Nov. 10 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank, said third-quarter profit rose even as it set aside a more- than-estimated $4.3 billion to cover bad loans in the U.S. and forecast ``further deterioration.''

The U.S. unit ``declined markedly'' because of consumer and corporate loan defaults, the London-based company said in a statement today. Pretax profit in the quarter was helped by lending in Asia, $3.4 billion in accounting gains on its debt and the sale of assets in France.

HSBC, the first European bank to report losses on U.S. subprime assets, has set aside $42.3 billion for bad loans across the company since the start of 2006. The latest provisions, needed to cover rising late payments on mortgage loans and credit cards, exceeded the $3.7 billion median estimate of three analysts surveyed by Bloomberg. Still, business in Asia is resilient and the bank won't cut the dividend or seek government help to raise capital, Chief Executive Officer Michael Geoghegan said today.

``The U.S. is weaker again, though the outlook for Asia is not too bad, whereas potentially I thought it could have been a horror show,'' said Leigh Goodwin, an analyst at Fox-Pitt Kelton Ltd. in London who has a ``sell'' rating on the stock. ``It's a mixed bag.''

HSBC fell 1.5 percent to 735.5 pence, valuing the bank at 89 billion pounds ($139 billion). The shares have declined 13 percent in London trading this year, making them the second-best performer in the 69-member Bloomberg European Banks index.

`Resilient'

Asian markets excluding Japan will grow by 7 percent next year, Geoghegan said. ``We expect Asian growth to remain relatively more resilient, although it is not yet apparent to what extent governments will succeed in encouraging stronger domestic demand to counterbalance export weakness.''

HSBC gets more than three quarters of its profit in emerging markets. London-based Standard Chartered Plc said growth in Asia is ``moderating.''

HSBC wrote down $600 million on credit assets against third- quarter profit. The bank also marked down $4.8 billion on the value of asset-backed securities against reserves, it said.

HSBC's first-half profit fell 20 percent to $7.7 billion as it put $10.1 billion into reserves for bad loans. The bank bought Household International for $15.5 billion in 2003 to become the biggest subprime lender at the time. Since then its sold units, reduced lending and ousted managers to contain losses at the division. HSBC cut 1,100 jobs in its global banking and markets division, which includes corporate and investment banking.

$1.3 Billion Injection

HSBC injected $1.3 billion into its U.S. unit in the third quarter. Further losses there depend on unemployment levels, Geoghegan said. ``We are a reflection of the economy,'' he said.

The bank takes in more customer deposits than it lends out, enabling it to avoid the funding shortages that forced Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc to sell as much as 37 billion pounds of stock to the U.K. government to increase capital.

Edinburgh-based RBS abandoned its profit forecast this month and may post its first annual loss in 2008 as credit losses worsened and bad loans rose. Banks and finance companies worldwide have reported almost $690 billion in writedowns and loan losses since the start of 2007 and raised about $714 billion in additional capital, according to data compiled by Bloomberg.

HSBC booked a gain of $2.4 billion from the sale in July of seven regional banking units in France to Banque Federale des Banques Populaires. HSBC agreed to buy 88.9 percent of PT Bank Ekonomi Raharja Tbk (Bank Ekonomi) for $607.5 million in cash in October to double its branch network in Indonesia.

`Low Quality'

``While third-quarter profit is ahead of last year, it is very low quality,'' said Simon Maughan, a London-based analyst at MF Global Securities Ltd. who has an ``add'' rating on the stock. He estimates profit for the quarter would have been $6.5 billion lower excluding the asset sale, gains on the bank's own debt and new accounting rules to mitigate writedowns.

HSBC was one of two big U.K. lenders that didn't fully pass on the Bank of England's 1.5 percent cut in interest rates last week. The government urged banks to follow the reduction.

``I haven't come under any pressure in that regard,'' Geoghegan said. ``I doubt we would react to pressure. We run the business for the benefit of our shareholders.''

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

Last Updated: November 10, 2008 13:31 EST