It was originally founded as the Central Bank of China by the Republican government but the current iteration of the bank was established in 1949. As with most Chinese banks, it is completely state-owned and is headquartered in Beijing, although it has multiple subsidiaries located in more than 60 different countries around the world.
As of September 2023, the Bank of China is the ninth-largest bank in the world by market capitalization and the fourth-largest by total assets held. The Financial Stability Board considers the Bank of China a systemically important bank and a critical institution in the world’s second-largest economy. When it received this designation in 2011, it was the first bank in an emerging market to ever be deemed a systemically important bank.
In terms of its major subsidiaries, Bank of China’s largest operations outside of China are in Hong Kong and Canada. While the Bank of China operates on every inhabited continent, this business accounts for less than 10% of the company’s overall revenue.
A History of the Bank of China
The Bank of China was officially founded in 1912 but can trace its roots back as early as 1905 as the Daqing Hubu Bank. This bank was first established by the Qing government but was transformed in 1912 by the Sun Yat Sen government into the Central Bank of China. The founder was Chen Jintao who was the head of financial reform under President Sun Yat Sen’s regime.
In 2002, the Bank of China merged with the Jiaotong Bank to form a new entity called the Mega International Commercial Bank. Today, the Bank of China is the Mainland China operation of this merger. The Bank of China is the second-oldest bank in China after only the Bank of Communications which was founded in 1908 and based out of Shanghai.
The Bank of China is a majority state-owned entity but it is also publicly traded on the stock exchanges in both Shanghai and Hong Kong. Its stock is a component of both the Hang Seng Index and the SSE 50. At the time, the Bank of China was the first bank to ever have both an H-Share and A-Share offering and be dual-listed in both Hong Kong and Shanghai. Although it was founded in 1912, the Bank of China did not hold its IPO until June 2006.
Bank of China’s Stock
As a result, most Chinese stocks will differ in price depending on which exchange you check. Not only do the different exchanges offer a wide range of trading volume, but there is also a difference when listed in Hong Kong Dollars (HKD) and Chinese Yuan. As of September 2023, the Bank of China has a market capitalization of about $139 billion and is just ahead of American bank Morgan Stanley in value.
In Hong Kong, the Bank of China’s stock has a massive share float of more than 83 billion shares. On the Shanghai exchange, the Bank of China has a share float of more than 210 billion shares. With such share dilution, it is not surprising that the stock has not returned any meaningful gains over the past 18 years.
Perhaps another red flag for the stock is that the state-owned Central Huijin Investment Co. owns a majority of the shares. Its position is equal to about 64% of the company, which means that one institutional entity, in this case, the Chinese government, has a large say in the future of the bank. This is one of many reasons why many investors choose to steer clear of investing in Chinese companies.
Bank of China’s Dividend
The high dividend yield is more of a result of the stock price struggling and it likely isn’t a red flag as it would be with other stocks. The dividend payout ratio for the Bank of China sits around 30% so the dividend distribution is relatively safe. This ratio calculates the total number of dividends paid to shareholders as a percentage of the company’s net income. So only 30% of the Bank of China’s net income is paid out as dividends each year. In Hong Kong, the 5-year average dividend yield sits at 7.73% while in Shanghai this figure is 5.81%.
The Bank of China’s dividend growth rate has not been consistent over the years. The 10-year dividend growth rate has only grown by an average of 2.21%. Over the past five years, this growth rate has been better with an average increase of about 5.63% per year. The Bank of China does not raise its dividend each year and in fact, is not shy about lowering the dividend yield in some years.
Bank of China Products and Services
Consumer-facing services from the Bank of China include personal savings and wealth management, investment banking, personal loans, insurance, and credit cards. As with nearly every bank and financial platform in China, the Bank of China is fully integrated with mobile banking as well as Chinese super apps like WeChat and AliPay. The Bank of China even offers a Taobao credit card, which is Alibaba’s top eCommerce site in the country.
On top of that, the Bank of China provides a long list of enterprise services for China-based businesses. This includes a wide variety of enterprise insurance options for engineering, cargo transportation, machinery breakdown, and employer’s liability. It also has an enterprise annuity service for companies who want to offer their employees a pension plan. Finally, the Bank of China shows its global influence by providing Chinese companies with local account management services for overseas subsidiaries.
What Does the Future Hold for the Bank of China?
But as an investment, what does the long-term hold for the Bank of China? In all honesty, the Bank of China’s stock has never been a great investment for shareholders. Neither the A-Shares nor H-Shares have provided much in the way of an exciting return. While the dividends are solid and likely safe, the overall capital returns of the Bank of China have severely lagged investments in American banks or even broader indexes.
As with other Chinese banks like the Industrial and Commercial Bank of China (ICBC), the large share count is playing a role in keeping the stock price depressed. There is also the concern about these banks being state-owned and operated. While that might not immediately appear in the price of the stock, it does put a limit on how well these companies can perform.
One interesting result of the weakness in the Chinese market is that companies with depressed stock prices have been undertaking steady stock buybacks. Stock buybacks are usually a positive result for shareholders as it shows that the company believes its own stock is undervalued, and it also boosts shareholder equity.
Is this enough to make the Bank of China a good investment? If you are bullish on China for the long run, then you can make a case to buy cheap Chinese bank stocks right now. While this seems like a good value investment, remember that the Bank of China has had a long history of underperforming with negative shareholder returns.
As a business, the Bank of China should continue to benefit from a rapidly growing middle class and one day, the Chinese economy should return to a period of growth. But as an investment, it’s hard to forecast if the stock will ever buck its historical trend and provide shareholders with a market-beating return. Given the stock’s abysmal performance over the past 18 years, there are other investments with better potential long-term risk-reward profiles.