HSBC's new boss is to cut back in retail banking and may sell its U.S. credit card arm in a bid to cut $3.5 billion in costs and revive flagging profits.

Europe's biggest bank faces an urgent need for action as over two-fifths of its businesses are not delivering their cost of capital, Chief Executive Stuart Gulliver said.

Retreating from high street services in some countries and savings ranging from IT cuts to reducing paperwork would help trim costs as a share of revenue to 48-52 percent by 2013 from 61 percent in the first quarter.

Many banks, including HSBC, have seen this ratio rise sharply, partly through competition for staff in fast-growing Asian markets.

By comparison, rival Standard Chartered's cost/income ratio was 56 percent last year. But others have done more to keep costs below 50 percent, such as Spain's Santander, where it was 43 percent last year.

We clearly have a cost problem, Gulliver said in a presentation to explain his strategic overhaul on Wednesday.

We've added $3 billion in costs over the last few years with no revenue to show for it, said the 51-year-old CEO, who took the top job at the start of the year after a damaging boardroom struggle last year.

Gulliver said a lot of the savings will be reinvested in higher growth areas. He reckons he can get $4 billion a year in additional revenues from winning business from wealthy customers and an extra $1 billion from making commercial and investment banking work more closely together.

But improving revenues remains a challenge, investors said.

They're having to cut costs because they're operating in an environment where revenue growth will be hard to come by, said Brown Shipley fund manager John Smith, who has HSBC shares in his portfolio.

The extent of Gulliver's task was laid bare on Monday this week, when the bank's results showed a jump in costs dragging quarterly profits down some 14 percent.

Investors and analysts were unimpressed by the plan, and HSBC shares dipped 0.8 percent to 651 pence at 1150 GMT.

Half of...(the) things they should be doing anyway, Brown Shipley's Smith said.

What is radical for HSBC is just not that radical for outsiders looking in, said Simon Maughan, analyst at MF Global in London.

The retreat marks a big shift from HSBC's traditional strategy, which has been criticized as planting flags around the world with little consideration to profitability.

It spans 87 markets and has 95 million customers and 300,000 staff.

Things that previously would never have been considered, we're now going to kick the tires on, Gulliver told reporters. Historically we've tried to do everything, everywhere. We're not going to do that.

HSBC will focus its wealth management business on 18 of the most relevant economies, and limit retail banking to markets where it can achieve profitable scale.

In retail banking it will focus on core markets such as Hong Kong and Britain, high growth markets like Mexico, Singapore, Turkey and Brazil, and smaller countries where it has a strong position.

It will exit retail banking in Russia and review its 475 branches and credit card arm in the United States.

Gulliver insisted HSBC was not going to be a forced seller of its U.S. credit card business, which could free up as much as $25 billion of capital, Barclays Capital analysts estimate.

The cards business in not strategic to us. However, we have lots of capital and lots of liquidity so we're not a forced seller, but if we're going to be disciplined we need to look at this, he said.

The cards business is profitable, but the United States has been seen as a low-return area for the bank, following HSBC's disastrous purchase of the Household mortgage business there before the global financial crisis.

Cost savings will range from saving $300 million a year by simplifying its regional structure and saving $175 million by moving its IT operations to lower cost locations, to reducing paperwork to save $100 million.

He expects to be able to limit the impact of tougher regulations on its capital ratios to about 120 basis points through mitigating action. The bank had previously warned Basel III regulations could hurt capital by 250-300 basis points.

The bank will also target a dividend payout ratio of 40-60 percent.

Gulliver needs to act to lift return on equity to his 12-15 percent target, from 9.5 percent last year and around 5 percent in the previous two years. It could take two to three years to achieve that goal, he said.

About 42 percent of the bank's businesses are delivering a return below its 11 percent cost of capital. You can see why there is an urgency to get on with this, Gulliver said.

Some analysts saw the returns goal as disappointingly low.

They are sending a pretty damning message for achievable returns for banks in general on a worst-case interpretation of regulations. It's a negative message about what (returns) banks can generate, MF Global's Maughan said.

Gulliver dismissed speculation about HSBC's investments in businesses in China, saying holdings such as its 16 percent stake in insurer Ping An were not for sale.

(Additional reporting by Clare Jim and Denny Thomas in Hong Kong and Sudip Kar-Gupta in London; Writing by Alexander Smith; Editing by Lincoln Feast and Andrew Callus)