China’s “Big Four” banks had a remarkable year in 2024, delivering impressive returns despite a challenging macroeconomic environment characterised by sluggish economic growth, low consumption, and a lingering property crisis. Total returns, including dividends, ranged from 44% to 58%, defying critics who had dismissed China as “un-investible”.
Resilience Through the Property Crisis
The property crisis in China has been a significant concern for years, with fears that the banking sector could crumble under the weight of bad loans. However, China’s banks have demonstrated remarkable resilience, both in their financial performance and stock prices. Notably, there have been no major bank failures, and the stock prices of these banks have risen over the past few years, proving their ability to weather the storm.
Take Bank of China (BOC) as an example. I’ve marked the point on its stock chart where Evergrande defaulted on its loans—a pivotal event in the property crisis. Remarkably, this did not derail BOC’s share price. Instead, its stock, including dividend gains, has climbed more than 70% since that event.
This resilience is no coincidence. BOC has delivered real business growth and strong financial performance, even amidst the pessimism surrounding China’s economy. Over the past five years, operating income and profits have steadily increased, showcasing the bank’s ability to navigate through challenging conditions.
BOC’s exposure to real estate loans stood at 31.42% at the end of 2023, according to S&P Global estimates. From its annual report, we can see that 4.39% of its total loan book is tied to corporate loans to the real estate sector, with the remainder assumed to be personal loans. The distinction is crucial: corporate real estate loans—extended to developers—are where the risks lie. Developers have borne the brunt of the crisis, struggling with cash flow and slowing project sales.
In contrast, individual borrowers have shown resilience. Chinese households have become more prudent, with savings rising in recent years. Many individuals have even repaid their loans early, reflecting a cautious approach to managing uncertainty and mitigating risks in a weakened property market.
Despite concerns around corporate real estate loans, these account for less than 5% of BOC’s total loan book. The bank has also made sufficient allowances for potential bad debts. This conservative approach has paid off—rather than a spike in non-performing loans (NPLs), BOC has reported a decline. Its ability to maintain asset quality while simultaneously growing revenue and loans underscores its operational strength and prudent management.
On top of its operational resilience, BOC continues to reward shareholders with steadily rising dividend payouts. These dividends provide investors with higher yield on cost over time, reinforcing the bank’s appeal as a reliable income-generating stock.
It’s worth noting, however, that fluctuations in BOC’s H-Share dividends are largely driven by currency exchange rate differences between RMB and HKD. Despite this, the overall trend of rising dividends is a testament to the bank’s commitment to delivering value to its shareholders.
In terms of valuation, Bank of China (BOC) is no longer the deep-value play it once was, but it remains fairly priced. The bank’s current valuation metrics are slightly higher than its five-year averages, reflecting the strong rally in its share price:
- Price-to-Book (PB): 0.44x vs. 0.4x (5-year average)
- Price-to-Earnings (PE): 4.9x vs. 3.8x (5-year average)
- Dividend Yield: 6.6% vs. 8% (5-year average)
Despite the lower dividend yield compared to historical levels, a 6.6% yield remains highly attractive. Moreover, BOC has a solid track record of increasing its dividend per share, which suggests the potential for further dividend growth. If this trend continues, investors could enjoy an even higher yield on cost over time.
Investing in Bank of China Through Singapore Depository Receipts (SDRs)
For Singapore-based investors, the Singapore Depository Receipt (SDR) scheme offers a convenient way to invest in BOC without needing to access the Hong Kong market. The BOC SDR (ticker: HBDN) brings several advantages:
- Trading on SGX: BOC SDRs are listed on the SGX and can be custodized in CDP. This allows investors to trade within the familiarity of the SGX ecosystem, benefiting from similar trading hours and fees as with local stocks.
- Currency Convenience: BOC SDRs are traded in SGD, and dividends are also received in SGD. This eliminates the need for currency conversion, which is particularly appealing to investors who desire convenience.
- Smaller Lot Sizes: The SDR’s smaller lot size makes it more accessible for retail investors. At the time of writing, a lot of BOC SDRs costs around S$69, compared to the H-Share listed in Hong Kong, which is approximately S$687 equivalent per lot. This lower entry point makes it easier for investors to size their positions with higher fidelity.
