The FTSE 100 recently hit a record high, defying the gloomy economic forecasts. But when I look underneath the bonnet, all is not what it seems. The FTSE 100 has lagged some other major indexes this year. This requires me to get savvy with my individual stock picking. The FTSE 100 isn’t outperforming, but there’s a stock that clearly is — HSBC Holdings (LSE:HSBA).

The global bank is already beating the FTSE 100. The shares are up 15% this year, compared to the main index (4%).

FTSE 100 banking shares

With recent interest rate rises, it’s an opportune time for me to look at the banking sector. Many analysts are forecasting that the Bank of England’s Monetary Policy Committee will lift interest rates higher still. This could be a boon for banks in 2023. I’m bullish on their earnings and on these stocks, based on higher interest income, decent dividend growth, and better financial health since the financial crises.

Of course, these stocks aren’t without risk. The benefits of interest rate rises tend to be partially countered by an uplift in loan defaults, particularly in the case of a struggling British economy. Certainly, low economic growth can severely dampen the growth prospects of the banking sector — as well as the businesses it serves.

HSBC’s global coverage

My main attraction to HSBC shares above other UK banks is its global operations around the globe. It’s a major player in Asia and is doubling down on investment there. This broader exposure also reduces the risk to me, because group profits aren’t dependent on the performance of just one economy.

However, this global coverage also poses a risk. The bank is bloated with many unprofitable global ventures driving high operating costs. Its retail banking offer in New Zealand is one example. I’d be keen to see plans in its upcoming results of more asset disposals to make the company a leaner, more profitable machine.

FTSE 100 bargain

Regular readers will know that I love bargains. Despite the good run in the HSBC share price recently, it’s the fundamentals that make the most compelling investment case for me.

I note the stock is one of the highest-yielding in the FTSE 100, with a forward yield of 7%+. I also see that the shares are trading at a very modest value too. The price-to-earnings ratio is 7 times, compared to the UK peer average of 9 times.

Alongside this, analysts seem to think the stock is trading at 40% below its fair value. I certainly see upside potential regarding its valuation. Revenue for the underlying business is forecast to grow 7.1% per annum (on average) during the next three years, compared to 5.8% growth forecast for the UK banking sector overall.

I hope its upcoming Q4 and full-year results for 2022 this month will make for pleasant reading.

In the higher interest rate environment globally, HSBC is well-positioned to benefit, I feel. Though a cyclical business that could be victim to a faltering UK economy, it’s internationally diversified enough to increase its profitability. I expect HSBC to generate more income this year as interest rates rise.

For these reasons, I intend picking up some shares. But that’s on the proviso the long-term outlook in the upcoming results this month is in line with my expectations.

The post HSBC shares are outperforming the FTSE 100. Should I buy this month? appeared first on The Motley Fool UK.

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Henry Adefope has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.