HSBC Holdings cited a dire outlook for the global economy as it reported a larger-than-expected drop in third-quarter profits, hit by lower investment banking income and a rise in bad debts in the United States.

Shares in Europe's biggest bank were some 3 per cent weaker in early trading today, after it said its underlying pretax profit was 36 per cent lower at $3 billion in the three months to the end of September.

"Trading conditions showed some improvement during October, but they remain very difficult and continuing turbulence in global markets may result in further downside risk," the bank said in a regular earnings statement.

HSBC 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 as he attempts to revive profitability.

HSBC said loan impairment charges and other credit risk provisions were $0.7 billion higher at the end of the quarter compared to a year ago, which was mainly due to an increase in its run-off portfolio in North America.

Its cost efficiency ratio for the first nine months of the year also worsened, to 54.6 per cent from 54.0 per cent 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.

Reuters