HSBC fears stock markets have not factored in credit crunch

HSBC has warned that markets were underestimating the effects of the credit crunch on the wider economy as the bank wrote down $3.4bn (£1.7bn) at its US consumer finance business for the third quarter.

Michael Geoghegan, HSBC's chief executive, and Stuart Gulliver, the head of investment banking, said there would be a slowdown in the US and UK economies as the credit crunch squeezed banks' ability to provide credit.

Mr Gulliver said share prices are "trading as if the world is really terrific" and that, excluding the banking sector, the US stock market was at an all-time high. This was "seriously puzzling" and did not take account of the impact on growth from banks limiting credit and charging higher prices for loans, he added.

Mr Geoghegan said he was not forecasting a recession in the US, but that there would be a slowdown caused by lack of confidence in the financial services industry and the housing market. In the UK, a lack of appetite for risk in the wake of the credit crunch would hit growth next year, the HSBC bosses said.

"This credit crunch is most worrisome," Mr Gulliver said.

The bank said delinquencies at its US consumer finance unit had spread from mortgages to unsecured loans and credit cards as the business wrote down $3.4bn in the three months to the end of September.

The write-down was $1.4bn more than the rate for the first half. Douglas Flint, finance director, said a consumer finance business would normally expect to write off 30-40 per cent of revenues but that the write-downs for the third quarter were about three-quarters of revenue. Mr Gulliver's business wrote down $925m for trading losses and leveraged finance loans but record performance in foreign exchange, cash management and other businesses produced third-quarter profit in line with a year earlier.

Britain's biggest bank said increased revenue more than made up for the higher bad-loan charges so that group third-quarter net operating income was higher than a year earlier. Emerging markets grew strongly, with the best performance in Asia and the Middle East, the bank said in a trading statement.

Bear Stearns, the US investment bank, said yesterday a write-down of $1.2bn of mortgage-linked assets would cause it to post a loss in the fourth quarter. HSBC's shares rose on relief that there wasn't a much higher write-off, closing up 2.8 per cent at 866p.