An investor could invest safely for passive income through dividend earning from various global banks such as ICBC, OCBC, Public Bank, etc, which have very consistent business performance each year.  The 3 major banks in Singapore have corrected more than 20% in share price over the past 6 months, presenting excellent opportunities to the investors and traders.  Let’s learn how to invest in banks:

Invest in bank is like saving in Fixed Deposit in bank. The difference is one will only gain interest from bank for the money in saving account.  If invest in the bank, one will receive the interest plus potential capital growth.

Bank is the most important sector that drives the economy of any countries. So long the country is continuing developing and the population keeps growing, the economy shall continue the growth. The banks in the country will benefit because any activities will need financial support.  The big thing to focus on 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 net interest income.

Meanwhile, non-interest income is the money the bank makes from everything else, 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 required Singapore-incorporated banks to meet a minimum CAR to ensure local banks are safe even under stress condition

‘Non-performing Loan (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. 

We should learn to find the top 10 global bank stocks with excellent business for our investment portfolio, buying at discounted price at low optimism, ahead of other potential big buyers who are also looking for these valuable assets.  Certain Bank stocks could be in crisis when there is global economy slowdown with high debt.  Therefore, we should only consider giant Bank stocks with strong fundamentals, not just any stock with price discount, buy low and sell high or hold patiently for both capital appreciation and passive income.