Dividend Investing with Bank Stocks

Date: August 10, 2016

An investor could invest for passive income through dividend earning from various global banks such as ICBC, OCBC, Public Bank, etc, which have consistent business performance each year. The 3 major banks in Singapore have corrected more than 20% in share price over the past 1 year, presenting excellent opportunities to the investors and traders. Let’s learn how to invest in banks.

Is investing in bank like saving in Fixed Deposit in bank? The difference is one will only gain interest from bank for the money in the saving account. If you invest in the bank, one will receive the interest in the form of dividends plus potential capital growth.

Banking is the most important sector that drives the economy of any country. So long as the country is continuing developing and the population keeps growing, the economy shall continue to grow. The banks in the country will benefit because any activity will need financial support. The thing to focus on a bank is the 2 different types of bank income that form the total income of the bank.

• Net-interest income

• Non-interest income

The core business of a bank is to make money by borrowing at one rate (via deposits and debt) and lending at another higher rate (via loans and securities). The spread is the net interest income.

Meanwhile, the non-interest income is the money the bank makes from other activities, such as fees on mortgages, fees and penalties on credit cards, charges on checking and savings accounts, and fees on services like investment advice for individuals and corporate banking for businesses.

In addition, 2 key ratios that indicate the strength of capital position of a bank:-

• Capital Adequacy Ratios (CAR)

• Non-Performance Loan (NPL) v.s. Allowances

Capital adequacy ratios (CARs) are measures of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset. MAS requires Singapore-incorporated banks to meet a minimum CAR to ensure local banks are safe even under stress conditions.

Non-performing Loans (NPL) – A sum of borrowed money upon which the debtor has not made payments for at least 90 days. A non-performing loan is either in default or close to being in default. Once a loan is non-performing, the odds that it will be repaid in full are considered to be substantially lower and allowances should be provided. Similarly, MAS provide guidelines on loan grading and provisioning for local banks.

The amount of NPL and provision made by the bank will directly affect its net earning declared. Hence, it will affect its dividend payout.

Understanding how to invest in strong bank stocks, can potentially provide both passive income and capital gains over the long term.

Author: Dr Tee Tong Yan, Founder of www.ein55.com