Great Eastern / OCBC

Great Eastern / OCBC: Announced weak FY2011 net profits. 4Q11 net profit of $69m was below expectations, and not far above the weak $40m profit of 3Q (2Q: $118m, 1Q: 159m). As per the prior qtr, the non-par result was the chief contributor, surprisingly posting a loss in 4Q. Mgt attributed this to unfavourable movements in swap spreads, offsetting improved credit conditions from the 3Q low.

Citi however maintains a Buy with $16.82 TP, due to still positive trends in premium growth, which in turn drives a higher per share embedded value (EV/S). Add that YTD 2012 market conditions suggest a likely recovery in non-par fund results from the 4Q11 loss. Swap spreads have narrowed, and credit conditions have improved further as more liquidity returns to markets. Although it can be dangerous to over-generalize, house suggest that during less volatile periods the non-par profit can be up to $50m per quarter (par about $30m, and similarly for ILP).