Banking – Singapore - UOB Kay Hian 2020-10-26: The EU and The UK Are Executing Their Vaccination Strategies

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Banking – Singapore - The EU and The UK Are Executing Their Vaccination Strategies

• The EU and the UK have unveiled their vaccination strategies, setting out clear priorities in their programmes. Preparations are underway and vaccination could commence within the next three months. In Singapore, vaccination is expected to begin in 2021.
• Assuming the MAS does not interfere with banks’ dividend policy, we expect DBS (BUY, Target Price: S$23.50) and OCBC (SGX:O39) (BUY, Target Price: S$11.48) to provide dividend yields of 5.0% and 5.7% respectively for 2021.
• Maintain OVERWEIGHT.

WHAT’S NEW

EU: Unveiled vaccination strategy on 15 Oct 20.

• The European Union (EU) has secured COVID-19 vaccines through advance purchase agreements with vaccine producers. It has agreements with AstraZeneca, Sanofi-GSK, Johnson & Johnson and CureVac to buy 300m (option: 100m), 300m, 200m (option: 200m) and 225m doses of COVID-19 vaccines from the above producers respectively on behalf of its member states. The EU has financed upfront costs borne by vaccine producers using its €2.7b Emergency Support Instrument in return for the rights to buy the specified doses of vaccines.
• Member states will have access to COVID-19 vaccines based on their population size. They should prioritise vaccination for:
  1. healthcare and long-term care facility workers;
  2. the elderly over 60 years old;
  3. people in ill health with higher risk of complications; and
  4. workers who cannot socially distance themselves due to job requirements.

UK: Age-based vaccination strategy.

• The roll-out of mass COVID-19 vaccination should commence in the UK within the next three months. The COVID-19 immunisation programme for adults could be completed within six months. According to Chair of the Vaccine Task Force, Kate Bingham, the government aims to vaccinate 30m people, which represent 45% of its population. The vaccination strategy is age-based and targeted at those “most at risk”. It places priority on older adults above 80 years old, elderly and healthcare workers at nursing homes, followed by adults aged 50-80 years old.
• The British government has ordered 402m doses of vaccines from six different vaccine producers (AstraZeneca: 100m, Pfizer/BioNTech: 30m, Johnson & Johnson: 52m, Novavax: 60m, Valneva: 100m and Sanofi-GSK: 60m).

Expedited authorisation due to public health emergency.

• The European Medicines Agency (EMA) has started rolling reviews on data from AstraZeneca / Oxford University and Pfizer/BioNTech’s phase 3 trials (fast track review to shorten regulatory timeline) on 1 Oct 20 and 6 Oct 20 respectively. Data is reviewed in real time as it becomes available from ongoing phase 3 trials. Several rolling review cycles are carried out for each vaccine with each cycle lasting 2 weeks. Rolling reviews help the EMA’s Human Medicines Committee reach its opinion sooner on whether to authorise the vaccine.

ACTION

Approval for COVID-19 vaccine in sight.

• We expect a COVID-19 vaccine to be authorised for emergency use in Nov-Dec 20 and formal approval for general public use in 1Q21. Pfizer is expected to apply for emergency use approval from the US Food & Drug Administration (FDA) in the third week of November. Moderna is expected to do so in December.
• The number of vaccine doses will be limited in 4Q20 before production is ramped up in 1H21. The commencement of vaccination would:
  1. improve business confidence;
  2. ease safe distancing measures; and
  3. reduce stress on the corporate sector, thus moderating NPL formation.
• Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalise when vaccination commences.

Singapore likely to roll out COVID-19 vaccination in 2021.

• Singapore is actively pursuing the procurement of COVID-19 vaccines with a number of pharmaceutical companies (covered by confidentiality obligations). The Ministry of Health (MOH) has established an expert panel of doctors and scientists to advise on the selection of vaccine candidates and other logistical issues. The priority is to protect individuals most vulnerable to COVID-19 and those more likely to be exposed to the infection, while working progressively towards a high level of vaccination in the population.

Guidance for credit costs maintained.

• We expect banks’ guidance for cumulative credit costs in 2020-21 to be maintained at 80-130p (S$3b-5b) for DBS, 100-130bp (S$2.5b- 3.5b) for OCBC (SGX:O39) and 100-130bp (S$2.5b-3.5b) for UOB.

DBS (SGX:D05) (BUY, Target Price: S$23.50)

• Assuming the MAS does not interfere with banks’ dividend policies, we expect DBS to provide DPS of S$1.08 for 2021 and S$1.32 for 2022, which represent dividend yields of 5.0% and 6.1% respectively.
• Our target price of S$23.50 is based on 1.13x 2021F P/B, derived from the Gordon Growth model (ROE: 8.3%, COE: 7.5%, Growth: 1.5%).
• See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

OCBC (SGX:O39) (BUY, Target Price: S$11.48)

• Assuming the MAS does not interfere with banks’ dividend policy, we expect OCBC to provide DPS of S$0.50 for 2021 and S$0.56 for 2022, which represent dividend yields of 5.7% and 6.4% respectively.
• Our target price of S$11.48 is based on 1.03x 2020F P/B, derived from the Gordon Growth model (ROE: 7.7%, COE: 7.5%, Growth: 1.0%).
• See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

SECTOR CATALYSTS

• Gradual recovery in earnings and DPS due to decline in credit costs in 2021-22.
• Continued recovery in the Singapore economy accompanied by easing of safe distancing measures.

ASSUMPTION CHANGES

• We have assumed the MAS does not interfere with banks’ dividend policies and banks cease to provide scrip dividends in 2021.

RISKS

• Escalation of geopolitical tension and trade conflict between the US and China.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-26

SGX Stock Analyst Report BUY MAINTAIN BUY 23.500 SAME 23.500

BUY MAINTAIN BUY 11.480 SAME 11.480

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000