Credit Market Watch: Summary for week ending 15-Jul

Credit Market Watch: Summary for week ending 15-Jul

·         MYR Credit:

Ø  MGS curve bull-flattened WoW after the 25bps OPR cut. Quasis and AAAs tracked the movement with yields down by 10bps or more for long duration bonds, while elsewhere in PDS yields largely fell 5-8bps WoW. A total of MYR4.1b volume were traded.

Ø  OPR: The earlier-than-expected OPR cut has now opened up the possibility of another 25bps cut, although it is data-dependant and event-driven. The MPS mentioned that BNM will monitor and assess the balance of risks on growth and inflation outlook, implying an open mind to more interest rate cut if needed.

Ø  Banking sector: The OPR cut will have a slight negative impact on banks’ profitability, though it varies individually as some banks had recently hike their base rates by 10bps. Our equity analyst estimates that Alliance Financial Group would experience the largest negative impact, while it could be marginally positive for AMMB, HL Bank, Public Bank and CIMB. Loan growth is unlikely to pick up significantly as household debt and LDR remain high at 89% and 87.6% respectively, while banks are still cautious on lending. Maybank, CIMB and AmBank revised down their base rate/base lending rate and deposit rates by 20bps.

Ø  Relative value: Prasarana 36 offers value last dealt at 4.73%, 5bps outside our fitted line and 4bps above where Danainfra 36 last traded.

·         Asian USD Credit:

Ø  UST curve bear-steepened along the 2y10y with 10y UST yield up 19bps WoW alongside higher Bund and Gilt yields as recent US economic data was resilient and the surprise BoE hold on rate may have somewhat dashed hope for more easing. Asian credit spreads tightened, with JACI composite -12bps, JACI IG -10bps and JACI HY -23bps WoW.

Ø  China: 2Q16 GDP growth stabilised at 6.7% (1Q16: 6.7%) on lagged effect of both fiscal and monetary stimulus. Our economic research maintains full year growth forecast at 6.6%, implying a slowdown in 2H16 with a view that near-term growth stability may be achieved at the expense of financial stability later as total leverage in the economy is high at ~250% debt/GDP with sign of credit stress such as rising NPL in banking system and widening lower-rated corporate bond spreads.

Ø  Rating changes: China Three Gorges was upgraded by S&P from A to A+ due to the higher likelihood of government support given its role in China’s energy sector and the provision of essential social functions in e.g. flood control. West China Cement’s rating outlook was cut again by Moody’s to under review for downgrade (was earlier downgraded by both S&P and Fitch), citing likely subdued cement prices for a longer than expected period which could weigh on margins, free cashflow and liquidity thus pressurising its credit profile.

·         CDS: EM Asia 5y CDS spreads tightened substantially with Indonesia -27bps, Malaysia -26bps, China and Thailand -15bps each WoW.