I like bank stocks that pay growing dividends. Especially when you pay a good price for them. What caught my eye was exactly shares of Dah Sing Bank (SEHK: 2356).
It’s shares trading at absurd prices today — down close to 60% from its last peak in 2017.
This tiny, solid dividend payer makes it hard to ignore on my radar.
A 10% dividend payer…
Is Dah Sing Bank be worth a buy today?
At a market cap of HK$8.2 billion, Dah Sing Bank is a mid-size Hong Kong bank. It was founded in 1947, listed on the Hong Kong Stock Exchange in 2004, with Chairman David Wong Shou Yeh owning 42% of the bank’s stock.
Credit: tikr.com
Unlike high-octane investment banks that make their money selling IPOs, helping companies buy and sell businesses, or trading the markets, Dah Sing Bank is an old-school, commercial bank.Â
On a typical day, Dah Sing takes in deposits and lends them out at a higher, more profitable interest rate.Â
For years, Hong Kong’s banking sector has been largely dominated by a handful of players: HSBC, Standard Chartered, Bank of China Hong Kong and Hang Seng Bank control the market. Instead, Dah Sing is a small fish in a big banking ocean. This makes Dah Ding an underdog in the business.Â
Put things in perspective, HSBC has HK$1 trillion dollars of loans. Meanwhile, Dah Sing holds only about HK$141 billion of loans.
The banking industry is a highly competitive industry. After all, where depositors put their money, and which banks to borrow from is determined by how banks adjust their interest rates.Â
In some ways, banks are commodity businesses.
One good way to distinguish a profitable bank is reputation. And Dah Sing is 77 years old. Today, you can’t get any new banking license in Hong Kong anymore, which makes existing bankers like Dah Sing a well protected player against digital banks.
If there’s one lesson I learnt: banks, like any other businesses, are about surviving the worst of market cycles. You can tell how banks survive by looking at their deposit franchise. For a bank like Dah Sing, it’s actually flushed with deposits.Â
In its latest 1H2024 results, Dah Sing has total liabilities of HK$230 billion, most of it from customers’ deposits.Â
Credit: Dah Sing 1H2024 Financial Report
Unlike Lehman Brothers or Credit Suisse, this means Dah Sing doesn’t need to borrow money. And it’s unlikely Dah Sing will face a major bank with its strong reputation.
Why Dah Sing shares are falling?
Dah Sing Bank shares have fell 61% since it last traded at its peak in 2017.Â
First it was the Hong Kong unrest, then trade wars, then COVID-19 hit and more recently, the spike in US interest rates back in 2022.
Note: Hong Kong’s interest rates tracks US interest rates closely.Â
Credit: Hong Kong Monetary Authority
Along the way, Hong Kong has lost its economic juice. It has faced higher interest rates, a weak property market, and people aren’t just spending as much as it was before COVID.Â
Hong Kong’s home values have been the lowest over the last 8 years, falling about 28% since 2021.Â
If property prices continue to fall, rent drop, it could hit any banks’ mortgage business.Â
Credit: Bloomberg.com
Since Dah Sing has almost half of its loans in both residential and commercial real estates, the market just doesn’t like the stock anymore.
Credit: Dah Sing Bank 1H2024 Financial Results
What’s powering Dah Sing’s dividends?
But I believe, the biggest advantage is Dah Sing is flushed with deposits — it only lends out 70% of its deposits for loans. Its loans to deposits ratio is 70%.This gives it plenty of room for more firepower in the future.
And makes it far more conservative than it appears to be.
If the Fed continues to cut interest rates, it would encourage Dah Sing to lend more, which will improve its profitability.Â
During its latest half-year financial results, its total operating income grew 22% to HK$3.2 billion, meanwhile net profits grew 21% to HK$1.1 billion, as it grew its loans. Net interest margins, which is a measure of a bank’s profit margins, was stable at 2.1%. Mortgage lending business is still stable.Â
Credit: Dah Sing Bank 1H2024 Financial Results
Dah Sing’s biggest advantage for dividends?
It’s hard to get new land in Hong Kong anymore. The Hong Kong government isn’t going to sell land in a massive way. With an open economy, Hong Kong’s limited land supply should get outpaced by demand in the long term — making land indispensable.
This makes Hong Kong one of the most expensive cities in the world. Over the next decade, I’m sure Hong Kong will still be the most expensive Asian city, just ahead of Singapore...
Credit: Wall Street Journal
One concern I have is Dah Sing isn’t the same as it was before the global financial crisis. These days, it’s hard to find banks operating at high double digit ROE.Â
Today, after the global financial crisis in 2007, banks now have to add more capital to increase their “safety”, which reduces their efficiency for profits.Â
That’s why Dah Sing’s ROE continued to fall over the last couple of years. You can’t see that kind of extremely high ROE as it was before.
I can’t expect huge growth with Dah Sing Bank.Â
Having said that, at current prices, it a solid dividend payer.
Over the last 12 months, it paid HK$0.76 per share, which makes it a 10% yield at current prices.Â
Over the last 10 years, dividends have been growing at a steady pace. At this price, the stock market is valuing Dah Sing at a discount..
My Final Thoughts
But having said that, the way Dah Sing shares trade is just too much. I mean, at 0.3x PB and 10% yield just seems like an untapped opportunity for income.
Put it this way, property prices are down over the last decade. Markets don’t like this because Dah Sing owns a heavy mortgage book.Â
And if you’re counting on this bank as a growth stock, you’re in for a big shock.
Meanwhile, shares are trading at just a fraction of what its high quality mortgages are worth. Even if Dah Sing doesn’t grow, shares are already trading at a dividend yield of 10%, which makes this worth more than just being a growth stock.
Sometimes, investing can be simple.Â
Willie Keng, CFA
Founder, Dividend Titan
is the 3x increase in credit loss a cause for concern especially with a heavy mortgage loan book in view of plunging HK property prices and high cost of HK properties to income?
Hi LA!
Are you talking about the credit losses that’s set aside for potential loan impairments? There’s always a concern but I don’t think it’s a big issue. The increase is set by management in case if these loans really do get impaired 🙂
Cheers,
Willie