March 29 (Bloomberg) -- HSBC Holdings Plc Chairman Stephen Green said the U.S. subprime mortgage services division will be ``run down significantly'' as the world's fourth-biggest bank by market value tries to recover from loan losses.

HSBC is curtailing the sale of so-called second-charge loans, which don't have first claim on assets when a loan isn't repaid, as it tightens credit controls after an increase in defaults at the unit caused U.S. earnings to plunge.

``Whether or not we completely write it off I'm not sure,'' said Green, in reference to the subprime mortgage services unit, speaking to reporters in Kuala Lumpur today.

HSBC had said it would stop buying second-charge loans from other lenders earlier this month, when it reported 2006 results. Still the London-based bank has continued selling its own.

HSBC reported an 87 percent drop in second-half profit in North America as delinquencies on subprime mortgages in the U.S. rose to a four-year high in the fourth quarter. Escalating defaults have touched companies ranging from mortgage lender New Century Financial Corp. to Lehman Brothers Holdings Inc. and General Motors Corp.

Consumers will only be offered ``standard'' second-charge loans where the reset, the difference between the introductory rate of interest and the standard rate on the loan, is narrower, said London-based HSBC spokesman Richard Lindsay by telephone.

`Lower Volatility'

``It represents less of a risk because there is lower volatility in the borrower's repayments,'' said Lindsay.

HSBC bought Household International Inc., a U.S. subprime lender, in 2003 for $15.5 billion. Subprime refers to mortgages granted to people with poor credit histories or high debts. More than 20 mortgage companies have closed in the U.S., declared bankruptcy or sought buyers since the start of 2006.

``The subprime lending market is going to get worse,'' said Jim Rogers, chairman of Beeland Interests Inc., who is selling short shares in Fannie Mae, betting on a price drop. ``We've had many housing bubbles in America in the last couple of hundred years. This is going to be the worst.''

HSBC's second-half profit dropped 5.7 percent to $7.06 billion, primarily because of the increase in U.S. loan defaults. Bad loans in North America rose 51 percent to $4.6 billion in the period and account for more than two-thirds of the bank's total.

`On the Case'

The business of buying subprime mortgages through brokers ``grew more than it should have,'' Green said. ``It's a workout that will take a year or two or three, but we're on the case and we will fix the problem.''

Mortgage services account for about 2 percent of HSBC's total lending assets, making the losses ``very containable,'' Green said. HSBC may sell some assets, though not at ``fire sale prices,'' he added.

While shrinking the U.S. mortgage unit, HSBC is investing in emerging markets in Asia, Latin America and the Middle East to profit from faster-growing economies, Green said. Key markets include China, India and Indonesia.

Europe's biggest bank also plans to expand its insurance business globally and has applied for an insurance partnership in China, said Green. There's a ``tremendous opportunity'' to double the share of group profit coming from insurance to 20 percent over coming years, he said.

HSBC also plans to use Malaysia as a center for its Islamic banking business in Southeast Asia, he said. The Malaysian unit has applied to the central bank to set up an Islamic banking subsidiary in the country, said Zarir J. Cama, chief executive officer of HSBC Bank Malaysia Bhd.

The Malaysian unit is also seeking central bank approval to open eight more branches in the country, after opening four in the past year. It has 40 branches in Malaysia currently.

Malaysia has the region's largest Muslim population after Indonesia, with about 60 percent of its 27 million people practicing the religion.

To contact the reporters on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net; Chia-Peck Wong in Hong Kong at 6532 or cpwong@bloomberg.net

Last Updated: March 29, 2007 10:44 EDT