* Says Libor, FX probes could expose HSBC
* Fears a substantial fine could hamper dividend growth
* Sells his fund's entire stake in HSBC
(Adds detail on other sellers of HSBC, context)
By Sudip Kar-Gupta, Nishant Kumar and Simon Jessop
LONDON, Sept 1 Star British fund manager Neil
Woodford sold his fund's stake in HSBC last month,
citing concerns about the impact of potential fines from several
industry-wide investigations on the banking group.
Banks in Europe and the United States have been fined for a
variety of transgressions as regulators increase their scrutiny
of financial institutions.
Two of the most high-profile and wide-reaching of the
investigations concern the setting of interest rates between
banks, specifically the London Interbank Offered Rate (Libor),
and the fixing of currency rates.
"I am worried that the ongoing investigation into the
historic manipulation of Libor and foreign exchange markets
could expose HSBC to significant financial penalties," Woodford
said in a blog posting on his fund's website.
"Not only are these potentially serious offences in the eyes
of the regulator, but HSBC is very able to pay a substantial
fine," said Woodford, who built a near cult-like status during
more than 25 years at Invesco Perpetual. He left in April to set
up Woodford Investment Management.
Asked about Woodford's share sale, HSBC said it had no
comment to make on the matter.
While Woodford is not the first to advise caution on the
sector after a flat start to the year for the STOXX Europe 600
Bank sector following a gain of nearly 70 percent over
the previous two years, investors pay close attention to the
bets of such high-profile fund managers.
Sell-side analysts retain a consensus "buy" recommendation
on HSBC stock, which currently trades at 1.1 times book value,
above the 0.9 times sector average, data from Thomson Reuters
For Woodford, who began building a stake in the UK's biggest
lender in 2013 after avoiding the sector since 2002, HSBC was "a
different beast" to its peers, many of which still had problems
over the quality of their loan books, capital adequacy and high
In spite of the fact he considered HSBC a
"conservatively-managed, well-capitalised business with a good
spread of international assets", Woodford said he had become
concerned in recent weeks about the threat of "fine inflation".
From the $1.9 billion paid by HSBC in 2012 over money
laundering to the $16.7 billion set to be paid by Bank of
America over its role in selling toxic mortgages, fines were
increasing, Woodford said, and looked to be based on a company's
ability to pay "rather than the scale of the transgression".
With the size of any potential fine "unquantifiable",
Woodford said he was concerned about HSBC's dividend payouts.
The stock currently yields 4.8 percent, against a FTSE 100
average of 3.8 percent.
"A substantial fine could hamper HSBC's ability to grow its
dividend, in my view. 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.
Woodford generated a return of more than 2,200 percent for
the Invesco Perpetual High Income Fund, while the FTSE All-Share
Total Return index rose 868 percent during the same period.
CF Woodford Equity Income Fund had 2.68 percent of its 2.4
billion pounds of assets in HSBC shares at the end of July,
according to the fund's factsheet. That meant the stake was
worth 64.3 million pounds ($107 million) at the end of July and
was the fund's biggest financial sector holding.
HSBC shares, which opened down 0.2 percent, extended their
fall to 1.4 percent after Woodford's blog post. The shares were
trading down 1.1 percent at 1357 GMT on Monday. By comparison,
Britain's FTSE 100 was down 0.1 percent.
Woodford had invested 17 percent of his fund's assets in the
broader financial sector at the end of July, far below the
roughly 25 percent weight of such stocks in his benchmark FTSE
All Share Index.
As well as HSBC, which was his second-biggest financial
sector holding, he had positions in companies including insurers
Legal & General, Hiscox and Catlin, and
doorstep lender Provident Financial.
(1 US dollar = 0.6018 British pound)
(Additional reporting by Matt Scuffham; Editing by David