Historically lucrative dividend yields likely to continue, given strong balance sheet
China Construction Bank Corp (CCB) is a leading commercial bank in China providing a comprehensive range of commercial banking products and services. CCB is one of the largest banks in the world by market cap and Tier 1 capital. It has subsidiaries in various sectors, including fund management, financial leasing, trust, insurance, futures, pension and investment banking, as well as more than 200 overseas entities covering 31 countries and regions.
Our case for CCB is that it is a dividend play. Before looking at its financial statements, its scale as a bank is a reason why it has a higher likelihood to pay dividends, along with its yearly dividend policy. We think that based on its history of paying dividends, and given that its dividend yields have been historically lucrative, it is a great investment for dividend yield investors.
For its most recent 2021 interim results, CCB implemented new business strategies, which resulted in good performance for the period. The company’s balance sheet grew, with total assets reaching close to RMB30 trillion ($6.4 trillion), up 6.1% y-o-y, and total liabilities up by 6.3% to above RMB27 trillion. Net profit recorded was RMB154.1 billion, up 10.9% from the previous comparable period, return on assets was 1.1%, and return on equity (ROE) was 13.1%. The net interest margin was 2.13% and capital adequacy ratio was 16.58%. Operating income was up 5.8% y-o-y from RMB360 million to RMB381 million. Around 60% of the bank’s profits derive from its personal banking business, and around 20% each from its corporate banking business, and treasury and other businesses.
CCB’s fee income growth was boosted and was higher compared to its peers, with its income from agency fund sales and third-party payments growing rapidly. The bank’s asset quality was also manageable, with a non-performing loan (NPL) ratio of 1.53%, a slight improvement from the beginning of the year. Allowances for NPL were high at around 222%, reflecting the bank’s better risk offsetting capacity. The bank’s cost structure was also further optimised, with a smaller proportion of fixed and variable costs and a higher proportion of strategic costs. All these ratios show improvement on the banking front, and further augments its capacity to pay dividends.
In terms of the qualitative part of the bank’s business, its developments include enhancing its FinTech governance and its FinTech core capabilities by utilising AI, blockchain, cloud computing and Big Data, mobile Internet platforms and Internet of Things. CCB also focused on internally transforming its business, such as through more targeted marketing services and intelligent risk management.
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Other areas of focus from the bank include green financing, financing for housing services and inclusive financing for enterprises for example.
For the upcoming financial period, CCB will be focusing on a few key areas. These include promoting a higher-quality digitalised operation and reinforcing internal risk control with higher standards.
On the capital management front, the company issued RMB80 billion Tier 2 capital bonds in August 2021 and will issue another RMB80 billion of Tier 2 capital bonds by the end of March this year. CCB also proactively promoted the implementation of the new Basel III Accords on credit risk standards, along with enhancing its internal management capabilities.
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Prospects-wise, CCB stands to gain from more reserve-ratio cuts from the central bank, which is likely. A lower reserve ratio enables the bank to deploy the capital to more profitable purposes, and hence will boost margins. Further, the impact of Evergrande crisis is mostly manageable by CCB, and the NPL ratio for the bank should continue to improve into 2022.
Chart 1 illustrates the company’s historical dividend yield over the past five years, which is steadily on the rise, and, at current levels, is very lucrative. The bank has consistently paid dividends for over 10 years, and will very likely continue doing so, given its strong balance sheet. The dividend pay-out ratio for the past 10 years has averaged between 30% and 35%.
The company’s profitability is good, reflected by its strong and consistent double-digit ROE over the past decade. Relative valuation-wise, the bank trades at a 24% discount for its forward P/E compared to domestic peers, and a 61% discount compared to regional peers.
Sentiment-wise, there are 29 “buy” calls, two “hold” calls and no “sell” calls on the company from analysts. The average target price for the company is around 35% above its trading price of HK$5.96 ($1.03) as of Jan 28.
This is a great stock to hold for investors seeking dividend yields. As the share price declines, it is strategic to accumulate shares to capitalise on higher dividend yields. However, if the yield ceases to be attractive, it would be better to dispose of the shares.
