FW: RHB FIC Credit Markets Update - 21/12/17

 

 

 

 

21 December 2017

Credit Markets Update

 

Our daily publication will resume on Tuesday, 2 January 2018.

Wishing you a Merry Christmas and Happy New Year 2018!

           

November CPI Moderates as Expected; Advancement in US Tax Bill Prompts UST Yields to Edge Higher.

MYR Credit Market:

¨      Trading for MYR govvies picked up, inflation moderates for the month of November in line with markets' expectation. Overall trading volume improved for local govvies but stay thinned for the corporate bonds/sukuk space. Meanwhile inflation for the month of November moderated, gained 3.4% YoY versus previous print of 3.7% back in October. The MYR was well supported versus the USD, closing at 4.0740/USD (+0.17%). The advancement in US tax bill influenced UST yields to edge higher as well as European government bonds in anticipation of ECB embarking on its tapering plans starting January 2018. We expect local govvies yields to inch higher tracking the overall regional theme.

¨      Govvie trading volume picked up higher to cross MYR1.6bn versus MYR1bn recorded on Tuesday. Trading activities for MYR govvies picked up after inflation moderated lower for the month of November as expected. The benchmark 10y MGS ended 2 bps lower to close at 3.93%-3.94% level with decent amount of MYR415m changing hands. Meanwhile, shorter-dated MGS 9/18 and GII 5/18 seen crossed at 2.72% and 3.09% respectively, with MYR439m and MYR215m traded. Focus on upcoming foreign reserves release this week.

¨      Trading in the corporate bonds/sukuk space remained thin with only MYR311m dealt. In the power sector segment we saw SPR Energy 7/25 traded at 4.98%, whilst TBEI 9/18 and YTL Power 5/27 ended at 4.09% and 4.90% level respectively. Other notable trades include short-dated bank papers Maybank 10NC5 5/19 and Maybank 10NC5 12/18 traded at 4.48% and 4.34% level respectively with combined amounts of MYR50m. Expect trading volume to remain thin ahead of the upcoming Christmas period.

¨      RAM has reaffirmed the rating of Besraya (M) Sdn Bhd's (Besraya or the Company) MYR700m Sukuk Mudharabah Issuance Facility (2011/2028) at AA3, but revised the outlook to negative from stable. The revision of the rating outlook reflects RAM's concern that the Company's recent dividend distribution of MYR70m in fiscal 2018 to its shareholder and the construction of Kuchai Link 2 (or Kuchai overpass) which will cost RM50 million over the next 3 years could cause the Company's minimum finance service coverage ratio (FSCR, with cash balances, post-distribution) to come in below the 2-time threshold, under our sensitised case, for AA3-rated transactions on sukuk payment dates between fiscal 2020 and 2023.

¨      RAM has reaffirmed Bank Kerjasama Rakyat Malaysia Berhad's (Bank Rakyat or the Bank) AA2/Stable/P1 financial institution ratings.  Concurrently, the ratings of the Bank's sukuk, issued through its funding conduits, have also been reaffirmed. The reaffirmation is premised on the Bank's strong foothold in personal financing (PF), particularly among civil servants, and robust loss-absorbing capacity. Nonetheless, its profitability has been tapering off amid keen competition that has eroded its margins. RAM expect Bank Rakyat to benefit from government support, if needed, given its status as a cooperative bank-cum-developmental financial institution. Given its sizeable PF portfolio that is supported by non-discretionary salary-deduction and transfer mechanisms, Bank Rakyat's asset quality has remained sound. As at end-June 2017, its gross impaired-financing (GIF) ratio stood at 1.9% while its GIF coverage ratio (inclusive of regulatory reserves) came up to a comfortable 129.1%. While there were some upticks in impairments for property financing (including non-residential property) and personal financing, some reclassification of its corporate financing had helped offset the impact.

APAC USD Credit Market:

¨      USTs yields pressured to edge higher taking cue from advancement in US tax bill passed. The House of Representatives has, once again, voted to approve procedural changes made by the Senate in the tax-cut legislations. The Congress has now officially passed the tax bill to President Trump to be signed into law although there was an uncertainty on the exact date of the signing. There was a possibility that President Trump may postpone the signing to delay across-the-board spending cuts to 2019. As fiscal deficit widening continues to draw concerns, cuts may only be triggered by the Pay-As-You-Go Act of 2010. The USTs yields saw levels increasing across the curve especially in the long end of the curve following the passing of US tax code. The 2y USTs and the 5y USTs continued to weaken as both yields edged higher to 1.86% (+1bp) and 2.24% (+1.5bps) respectively. As expected, the 10y USTs and the 30y USTs fell further with yields increasing sharply for the latter as the former touched the 2.50% level (+3.3bps) while the longer tenure security reached 2.88% (+5.7bps). The DXY Index continued to decline, closing at 93.3 (-0.14%). Elsewhere, all eyes will be on the release of US GDP 3Q17 QoQ data where it is forecasted to remain unchanged at 3.3% while core PCE QoQ also estimated to stay at 1.4% level. Also, keeping a close tab is the BoJ's rate decision later today where investors are mostly anticipating hints for potential monetary policy changes in the coming year. The BoJ is expected to leave short-term rates unchanged for this year to support its current inflation level, stood at below target-level of 2%.

¨      China corporate led the tightening in AxJ IG CDS. The iTraxx AxJ IG spreads fell further to 68.3bps (-0.8bps). Leading the tightening in the CDS space was China corporate as spreads for CNOOC Ltd reduced about -6.4bps. Sovereign Indonesia saw CDS levels declining further of approximately -1.4bps following its recent rating upgrade to BBB/Sta by Fitch. Recording a similar fall in CDS level was Samsung Electronics Co. Ltd, compressing -1.4bps in estimation. Leading the widening, on the other hand, were South Korea Fis Kookmin Bank and Industrial Bank of Korea as levels increased close to +1bp and +0.5bps respectively. 

¨      Fitch has upgraded sovereign ratings on Republic of Indonesia to BBB/Sta from BBB-/Sta. The 1-notch upgrade is driven by its prudent macroeconomic policies which include flexible exchange-rate policy and relatively strict monetary policy, creating a more resilient economy against shocks. Foreign reserves were seen steadily improving to USD126bn as at Nov17. Despite recording growth of over 6% before the terms-of-trade shock period in 2012, real GDP growth remained strong at an average of 5.1% over the past 5 years. Fitch has forecasted growth to accelerate from 5.1% in 2017 to 5.4% and 5.5% in 2018 and 2019 respectively. As estimated, general-government debt burden remained low at 28.5% of GDP recorded in 2017. The government is targeting to reach its 2018 budget deficit to 2.2%. It is expected that deficit outturn may remain stable at 2.7% of GDP and will likely to hover below the self-imposed ceiling of 3% of GDP. However, non-financial state-owned enterprises debt (SOE) at 4.5% of GDP recorded in Jul-17 would likely to further deteriorate due to the government's low revenue intake which has forced SOE to deal with the large infrastructure deficit. Fitch opined that sovereign's exposure to banking-sector risks is limited with private credit account of about 37% of GDP while the banking sector's capital adequacy ratio continues to be steady at 23.2% recorded in Oct-17. Gross NPL, however, has increased from 1.8% as at end-2013 to 3% in Oct-17 due the risks accumulated in the previous credit cycle, resulting in a deferral of private-sector capex. Meanwhile, average per capita GDP of USD3.8k is low, well below the 'BBB' range median of USD11.1k.

 

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