Chinese SOE Banks as High Yield Value Play
An Enviable Situation ?
Banks in China face the headwinds of lowering rates, but their situation is enviable compared to the ordeal faced by Japanese, Euro, and to a lesser extent US banks.
The SOE follow the predictable policy to pay 30% of their earnings as dividend. The dividend is not taxed in Hong Kong, and the banks have grown albeit slowly in recent years.
Data
According to yahoo data, the P/E and P/B ratio are very low, and the dividends are high. The growth is not reported, but I checked how much revenue and earnings grow since 2017 to latest TTM and get a annualized growth rate.
| ticker | name | 2017 | ttm | 2017 | ttm | p/b | p/e | div | revenue grwth | earning growth | div+growth | npl | tier1 ratio |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1398 | icbc | 723 | 888 | 286 | 317 | 0.55 | 4.74 | 7.02% | 4.20% | 2.08% | 9.10% | 1.58 | 15.28 |
| 939 | ccb | 621 | 762 | 242 | 273 | 0.64 | 5.21 | 6.39% | 4.18% | 2.44% | 8.83% | 1.56 | 14.02 |
| 3988 | boc | 482 | 574 | 172 | 194 | 0.41 | 4.09 | 8.52% | 3.56% | 2.44% | 10.96% | 0.78 | 13.19 |
| 1288 | abc | 537 | 664 | 192 | 217 | 0.43 | 4.02 | 8.31% | 4.34% | 2.48% | 10.79% | 1.63 | 12.92 |
| 998 | citic bank | 157 | 195 | 42 | 50 | 0.32 | 3.47 | 8.30% | 4.43% | 3.55% | 11.85% | 1.81 | 10.18 |
| JPM | JPMorgan | 99 | 123 | 22 | 38 | 1.9 | 12.41 | 2.36% | 4.44% | 11.55% | 13.91% | 1.14 | 15.3 |
| BNP.PA | BNP | 78 | 55 | 7.5 | 7 | 0.59 | 9.41 | 2.10% | -6.75% | -1.37% | 0.73% | 3.63 | 17.3 |
| 8316.T | Sumitomo Mitsui | 3470 | 3166 | 759 | 512 | 0.43 | 7.66 | 5.22% | -1.82% | -7.57% | -2.35% | 1.1 | 16.96 |
Interpretation
- JPM has the best growth, highest Tier1 ratio and lowest NPL, but it is expensive, its dividend is subject to withholding tax, and its recent growth seems to be mostly driven by the one-off benefit of the TCJA.
- CCB is the best quality name amongst chinese banks, followed by ICBC
- BoC and ABC are laggards in terms of quality and growth, but BoC is not far behind the best
- Citic Bank is even cheaper, but has higher NPL and lower growth.
- BoC appears to be the best value
Thesis
BoC: a better deal than European or Japanese banks?
This looks like an extreme case of high dividend, relatively low growth stock. The pricing appears consistent in China but much more attractive than European and Japanese leading banks.
Compared to US, JPM had better earning growth in the last 5 years, but this is included in valuation. Over the long term, one would expect earnings growth to stay in line with GDP growth, which would cause the Chinese banks to catch up.
The investment thesis would be to buy and keep receiving the dividend forever or until multiple expands to reach levels similar to Singapore Reits which reviewed in this post.
Disclosure: I own some BoC.
Update 20211030
I was busy with Crypto future arb offering better yield. It seems to me that there was massive dilution of equity holders through equity issuance in recent years, explaining why BoC stock does not gain traction. Nice dividend though.
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