Why I’ve just spent £2,500 on this FTSE 100 stock

Last week, I bought shares in HSBC (LSE:HSBA), the third largest FTSE 100 stock. I made the investment on Friday, the day after US regulators announced they were closing Silicon Valley Bank (SVB). Bank stocks, and the broader market, reacted to the news. Since then, HSBC shares have fallen almost 9%, and the FTSE 100 is down more than 4%.

Investors get nervous as news spreads about banks facing financial difficulties. A stable banking system is essential for a functioning global economy. The collapse of Lehman Brothers in 2008 led to a banking crisis, and a prolonged downturn in global equity markets.

Although SVB’s failure is the second largest in US history – it has $200bn in assets – I think the health of the global banking sector is unfounded. Most of SVB’s customers are technology start-ups and venture capital firms. More than 50% of that exposure is in one industry. The bursting of the dotcom bubble showed how risky this sector was.

Why HSBC is different

The day after I bought the shares, HSBC acquired SVB’s UK operations for £1. But these two businesses are like chalk and cheese.

HSBC has a very different business model, both in terms of scale and customer base. It has 39 million customers (individuals and companies) in 62 countries. And it has net assets of $2.2trn, debt to every industry I can think of.

Last month, during earnings season when all the banks in the FTSE 100 announced their 2022 results, HSBC caught my attention. Compared to a year earlier, it reported a 4% increase in revenue to $51.7bn. And profit before tax and exceptional items rose 5%, to $19.9bn.

Encouragingly, HSBC reported the biggest increase in net interest margin (NIM). This is the difference between the interest earned on the loan and the interest paid on the deposit. This is a key metric for banks and a reliable indicator of profitability.

International reach

HSBC is more exposed to overseas markets than any other UK-listed bank. Nearly 60% of loans are to customers in Asia, the Middle East and North Africa. But I see this as a positive.

The International Monetary Fund predicts growth in developing and emerging Asia of 5.3% in 2023, and 3.2% in the Middle East and Central Asia. This compares to a forecast of 1.4% growth in the US, and 0.7% in the euro area.

Other stocks in the FTSE 100 are currently offering better returns. But HSBC is slightly above the average, and the directors have committed to paying dividends equal to 50% of earnings per share in 2023 and 2024. Payouts will be made every quarter, which will be good for cash flow.

If I buy shares on the day of results, they will cost me 9% more. Time will tell if I have made the right decision. Global stock markets, and bank stocks in particular, have not reacted well to the collapse of SVB. But I invest for the long term, and I am glad that the bank is now part of my portfolio.