HSBC gave its starkest warning to date that new regulations might force it to leave Britain and said its U.S. bad debts had jumped as more homeowners stopped payments on their mortgages.
Europe's biggest bank on Wednesday reported a 36 percent fall in third quarter profits as the euro zone debt crisis hit investment bank income, while strains in the U.S. economy saw bad debts there jump by almost $1 billion, the first rise in two years.
Extra British regulations could cost HSBC $2.5 billion a year, which it said may be too high to stay, though it would delay its decision to move its headquarters back to Hong Kong or elsewhere until at least next year.
HSBC's London-listed shares fell 5.8 percent, as analysts said underlying profits of $3 billion in the three months to the end of September fell short of expectations and there was also disappointment on rising costs and U.S. bad debts.
Asian growth is insufficient to fill the hole left by run-off of the Household disaster in the U.S., and (investment bank) GBM profitability has fallen sharply, said Ian Gordon, analyst at Evolution Securities. The challenge of improving the group's cost efficiency is tortuous, he added.
The wider market was also under pressure and the EU bank index fell 4 percent as Italy's borrowing costs surged to more than 7 percent, raising fears it will also need a bailout that Europe cannot afford.
The outlook for the global economy is very challenging as problems in developed markets begin to affect growth rates around the world, HSBC Chief Executive Stuart Gulliver said.
Gulliver, who wants to cut annual costs by $3.5 billion and sharpen the bank's focus on Asia by quitting countries where it lacks scale, said he was making progress on costs and the turnaround plan, but it would be a long haul and external headwinds were building.
Losses on bad debts swelled to $3.9 billion in the third quarter, up $1 billion from the previous quarter, as U.S. impairments jumped by 64 percent to $2.4 billion, which the bank blamed on a moratorium on mortgage foreclosures.
We're seeing the effects of moral hazard, where even seriously delinquent customers simply cannot be foreclosed on by banks operating in the United States, Finance Director Iain Mackay told journalists on a conference call.
We believe we're seeing people taking payment holidays from their mortgages recognizing that banks are unable to foreclose on them, Mackay said.
Delinquencies on loans jumped in September. There was some stabilization in October, although the bank said a return to more normal foreclosure activity could weaken house prices.
HSBC became one of the biggest providers of U.S. mortgages for customers with a weaker credit history after its purchase of Household Finance eight years ago. It has closed the business and is running down its $50 billion loan book.
U.S. regulators suspended foreclosures, although banks in some states have restarted foreclosure actions since.
HSBC fired a warning shot at British politicians who are considering imposing tougher regulations, saying the cost might prompt it to move its headquarters out of the country where it has been based for the last 18 years.
Gulliver said requiring banks to hold substantial debt that can absorb losses if it hits trouble could force HSBC to issue $55 billion of senior debt, at an annual cost of $2.1 billion. He said deposit-rich HSBC does not need this extra buffer.
It pays another $400 million on its overseas assets under a UK bank levy.
You get to a $2.5 billion cost for being UK headquartered. This is a non-trivial decision, you don't move your head office on a regular basis, Gulliver said.
Mackay said of the $2.5 billion cost: We would probably view that as too high.
Gulliver said the decision would not take place at this month's board meeting, and would likely be taken in the next year to 18 months. It would only consider moving the holding company abroad, and the retail bank would always be based in the UK.
HSBC has so far said it will sell or retreat from 14 countries. They include the sale of its U.S. credit card business and branches in New York state, retail businesses in Russia, Poland and Chile, and its Canadian brokerage business. It is exiting Georgia.
It has also put its $1 billion general insurance business on the block.
HSBC's corporate clients provided a rare bright spot, but GBM's profit almost halved from the previous quarter to $1 billion. Operating income for credit and rates was a negative $460 million, swinging from income of $600 million the quarter before and offsetting strong profits in foreign exchange and equities.
Its costs so far this year were 54.6 percent of revenue, up from 54 percent last year, while it had reduced headcount by 5,000 since the first quarter.
The bank cut its holdings of the sovereign debt of Greece, Ireland, Italy, Portugal and Spain to $5.5 billion by the end of September, from $8.2 billion three months earlier.
HSBC's London-listed shares closed down 31.2 pence at 506.3p. The stock has fallen 22 percent this year -- still not as bad as a 34 percent drop in the wider DJ index of European banks.
(Additional reporting by Sudip Kar-Gupta and Rosalba O'Brien; Editing by Hans-Juergen Peters and Jane Merriman)