Neil Woodford, widely regarded as one of the UK's top fund managers, sold his holding in HSBC (HSBA) last month over the fines it is incurring for past misconduct.
The manager of the CF Woodford Equity Income Fund (GB00BLRZQ513) believes the fines will become such a burden to the bank they will affect its ability to pay dividends to investors.
For example, in 2012 HSBC was fined £1.15bn for failing to prevent Mexican drug cartels laundering money through its bank accounts. Last month, Bank of America agreed to pay $16.7bn to end investigations into its role in the run up to the financial crisis, selling toxic mortgages.
HSBC is the only bank that Woodford has held in his funds since 2002, suggesting that he believes it is a better investment than its peers. He started to build a position in the retail bank in May last year, and he included it in the portfolio of the CF Woodford Equity Income Fund (GB00BLRZQ406) at launch.
Mr Woodford regularly meets with the management of UK-listed banks, but he has remained concerned about the quality of loan books, capital adequacy and high leverage ratios.
Mr Woodford said: "HSBC is a challenged business in a troubled sector, but it has navigated through the headwinds that have blighted the banking industry in recent years robustly. I have questioned its valuation at times both pre and post financial crisis. But over the past couple of years it has returned to a more attractive valuation level, regularly trading at around or even below its book value and its yield is also appealing.
"I am worried that the ongoing investigation into the historic manipulation of Libor and foreign-exchange markets could expose HSBC to significant financial penalties. Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine.
"I'm not suggesting that HSBC is a bad investment but in the light of this growing risk, I now view the shares as broadly fair value. By contrast, there are plenty of stocks I can invest in which look significantly below fair value - for example, AstraZeneca (AZN), BAE Systems (BA), Drax (DRX), and Legal & General (LGEN)."
