A High Yielding Bank with Chinese Growth

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Remember when big banks paid big dividends? Before the financial crisis Citigroup ( C ) paid a quarterly dividend of $0.54; last quarter's dividend was $0.01. Bank of America ( BAC ) paid a per-share $0.64 quarterly dividend as recently as late 2008; December's quarterly dividend was $0.01. But, not all big-bank dividends have faded into memory.

Some large banks around the world avoided catastrophic losses during the economic downturn. One bank, in particular, not only offers a solid dividend but strong growth potential as well.

Hang Seng Bank LTD (OTC: HSNGY.PK) is the second-largest bank in Hong Kong and a subsidiary of U.K. banking giant HSBC Holdings PLC ( HBC ) , whose $204.7 billion market capitalization ranks it as one of the largest listings on the New York Stock Exchange. Founded in 1933, Hang Seng Bank offers a wide range of financial services and operates 220 service outlets in Hong Kong, and through its subsidiary, Hang Seng Bank, operates 34 outlets on mainland China.

Unlike most big banks these days, Hang Seng Bank pays a high dividend, and unlike most foreign companies, the bank pays quarterly dividends. Payments are generally made in April, June, September and December, with three equal dividends and a larger dividend in the April period. (If you want to get paid more often than that, use this proven income strategy.) The last dividend, paid in June, was $0.142. In 2009, dividends totaled $0.81, for a strong 5.5% yield.

The dividend appears solid, as net profits in the first half of about HK$6.45 billion easily covered dividend payments of HK$2.1 billion. Payments are made in U.S. dollars and, since Hong Kong dollars are pegged to the U.S. dollar, there is no currency volatility. Dividends have no foreign tax and qualify for the reduced 15% tax rate in the United States.

In addition to paying a solid dividend, the bank has excellent growth prospects, thanks largely to its neighbor to the north. In 2003, Hong Kong and China signed the Closer Economic Partnership Agreement ( CEPA ), which was designed to facilitate increased trade between the two nations by eliminating trade barriers. As a result of the increased access to business in China, Hang Seng Bank established Hang Seng Bank (China) in 2007, a wholly owned subsidiary.

As "Hang Seng" means "ever growing," the bank intends to be true to its name by taking the opportunity to expand in China.

The bank has made giant strides in high-growth China. In the first half of 2009, Hang Seng Bank increased its customer base in mainland China by +45% from just the first half of 2008. As a result, operating income from China business increased +19.9% in the first six months of 2009 from a year earlier. At the same time, China contributed 11.7% of total bank profits in the first half, up from 9.4% in the first half of 2008.

Hong Kong itself has been no slouch in terms of economic growth, but neither has it been immune from problems elsewhere. From 1989 to 2007 GDP grew by an average of +5% per year, making the island one of the fastest growing economies in the world. However, as a small island without a lot of resources, Hong Kong is highly reliant on international trade and exports. The worldwide financial crisis sent Hong Kong plunging into recession in the second half of 2008.

But, thanks to China's massive $586 billion stimulus package early in the year as well as stimulus spending from other Asian governments, Asia grew industrial production by about +36% in the second quarter of 2009. Meanwhile, annualized GDP for the region soared to about 10%.

Hang Seng Bank's results were down substantially in the first half of 2009. Operating profit fell -26% from HK$9112 in the first half of 2008 to HK$6740 in the first half of 2009. However, thanks to growth in Asia, first half 2009 results are much better than the second half of 2008. Profits were a whopping +46.1% higher in the sequential six month periods. In addition, increased worldwide economic growth likely will have shown improved results in the second half of 2009.

And, things are looking up for 2010. The International Monetary Fund ( IMF ) pegs growth for the region at a stellar +5.8% clip this year, up from +2.8% in 2009. The IMF puts China's growth at +9% compared with +8.5% in 2009. In contrast, the IMF predicts that output in the Group of Seven economies (the United States, Canada, France, Germany, Italy, the U.K. and Japan) will collectively grow at an anemic +1.3% in 2010.

Hang Seng Bank is well established in the midst of the world's fastest growing economies and offers upside potential from growth in China as well as a global economic recovery. The bank also provides a 5.5% yield, which is something not often offered along with the growth potential in Asia.

Having come down more than -10% from its highs in late July, Hang Seng Bank is reasonably priced now.

P.S. If you're looking to supercharge your income, you need to learn more about Carla Pasternak's "High-Yield Stock of the Month" for January 2010. This dominant player delivered +50% gains in 2009 and saw its earnings surge +69% last quarter. It's never missed a single dividend payment, dividends have rocketed +800% in the past five years, and the stock still yields nearly 10%. Keep reading...

Disclosure: Tom Hutchinson does not own shares of any security mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Stocks

Referenced Stocks: BAC , C , CEPA , HBC , HSNGY.PK , IMF

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