Neil Woodford has divested his holding in HSBC on the back of concerns UK banks are being levied with oversized and growing fines.
The manager, who until last year had not owned a bank since 2002, said HSBC is conservatively managed, well capitalised and praised chief executive Stuart Gulliver for a “great job” in the past four years.
Mr Woodford bought HSBC at the launch of his new fund in June but said in recent weeks he had become “more concerned” about one risk - namely ‘fine inflation’.
“Clearly, banks have attracted many fines in the post-financial crisis world as regulators and policymakers have cracked down on past and ongoing wrongdoings in the industry,” he said.
“The size of the fines, however, appears to be increasing.”
Mr Woodford said in 2012, HSBC was fined $1.9bn (£1.1bn) for failing to prevent Mexican drug cartels laundering money through its bank accounts and also highlighted a much larger fine for Bank of America, which agreed to pay $16.7bn to end investigations into its role in the run up to the financial crisis, selling toxic mortgages.
“This would represent the largest single federal settlement in the history of corporate America,” Mr Woodford added.
“Clearly, in both instances, these are wrongdoings which would be expected to incur a substantial fine.
“I am concerned, however, that these fines are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression.”
He added: “The size of any potential fine is unquantifiable, so this represents an unquantifiable risk.”
The manager added if a “substantial fine” were levied on HSBC it could “hamper its ability to grow its dividend”.
“I have therefore sold the fund’s position in HSBC, reinvesting the proceeds into parts of the portfolio in which I have greater conviction,” he said.
He said was “not suggesting HSBC is a bad investment” but viewed the shares as “broadly fair value”.
“By contrast, there are plenty of stocks I can invest in which look significantly below fair value – AstraZeneca, BAe Systems, Drax, Legal & General to name a few of the positions that have been recently increased – and I believe the long-term interests of my investors will be better served by focusing the portfolio towards them,” he said.
