Nov. 14 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, said emerging-market lending and a $1.3 billion accounting gain lifted third-quarter profit, offsetting losses on U.S. subprime mortgages that are spreading to credit- card and unsecured loans.

HSBC's securities unit has limited collateralized debt obligations backed by home loans to people with shaky credit, it said in a statement today. The London-based bank set aside $3.4 billion in the quarter to cover U.S. defaults, $1.4 billion more than it forecast in July.

``Given that they have increased provisions by more than $1 billion, for them to say pretax profit in the third quarter is ahead is little short of amazing,'' said Alex Potter, a London- based analyst at Collins Stewart Plc who rates the shares ``buy.''

HSBC, the first of the 10 biggest banks to take losses on U.S. mortgages, said consumer lending in the Middle East, Hong Kong and China are ``strongly ahead'' of last year. That's helping Chairman Stephen Green counter a ``broader deterioration'' in U.S. housing and credit markets than he forecast four months ago. The bank said it can't predict when the U.S. market will recover.

HSBC shares rose 2.8 percent to 866 pence in London, valuing the company at 102.4 billion pounds ($211 billion). The stock initially rose as much as 5.2 percent, its biggest gain in five years. HSBC has fallen 7 percent this year, outperforming the 15 percent drop for the Bloomberg Europe Banks and Financial Services Index and the 19 percent fall for the FTSE All-Share Banks Index.

Subprime Giant

North America pretax profit accounted for 17 percent of HSBC's total in the first half. Bad loans at the U.S. unit represented about 60 percent of default provisions. HSBC got 29 percent of pretax profit in Europe and 47 percent from Asia, with the remainder coming from Latin America.

Today's results show the benefits of HSBC's ``diversified business, both by geography and customer type,'' Fitch Ratings said in a statement. The company rates HSBC's debt AA, the third- highest grade. ``HSBC has traditionally been a deposit-focused group, and funding and liquidity are major strengths of the group and its major banking subsidiaries.''

The 142-year-old bank paid $15.5 billion for Household International Inc. in 2003 and became one of the largest U.S. subprime lenders. That forced HSBC to report U.S. mortgage losses as early as 2006. It took $10.6 billion in loan losses last year, pulling down 2006 net income to $15.8 billion.

Unsecured Losses

Chief Executive Officer Michael Geoghegan has since ousted managers, closed mortgage units and stopped trading and selling mortgage-backed securities. Still, Sanford C. Bernstein & Co. estimates HSBC will need $13.6 billion in loan reserves this year and will post worldwide net income of $20.6 billion.

``The market has not been anticipating a rise in unsecured losses,'' said Antony Broadbent, a London-based analyst at Sanford C. Bernstein & Co. ``That's what is going to kill HSBC over the next couple of years,'' said Broadbent, who has a ``market perform'' rating on stock.

The collapse of the U.S. subprime market and spillover to global credit markets triggered about $45 billion in writedowns among the world's largest banks. Citigroup Inc., the biggest U.S. bank by assets, said it may have to write down as much as $11 billion of assets on top of $6.5 billion of third-quarter credit- market losses. Citigroup's full-year profit will fall about 12 percent to $18.9 billion, according to the median estimate of six analysts surveyed by Bloomberg.

Associated Risks

HSBC's 2007 profit will rise 30 percent to $20.5 billion, according to the median estimate of 16 analysts.

The rise in third-quarter bad debts at HSBC ``underscores the risks associated'' with a bank that may be too large and too complex to be controlled effectively, Knight Vinke Asset Management LLC said in a statement following HSBC's report.

The New York-based investment firm, which tried to block Suez SA's merger with Gaz de France SA earlier this year, said last month that HSBC needs to consider ``radical alternatives'' to improve its performance, escalating a public campaign it started earlier this year against the bank.

HSBC's one-time accounting gain reflected money it borrowed before credit spreads widened earlier this year, it said.

``Third-quarter performance would have looked considerably worse'' without the gain, London-based analysts at Bear Stearns Cos. said. ``We would expect earnings to be downgraded given the expected increase in the impairment charge, and so we are cautious on the shares following strength in early trading,'' said analysts led by Robert Sage, who rates the stock ``outperform.''

`Early Stage Delinquency'

The bank posted $925 million in third-quarter writedowns on credit-related trades including securities backed by U.S. subprime mortgages. The bank also has $2 billion in subprime residential mortgages still to be securitized it said.

``The group has very little direct exposure to U.S. subprime mortgage-backed CDOs,'' it said.

HSBC's credit-card and unsecured lending are showing ``early stage delinquency,'' signaling that U.S. credit problems are spreading, the bank said. Falling house prices are squeezing consumer income, it said.

``Have we reached the bottom? I don't think anybody knows,'' Green said. ``The U.S. economy is a bit of conundrum.'' The bank had previously said it would take two to three years to dig out of its U.S. subprime losses. HSBC will take a $55 million charge to close an additional 260 consumer finance branches in the U.S.

U.S. `Pretty Grim'

``The U.S. is pretty grim and losses are going to remain high for some time, but HSBC is undertaking a restructuring of the business, which should stem losses in due course,'' said Simon Willis, an analyst at NCB Group in London who has a ``sell'' rating on the stock. ``The only comfort is that the losses could have been larger.'' Willis had estimated a writedown of $4 billion for the second half of 2007.

HSBC Finance Corp., the bank's Prospect Heights, Illinois- based subprime consumer banking unit, said third-quarter bad debts more than doubled to $3.2 billion from $1.38 billion. The impairments exceeded the $2.52 billion median estimate of three analysts surveyed by Bloomberg.

The unit posted a third-quarter loss of $1.3 billion, more than double the $492 million loss estimated by London-based analysts at Credit Suisse Group. That compares with $878 million of pretax profit last year.

`No Impairment'

HSBC's asset-backed commercial paper conduits are ``funding satisfactorily with no impairment of assets,'' the bank said in the trading update. The structured investment vehicles it manages ``have requisite funding arrangements in place'' HSBC said without giving further details.

The SIVs, companies that borrow in the commercial-paper market to invest in longer dated assets such as bank bonds and asset-backed debt, are not consolidated on HSBC's balance sheet, it said. Moody's said last week it may cut some of the lower ranking debt issued by HSBC's SIVs, citing declines in the market values of the companies' assets.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

Last Updated: November 14, 2007 12:21 EST