Neil Woodford has dumped his entire shareholding in HSBC amid concerns that Britain’s biggest bank faces further heavy fines that could hamper its ability to increase dividends.
The former star manager at Invesco Perpetual, who now runs his own £2.65 billion fund, described HSBC as a “challenged business in a troubled sector”.
Citing the risk of what he dubbed “fine inflation”, Mr Woodford said he was worried that HSBC could be facing bumper fines for its alleged role in the Libor scandal and in the alleged manipulation of the foreign exchange markets. He pointed to the $1.9 billion HSBC paid two years ago to settle charges that it had failed to prevent Mexican drug cartels using its bank accounts to launder money.
With Bank of America having to shell out $16.7 billion last month to settle allegations that it mis-sold mortgages in the run-up to the financial crisis, fines appeared to be increasing and were based more on banks’ ability to pay, “rather than on the extent of the transgression”, Mr Woodford complained.
“The size of any potential fine is unquantifiable, so this represents an unquantifiable risk. Nevertheless, a substantial fine could hamper HSBC’s ability to grow its dividend, in my view.
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“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 pointed to shares in AstraZeneca, BAE Systems, Drax and Legal & General as offering better value.
HSBC declined to comment on Mr Woodford’s disposal or on his argument about potential fines and the dividend. It has told shareholders that it is responding to requests for information from regulators over Libor and is co-operating with inquiries into foreign exchange investigations.
The bank is not thought at present to be facing a substantial fine for any rule breaches involving the Libor benchmark and is not believed to be any more exposed than other institutions to the forex scandal.
Mr Woodford said that he began to buy HSBC shares in May last year, when he was still at Invesco. He accumulated the holding in his new fund, CF Woodford Equity Income, in the run-up to its launch in mid-June. His stake represented 2.68 per cent of his fund’s £1.6 billion value at launch, or about £42.88 million. HSBC shares have since risen by nearly 6 per cent and Mr Woodford is thought to have made a profit of about £2.4 million during the two months or so that he held them.
While he was at Invesco, Mr Woodford gained a fearsome reputation as a skilled stockpicker. He also enhanced his reputation by selling all of his bank stakes in 2002, well before the arrival of the financial crisis.
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His “sell” call on HSBC sent the bank’s shares more than 1 per cent lower for most of the day, although they recovered slightly to close 4½p down at 647½p.