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LONDON (Reuters) - HSBC HSBA.L said costly new capital rules might force it to leave Britain, a threat it has made before, but which this time came with a bigger-than-expected fall in profit and a warning of "very challenging" conditions ahead.
Extra British regulations could cost $2.5 billion a year, which the bank said on Wednesday may be "too high" to stay, though it would delay its decision to move its headquarters back to Hong Kong or elsewhere until at least next year.
HSBC's corporate clients provided a rare bright spot, but its investment bank revenues slumped in credit and in rates, while a U.S. moratorium on mortgage foreclosures forced U.S. delinquencies up for the first time in two year and drove losses on bad debts sharply higher.
Shares in Europe's biggest bank fell more than 5 percent, after HSBC said its underlying pretax profit in the three months to the end of September fell 36 percent from a year ago to $3 billion.
"Asian growth is insufficient to fill the hole left by run-off of the Household disaster in the U.S., and (investment bank) GBM profitability has fallen sharply," said Ian Gordon, analyst at Evolution Securities. "The challenge of improving the group's cost efficiency is tortuous," he added.
HSBC 0005.HK Chief Executive Stuart Gulliver aims to cut annual costs by $3.5 billion and sharpen the bank's focus on Asia, quitting countries where the bank lacks scale in an attempt to revive profitability.
HSBC said loan impairment charges in the third quarter were $700 million higher than a year ago, mainly due to an increase in provisions for its mortgage portfolio in North America.
The increase was largely linked to the moratorium on foreclosures in the United States.
"We're seeing the effects of moral hazard, where even seriously delinquent customers simply cannot be foreclosed on by banks operating in the United States," Finance Director Iain Mackay told journalists on a conference call.
HSBC became one of the biggest providers of so-called sub-prime mortgages for customers with a weaker credit history in the United States after its troubled purchase of Household Finance. It has closed the business and is running down its $50 billion loan book.
U.S. regulators suspended foreclosures, although banks in some states have restarted foreclosure actions since.
HSBC fired a warning shot at British politicians who are considering imposing tougher regulations, saying the cost might prompt it to move its headquarters out of the country where it has been based for the last 20 years.
Gulliver said requiring banks to hold substantial debt that can absorb losses if it hits trouble could force HSBC to issue $55 billion of senior debt, at an annual cost of $2.1 billion. He said deposit-rich HSBC does not need this extra buffer.
It pays another $400 million on its overseas assets under a UK bank levy.
"You get to a $2.5 billion cost for being UK headquartered. This is a non-trivial decision, you don't move your head office on a regular basis," Gulliver said.
Mackay said of the $2.5 billion cost: "We would probably view that as too high."
Gulliver said the decision would not take place at this month's board meeting, and would likely be taken in the next year to 18 months. It would only consider moving the holding company abroad, and the retail bank would "always" be based in the UK.
HSBC has so far said it will sell or retreat from 14 countries. They include the sale of its U.S. credit card business and branches in New York state, retail businesses in Russia, Poland and Chile, and its Canadian brokerage business. It is exiting Poland and Georgia.
It has also put its $1 billion general insurance business on the block. [ID:nL3E7KT03H]
But its cost efficiency ratio so far this year worsened, to 54.6 percent from 54 percent last year, while it had reduced headcount by 5,000 since the first quarter.
"The outlook for the global economy is very challenging as problems in developed markets begin to affect growth rates around the world," HSBC said.
By 1035 GMT (5:35 a.m ET), HSBC's London-listed shares were 5.2 percent weaker at 509 pence. The stock has fallen more than 20 percent this year -- still not as bad as a 31 percent drop in the wider DJ index of European banks .SX7P.
Additional reporting by Sudip Kar-Gupta and Rosalba O'Brien; Editing by Hans-Juergen Peters