Feb. 28 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, reported the slowest earnings growth in 2 1/2 years as earnings from consumer lending in the U.S. declined.

Second-half profit rose 18 percent to $5.49 billion from $4.67 billion a year earlier, according to figures compiled today by Bloomberg. Shares of London-based HSBC fell 2.8 percent to 868 pence, the biggest drop in more than three months, reducing the company's market value to 96.5 billion ($186 billion).

"They're lackluster results," said Michael Gifford, who oversees about $463 million at F&C Asset Management Plc in London, which holds HSBC shares. In the U.S., "costs were higher than expected and there was pressure on margins."

HSBC's acquisition of Household International Inc., which lends to people denied credit by other banks, added $2.2 billion to earnings in the nine months after the takeover was completed in March 2003. In the second half of 2004, Household's profit fell as interest rate increases by the Federal Reserve boosted borrowing expenses and reduced consumer demand for high-cost loans.

Chairman John Bond today said William Aldinger, former chief executive officer of Household and head of the U.S. unit, will leave in April, a year earlier than planned.

HSBC's revenue growth is trailing Royal Bank of Scotland Group Plc, said Peter Toeman, an analyst at Morgan Stanley in London, who has an equal-weight rating on the stock. Royal Bank of Scotland's revenue rose 18 percent last year, outpacing HSBC's 7.5 percent growth before acquisitions.

`Deteriorating'

HSBC's 2004 profit rose to a record $11.8 billion, or $1.07 a share, from $8.8 billion, or 83 cents, in 2003, the bank said in a statement. Second-half earnings growth was the slowest since the first half of 2002, when earnings fell 7 percent. Bloomberg calculated second-half figures by subtracting first-half earnings from full-year results.

Second-half profit at the bank's U.S. consumer lending business fell to $1.55 billion from $1.58 billion a year earlier, as costs increased 13 percent to $2.6 billion. The net interest margin, a measure of profitability of its lending, declined as more customers took out loans guaranteed by mortgages on their homes and fewer unsecured loans that charge higher rates of interest.

"On a quarter-by-quarter basis, things appear to be deteriorating at Household," said Richard Staite, an analyst at SG Securities in London, who has a "buy" rating on HSBC.

The decline in margins "was probably more than we expected" Finance Director Douglas Flint, 49, said in an interview. Annual loan-loss provisions increased $264 million to $6.36 billion.

Aldinger, 57, former CEO of Household, will be replaced by Bobby Mehta, a vice chairman of Household.

U.S. Economy

Household's earnings decline compares with Bank of America Corp. and Wells Fargo & Co., the No. 3 and No. 5 U.S. lenders, which posted record fourth-quarter profit as consumer lending, including credit cards and home equity loans, climbed and customers opened more checking accounts generating fees.

A competitor to HSBC's Household, Wells Fargo Financial, which lends to individuals with short or blemished credit histories and handles leasing and private-label credit cards, earned $129 million, 8 percent more than the fourth quarter of 2003.

"The continuing growth in the U.S. economy is encouraging given the scale of consumer finances business in North America," Bond, 63, said at a press conference in London to discuss the results. "HSBC doesn't feel like a place that has lost momentum."

Asian Units

Profit at HSBC's non-U.S. retail banking units rose 43 percent to $1.93 billion, helped by cost cuts in Britain and increased sales of life insurance in Hong Kong. HSBC last June announced plans to cut 2,500 U.K. jobs by shifting clerical work to Asia. The U.K. unit accounts for 25 percent of profit and a third of costs.

In Asia, HSBC's Hang Seng Bank Ltd. reported a 14 percent gain in second-half profit to HK$5.15 billion ($660 million) from HK$4.52 billion, as loan provisions fell. The Hong Kong economy snapped 68 months of deflation in July, pushing the jobless rate to a three-year low. Hong Kong's government estimates the economy expanded 7.5 percent in 2004, the fastest pace in four years.

Founded in Hong Kong and Shanghai in 1865, HSBC has spent $51.8 billion on acquisitions during the past five years. In August, HSBC paid $1.75 billion for a fifth of Bank of Communications, China's No. 5 lender, adding to stakes it has in Bank of Shanghai and Ping An Insurance Co. It's also looking for acquisitions in Japan and Korea, Flint said in December.

Investment Banking

HSBC is also trying to bolster its securities unit, which makes about a quarter of HSBC's pretax profit. HSBC ranked 15th last year among global merger advisers, up from 17th in 2003, data compiled by Bloomberg show. The bank placed seventh among underwriters of international debt sales, up from eighth in 2003.

The corporate, investment banking and markets division's pretax profit rose 17 percent in 2004 after recovering money it had written off for bad loans. Excluding the recoveries, operating profit fell 5 percent in the full year 2004 compared with 2003. The unit's cost-income ratio jumped to 56.5 percent from 48.9 percent.

The bank proposed a fourth quarter dividend of 27 cents a share, taking the total annual payment to shareholders to 66 cents, up 10 percent from the year before.