY2014: 45.1). In addition, its short-term borrowings has risen rapidly, growing by 28% quarterly since Q314 (SGD290m), with Cash/ST debt at 0.83. Sembcorp Marine’s orderbook increased by SGD2.9bn this year, with a total of SGD11.6bn currently, slightly lower than in Nov-2014 (SGD12.6bn). Nevertheless, in lieu of the continued sluggish outlook for oil prices (currently c.USD48/bbl), further customer deferment of rigs & vessel building & repair would be very likely. Though its credit profile is very weak, it benefits from an indirect stake by Temasek.  Sembcorp Marine is 61% owned by Sembcorp Industries, which in turn is 49.5% owned by Temasek.
Keppel Corporation (NR)	O&G	SG	3Q15 revenue dip 23.4% YoY to SGD2.4bn while net profit declined 30.7% to SGD372m mostly due to declines in profit contribution from its offshore marine unit.	Maintain marketweight on credit.  Among the O&G players in Singapore, Keppel Corp displays better credit fundamentals, partially attributed to its diversified business revenue segments (O&G: 64%; Infrastructure: 22%; property 13%). It’s LTM Total Debt/EBITDA currently stands at 4x (FY2014: 3.3x) while EBITDA Interest Coverage is at 9.1x (FY2014: 13.6x). Cash (SGD1.7bn) is sufficient to cover its short-term debt of SGD1.51bn. The offshore marine division has a decent orderbook of SGD10bn (~1.1x of annual O&G segment revenue), an increase of SGD1.7bn YTD. Temasek has a 21% stake in Keppel Corp.  A continued headwind to Keppel Corp would be the announcement on 22-Oct that the Brazilian government would further investigations into related parties to the Petrobras and Sete Brasil corruption scandal, of which Keppel Corp (through its subsidiary Keppel FELS Brasil) is one of the ten companies involved.