Like all investments, BOC comes with its own set of risks. As China grapples with sluggish consumption and slower GDP growth, policymakers are likely to continue cutting interest rates and allowing the RMB to weaken. These measures, while designed to stimulate the economy, could pose challenges for banks like BOC.
- Net Interest Margin Compression: A lower interest rate environment puts pressure on net interest margins (NIM). For BOC, the NIM has already compressed from 1.37% in 2019 to 1.27% in 2023, and further declines may be expected. While the bank has historically offset this compression by increasing loans and revenue, sustained margin pressures could weigh on profitability.
- Currency Risks: A weakening RMB could lead to forex losses for investors when converting returns to their home currency, such as SGD. This would also impact the value of dividends received, reducing their attractiveness in foreign currencies.
Despite these risks, the outlook isn’t entirely grim. If China’s policy measures succeed in revitalizing domestic consumption and economic growth, banks like BOC stand to benefit significantly. A stronger economy would likely drive higher loan growth, improved profitability, and greater investor confidence.
HSBC: A Different Kind of Bank Stock
HSBC offers a different proposition, standing apart from China’s “Big Four” banks with its diversified geographical footprint. Unlike its peers, which are heavily reliant on the Chinese economy, HSBC derives approximately 30% of its revenue from Europe, with another 10% each from North America, the Middle East, and Latin America. This diversification reduces its exposure to China-specific risks and provides a buffer against regional economic volatility. For investors holding primarily China or Singapore bank stocks, adding HSBC can bring meaningful geographical diversification to their portfolio.
Another reason to consider HSBC is its valuation. The stock has been lagging its European peers in terms of performance, making it one of the more undervalued major banks in the region.
When compared against its five-year averages, HSBC is trading at attractive levels, particularly in terms of its price-to-earnings (PE) ratio and dividend yield. Here’s how its current financial ratios stack up:
- Price-to-Book (PB): 0.92x vs. 0.7x (5-year average)
- Price-to-Earnings (PE): 7.9x vs. 9.7x (5-year average)
- Dividend Yield: 6.3% vs. 4.5% (5-year average)
This indicates that HSBC is priced attractively relative to its earnings and dividends, making it an appealing choice for income-focused investors. Additionally, HSBC has consistently grown its dividend payouts, reinforcing its status as a reliable income stock.
HSBC is currently undergoing a significant restructuring aimed at unlocking value and improving operational efficiency. The bank is consolidating its business units into four key segments:
- UK Operations
- Hong Kong Operations
- Corporate and Institutional Banking
- Wealth Banking
Of particular interest is the standalone Wealth Banking unit, signaling HSBC’s strategic focus on expanding its wealth management business. This move aligns with the bank’s long-term strategy to tap into high-growth markets and capture opportunities in the wealth management sector, particularly in Asia.
The restructuring also includes aggressive cost-cutting measures, such as reducing staff, including senior roles. This is expected to save $300 million annually, contributing to improved profitability. Restructuring initiatives like these often lead to value-unlocking events, making HSBC an even more promising investment prospect.
Similar to BOC, HSBC also has a Singapore Depository Receipt (SDR) traded on SGX under the ticker HSHD. This SDR provides the same benefits as those mentioned earlier, including trading in SGD and the convenience of operating within the SGX ecosystem. One key advantage is the smaller lot size—just 100 shares per lot, costing approximately S$265 at current prices. In contrast, the HK-listed H-Shares require a lot size of 400 shares, which translates to about S$5,250 per lot. This makes the SDR version significantly more accessible for investors looking to build or adjust their positions with smaller capital outlays.
To understand how SDRs work, refer to this post [here].
Final Thoughts
Bank stocks remain a compelling choice for income-focused investors. China’s banks have demonstrated remarkable resilience in the face of economic challenges, while HSBC offers a unique opportunity for diversification with its global footprint and ongoing restructuring efforts.
Despite the recent strong performance and rising share prices, the dividend yields—still exceeding 6%—continue to be highly attractive. Furthermore, there is potential for these yields to increase over time, making bank stocks a reliable option for those seeking steady income and long-term growth. And SDRs have provided local investors with easy access to these foreign investment opportunities, simplifying the process and enhancing convenience.
This post is sponsored by SGX. The views expressed are solely those of the author.