When China devalued its currency to boost exports, shockwaves rippled around the world, with surrounding countries that rely on China for growth especially feeling the effect.  But even Australia’s economy, already reeling from falling commodity prices, was dealt another blow from slowing trade with China, Australia’s biggest export market.

Australia hopes its weak currency will drive exports and make its economy less dependent on commodities. In the meantime, though, the country faces slower growth.  The International Monetary Fund predicts Australia’s economy will grow only about 2% for the next two years, down from 3.25%, the rate at which the country’s economy grew for the past three years.

The financial sector, which mirrors the broader economy, will also slow. While this outlook means our GIE aggressive holding Westpac Banking’s (NYSE: WBK) will face some significant headwinds, we hold firm on our belief that Australia’s second-largest bank will continue to pay a solid dividend.

Australian financial stocks have been hit especially hard, a reversal of fortune given that they had largely outperformed the market in the past few years as the economy was booming. While the broad Australian market fell 4.5% this year, shares of Westpac on the Australian Stock Exchange were down roughly 8.4%. The “Big Four” Australian banks, which besides Westpac include Commonwealth Bank of Australia, Australia and New Zealand Banking Group and National Australia Bank, posted an average decline of 10.8%. The weak performance pushed the group’s average dividend yield to about 6%, and some investors are bracing for possible dividend cuts.

Dividend Worry

Several factors will affect Westpac’s fortunes immediately. The sluggish economy will continue taking a toll on the company’s profits, as it collects less in interest payments and as loan defaults increase. Like its peers, Westpac’s dividend payout ratio is currently about 77%, which is above its safe payout range of 60% to 70%. And these payout ratios for all major banks are expected to rise to about 80% next year.

The Australian Reserve Bank’s policies have a direct effect on the banks. The reserve bank recently announced it will leave its official interest rate at 2%, signaling that it is comfortable with the country’s growth trajectory. But if conditions deteriorate, the bank may reduce interest rates to help the economy. This would depress earnings more and possibly force the bank to cut payouts.

Westpac currently yields a generous 6.31%, and trimming that payout will still produce a sizable yield.

Plus, given Westpac maintains a payout range for its dividends, we expect it to boost payouts as the economy and the bank’s bottom line recovers.

Too Big to Fail

Another major concern right now is the expanding housing market, which many believe is veering into bubble territory, similar to the U.S. housing market last decade. But policy makers recognize this and have implemented preventative measures such as tightening lending to slow down home price appreciation.

The Australian Prudential Regulation Authority (APRA) has long pushed the big four banks to build up their capital ratios to stay at the top quartile of global banks. This has earned the group a place among the world’s 20 safest banks because this capital buffers them from any potential catastrophes.

Consequently, Westpac is already well-capitalized, with a Tier 1 ratio of 8.8%,  well above the APRA’s minimum requirement of 4.5%. In September, the bank strengthened its capital base by raising $940 million from the sale of 13.24 million Capital Notes 3, which qualifies as additional Tier 1 capital.

As the country’s second-largest bank, Westpac has a market cap of roughly $68 billion, so that the term “too big to fail” immediately comes to mind. In the event of a U.S.-style housing bubble burst (which is unlikely to happen due to policy changes), the Australian government will certainly step in to bail out its largest banks similar to Bank of America’s $20 billion bailout in 2008.

Favorite Status

After a tendering process that took four years, Westpac was able to retain its role—something its held since 1989—as the Australian government’s main bank. Although five other banks were awarded smaller contracts, Westpac won the core contract for transactional banking services and shares the remaining government business for foreign exchange, payment services and card services with other banks.

Under a recently signed eight-year contract, the bank will profit from 35 core government agencies that will be required to use Westpac’s services.

Given Westpac’s status as most-favored bank, its large capital reserves and conservative management, we are confident the bank will maintain a high dividend yield, even if the dividend is trimmed should the Australian economy worsen.

Buy Westpac up to $34.