Last week, I purchased 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 wider market, reacted badly to the news. Since then, HSBC’s shares have fallen by nearly 9%, and the FTSE 100 is down over 4%.
Investors get nervous when news spreads of a bank facing financial difficulties. A stable banking system is essential to a functioning global economy. The collapse of Lehman Brothers in 2008 prompted a banking crisis, and a prolonged downturn in global equity markets.
Although the failure of SVB is the second-largest in US history — it had $200bn of assets — I think concerns about the health of the global banking sector are unfounded. Most of SVB’s customers were technology start-ups and venture capital firms. Over 50% of its exposure was to one industry. The bursting of the dotcom bubble showed how risky this sector can be.
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Why HSBC is different
The day after I bought the shares, HSBC acquired the UK operations of SVB for £1. But these two businesses are like chalk and cheese.
HSBC has a very different business model, both in terms of scale and its customer base. It has 39m customers (individuals and companies) in 62 countries. And it has net assets of $2.2trn, lending to every industry I can think of.
Last month, during earnings season when all of the banks in the FTSE 100 announced their 2022 results, HSBC caught my eye. Compared to a year earlier, it reported a 4% increase in revenue to $51.7bn. And profit before tax and exceptional items was up 5%, to $19.9bn.
Encouragingly, HSBC reported the biggest increase in its net interest margin (NIM). This is the difference between the interest earned on loans and that paid on deposits. This is a key metric for banks and a reliable indicator of profitability.
International reach
HSBC is more exposed to overseas markets than other UK-listed banks. Nearly 60% of its lending is to customers in Asia, the Middle East and North Africa. But I see this as a positive.
The International Monetary Fund is forecasting growth in emerging and developing Asia of 5.3% in 2023, and 3.2% in the Middle East and Central Asia. This compares to predictions of 1.4% growth in the US, and 0.7% in the euro area.
Other stocks in the FTSE 100 are currently offering a better yield. But HSBC’s is slightly above average, and the directors have committed to paying a dividend equivalent to 50% of earnings per share in 2023 and 2024. Payouts are going to be made quarterly, which will be good for my cash flow.
Had I bought the shares on results day, they would have cost me 9% more. Time will tell whether I have made the right decision. Global stock markets, and bank shares in particular, have not reacted well to the collapse of SVB. But I’m investing for the long term, and I’m glad that the bank is now part of my portfolio.
