Why I Just Bought More of This Brilliant Bank Stock

I recently bought a foreign bank stock. Should you follow me or buy Canadian lenders like First National Financial (TSX:FN) instead?

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Recently, I added to a bank stock that I have held in my portfolio for about a year now. A Chinese bank, this stock sports a hefty 8% dividend yield, or 7.2%, after China’s dividend withholding tax is subtracted. Unlike the United States, China does not charge a 15% tax on dividends but rather a mere 10%. This makes dividend-paying Chinese stocks attractive from a tax perspective.

In this article, I will reveal the Chinese bank stock that I have been buying as well as a Canadian alternative you could buy if you’re averse to investing in China.

Postal Savings Bank of China

Postal Savings Bank of China (OTC:PTSV.Y) is a Chinese bank that lends to individual Chinese people in rural areas. If you are familiar with China’s economy, you will have recognized two attractive features of PSTV.Y just in the previous sentence:

  1. Individual Chinese people: China’s property companies are under financial strain. Chinese banks that lend to individuals instead of real estate companies and other stressed corporations will do better over the long run than those lending to China’s collapsing property companies.
  2. Rural areas: Rural development is one of the Chinese government’s top priorities. Although many of China’s big cities are quite rich, the rural population is still, by and large, poor. The government hopes to change this — without simply moving rural dwellers to big cities — by investing in the rural economy. Thus, Postal Savings Bank’s business operations are well aligned with China’s government policy. This could signal that the government will be friendly to Postal Savings Bank.

How is Postal Savings Bank doing with all of these advantages? Pretty well, it seems. In its most recent quarter, it delivered the following:

  • $4.98 billion in operating income, up 1.24%
  • $4.7 billion in net income, up 2.45%
  • A 9.46 common equity tier-one ratio (CET1), above the regulatory requirement

A little bit of explanation is in order on that last point. The CET1 ratio is tier-one capital (cash and common stock) over risk-weighted assets. It’s a measure of how risky a bank’s asset base is. PSTV.Y’s CET1 ratio is considered adequate, which is a good sign on the risk front.

A similar Canadian stock

Not everybody is comfortable investing in China. Its government has been accused of various misdeeds, and there’s always a remote possibility of shares getting delisted in the event of a Taiwan invasion. If you are not comfortable holding Chinese stocks, here’s a Canadian alternative to Postal Bank:

First National Financial (TSX:FN) is a bank stock with a 6% dividend yield. First National Financial is similar to Postal Bank in many ways. It’s not a bank; it’s a pure-play mortgage lender, which makes it somewhat comparable to PSTV.Y’s “consumer-oriented” business. The difference is that FN doesn’t take deposits. Instead, it finances its loans with bond issues, which means it doesn’t face the risk of deposit flight.

First National is doing very well as a business — in fact, it’s doing better than Postal Savings Bank. In its most recent quarter, it grew its revenue by 26% and its earnings by 109%. That’s much faster than PSTV.Y’s growth. The only reason I like PSTV.Y more than FN, is because it’s just dramatically cheaper. Postal Bank trades at 4.6 times earnings and 0.51 times book value. There’s no Canadian financial stock that’s that cheap.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in Postal Savings Bank of China. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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