Good News for Banking Bonds Amid Tightening Liquidity

Penulis: Martha Ruth Thertina

Selasa 18/9/2018, 15.02 WIB

Bonds from Indonesian banks are deemed attractive due to high yields and solid fundamentals. Banks need to provide high returns, as there are various funding needs.

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There is good news for banks in Indonesia amid the turmoil of the global financial market. Debt securities issued by local banks are seen as an attractive option for long-term investments because they offer higher yields and solid fundamentals. This can help banking efforts to mobilize external funding in order to increase liquidity and other needs.

Corporate bond yields are rising, including banking bonds. This is in line with the weakening of the rupiah, rising benchmark interest rates that hoist banking interest rates, and soaring yields on government bonds (SUN).

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Bank Indonesia (BI) has gradually raised its seven-day reverse repo rate by 1.25 percent to 5.25 percent in response to a series of global challenges, including increases in the US central bank’s benchmark interest rates and yields on state securities, which led to a sell-off in the domestic financial market and rupiah depreciation.

Along with these global conditions, yields on rupiah SUN have also surged. As of 13 September, the five-year and 10-year SUN were 8.4 percent and 8.5 percent, respectively, rising 247.7 and 220.5 basis points, respectively, this year. Based on Asian Bond Online data, this was the highest increase among countries in Asia.

Although the yields are high, some banks are still issuing bonds, as they need additional liquidity to support credit expansion and refinancing of maturing debt.

Several systemic banks have also issued subordinated bonds, as they must meet the recovery plan in accordance with Financial Services Authority (OJK) rules. The plan aims to make banks ready to bail-in when needed.

The high yields are turning Indonesian banking bonds into an attractive investment option for long-term investors. In its study released last week, DBS analysts noted the bonds of major banks in Indonesia and the Philippines – average rating of Baa2 and Baa3 – are being traded with z-spreads of 130-150 basis points (absolute yields of 4.25-4.5 percent).

“This is equivalent to the level in the Indian banking bond trade, but Indonesian and Philippine banks have better fundamental quality,” said the Singapore-based bank analysts. The fundamental quality in question is a low non-performing loan ratio and a healthy capital level, even though in general the size of the banks is smaller.

On the other hand, bonds from banks with higher ranks, such as from Thailand (Baa1) and Korea (A1), are being traded with tighter z-spreads on an average of 80-100 basis points.

DBS analysts do not deny the existence of trade risks, but it is more to the macro economy in the form of continued sell-offs in the SUN market rather than on rating risk. “For investors with a long-term view, this is just a little concern.”

In the second half, several banks are preparing to issue bonds, the closest being CIMB Niaga and Bank Mandiri. CIMB Niaga, with its Baa2 rating, began offering its bonds through shelf-registration issuance (PUB) II Phase IV on Friday (9/14). It targets Rp 1.25 trillion in funds, which will be used entirely for loan expansion.

The bonds are offered in three series. A series worth Rp 746 billion with one-year tenor and an interest rate of 7.5 percent per year. B series worth Rp 137 billion with a three-year tenor and an interest rate of 8.5 percent. And C series worth Rp 117 billion with a five-year tenor and an interest rate of 8.8 percent.

Bank Mandiri – rating of Baa2 – plans to issue bonds worth Rp 3 trillion. The five-year tenor bond offers an interest rate of 8.5 percent. The public offering period is predicted to take place on Monday (17/9) or Tuesday (18/9). The proceeds are planned for loan expansion.

The interest rate offered by Bank Mandiri is higher than that of banks with a similar rating (Baa2), such as Bank Rakyat Indonesia (BRI) and Bank Central Asia (BCA), and below Bank Pan Indonesia (Baa3), which issued bonds in the first half.

In comparison, BRI issued two bond series worth Rp 2.4 trillion in February. A series worth Rp 1.84 trillion with a five-year tenor and an interest rate of 6.65 percent, and a B series worth Rp 605 billion with a seven-year tenor and an interest rate of 6.9 percent.

In early June, the state-owned bank also issued subordinated (junior) bonds with a five-year tenor. It absorbed Rp 500 billion in fresh funds with an interest rate of 7.7 percent. The interest rate was higher due to the priority to pay if there is a default for junior bonds, which is lower than senior bonds.

BCA also offered a similar interest rate for its subordinated bonds from the end of June to early July. It offered total corporate bonds of Rp 500 billion, which was split into two: a seven-year bond worth Rp 435 billion with an interest rate of 7.75 percent, and a 12-year bond worth Rp 65 billion with an interest rate of 8 percent.

Bank Pan Indonesia (Panin) issued bonds worth Rp 3.9 trillion with a five-year tenor at the end of February. The interest rate was set at 7.6 percent per year. In early June, the bank again issued bonds of Rp 100 billion with a higher interest rate of 8 percent. Panin also issued a seven-year bond worth Rp 1.3 trillion, but with a higher interest rate at 9.5 percent.

Based on OJK data, the total value of bond issuance by banks in the first half of this year was Rp 16.73 trillion. Some were issued by large asset banks such as BRI, BCA, Bank Panin, and Maybank Indonesia. The issuance value was smaller than Rp 29.71 trillion in the same period last year.