Aug. 1 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, may report its sharpest decline in profit since 2001 as costs for bad U.S. loans increased.

First-half net income probably dropped 33 percent to $7.34 billion from a year earlier, according to the average estimate of 11 analysts surveyed by Bloomberg. The London-based company may say Aug. 4 that it added $9.7 billion to loan-loss reserves during the first six months of the year, after setting aside $27.8 billion over 2006 and 2007.

``Investors will be looking to see that there are no more nasty surprises in the U.S.,'' said Julian Chillingworth, the chief investment officer at London-based Rathbone Brothers who helps manage $21 billion and holds HSBC shares. ``They will also be concerned if they have seen a marked slowdown in Asia.''

HSBC has relied on emerging markets and profits in Europe to counter losses from the collapse of the subprime market. Chairman Stephen Green said at the annual shareholders' meeting on May 30 that the U.S. economy may slip into a recession as deterioration in the housing market extends into 2009.

The company, which has operations in 83 countries and territories, depends on North America for about 25 percent of its annual revenue. HSBC became the biggest U.S. subprime mortgage lender in 2003 through the acquisition of Prospect Heights, Illinois-based Household International Inc.

Losses in U.S.

HSBC's North American operation may post a first-half loss before taxes of $1.87 billion, compared with earnings of $2.44 billion a year ago, as loan defaults climbed, an average of six analysts estimate.

``The interim results will refocus the market's attention'' on HSBC Finance Corp. in the U.S., said Jonathan Pierce, a London-based analyst at Credit Suisse Group AG, who has a ``neutral'' rating on the stock. ``Provisions will remain elevated through 2009.''

Pretax earnings from Europe probably fell 13 percent to $3.51 billion because of lower revenue at its securities unit and higher credit-related costs, analysts estimate. The company may say first-half profit in Hong Kong and the rest of Asia rose 4.3 percent to $6.96 billion, analysts estimate.

Earnings from Hong Kong, India, Mexico and Brazil are helping support the bank's shares. HSBC, down less than 1 percent this year, is the top performer in the eight-member FTSE 350 Banks Index. It ranks as the world's third-largest bank by market value after limiting credit-market writedowns that led to record losses at competitors led by New York-based Citigroup Inc. and UBS AG in Zurich.

Capital Ratios

Banks and financial companies worldwide have posted about $460 billion of loan losses and writedowns in the past year amid the worst housing market in the U.S. since the Great Depression, data compiled by Bloomberg show. HSBC has disclosed $19.5 billion of mortgage-related markdowns, compared with $54.6 billion at Citigroup and $38.2 billion at UBS since the start of 2007, according to Bloomberg data.

HSBC's so-called core Tier 1 capital -- a measure of financial strength that shows a bank's ability to withstand losses -- was 9.3 percent at the end of 2007, compared with 7.3 percent at Edinburgh-based Royal Bank of Scotland Group Plc, company reports show.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: July 31, 2008 20:27 EDT