The Motley Fool

BOC Hong Kong: Is Its 7% Dividend Yield Sustainable?

Large Hong Kong-focused bank BOC Hong Kong (Holdings) Ltd (SEHK: 2388) reported its full-year 2019 earnings late last week. The local bank is also a constituent stock of the benchmark Hang Seng Index.

For local investors, the bank is known as a solid dividend payer. It delivered a respectable set of results, even with all the headwinds from the Hong Kong protests last year.

In fact, it also raised its full-year dividend and for 2019 it posted a dividend per share (DPS) of HK$1.537. this was up just under 5% year-on-year from its 2018 dividend.

That means the bank’s shares are now yielding just over 7% given its share price of HK$21.10. The question is, though, can the bank maintain its solid dividend?

Manageable dividend payout ratio

The bank posted profit of HK$34.07 billion (US$4.39 billion) for 2019, up 4.3% year-on-year from 2018. Its earnings per share (EPS) was also slightly up year-on-year at HK$3.044.

Given the full-year DPS of HK$1.537, the dividend payout ratio works out at around 50%. This is a very sustainable ratio in the context of the business environment in 2019.

Strong fundamentals

The bank has been steadfast in maintaining a high CET1 capital ratio (basically a capital buffer). For 2019, its CET1 capital ratio was an impressive 17.76%. Under the Basel III international banking requirements, the minimum capital adequacy ratio for banks to maintain is 10.5%.

Clearly, BOC Hong Kong has managed to strengthen its balance sheet since the Global Financial Crisis in 2008.

Threats and uncertainty

However, the firm is facing new competitive threats from the opening up of the banking sector in Hong Kong to online banks.

How this will impact its earnings in the longer term is unclear but the shorter-term risks appear to be mitigated given the bank’s commanding market share in Hong Kong. This is particularly true in the mortgage market.

BOC Hong Kong has a 23.5% market share in Hong Kong mortgage lending transactions, as of August 2019. That was actually the number one spot and came in ahead of local giant HSBC Holdings – which had a 21.7% market share.

What investors should note, though, is how far the property picture has deteriorated in Hong Kong. Although prices haven’t plummeted, the demand has clearly been impacted by both the protests in the city last year and now the coronavirus outbreak.

Foolish takeaway

While BOC Hong Kong’s dividend payout ratio seems clearly sustainable in the short term, perhaps the market is pricing in headwinds.

These will come in the form of lower interest rates (bad for banks), a depressed Hong Kong property market and threat from new online entrants into the Hong Kong banking sector.

Profits for the bank will likely drop sharply in 2020. For investors looking for dividend income, though, it could be an opportunistic way to benefit from a strong recovery in Hong Kong.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips doesn’t own shares in any companies mentioned.