Great Eastern will redeem 594m GLC units at $1.00 each. GLC policyholders taking up the offer will receive a refund based on their original investment amounts less total payouts received to-date, and the insurance coverage will cease. Great Eastern will take delivery of the underlying CDOs and will account for the fair value of these instruments at the close of the offer period.
This is a one-off gesture of goodwill to pacify Great Eastern’s loyal policyholders.
We expect investors to focus on the positive outlook for the banking industry. Local banks face less competition as foreign banks retreat while an easing in the credit crunch provides positive industry dynamics. Systemic risk has reduced and this paves the way for valuations to recover to pre-crisis levels.
Latest MAS statistics showed accelerated growth in total deposits of 11.7% yoy in Jun 09, indicating the start of a new credit cycle.
The financial hit will be incorporated in Great Eastern’s 3Q09 results and is estimated at S$250m. The negative impact on OCBC 3Q09 results is expected at around S$218m.
Maintain BUY. Our target price of S$8.12 is based on a P/B of 1.58x derived from the Gordon Growth Model (ROE: 11%, payout ratio: 48%, required return: 8% and constant growth: 4.5%).
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