LONDON (Bloomberg) — HSBC Holdings Plc, Europe’s biggest bank by market value, said third-quarter bad debts in the US rose 12 percent, eroding earnings at its consumer-finance and retail- banking units.Total bad loans in the two units rose 12 percent to $1.59 billion from $1.43 billion in the year-ago quarter, the company said in a statement yesterday. Provisions for bad loans at HSBC Finance Corp., the consumer operation, rose 1.7 percent to $1.38 billion. Bad debts increased 4 percent to $207 million at HSBC USA Inc., the commercial and retail banking unit, the bank said.

Consumer bad debts at HSBC’s US operations “appear to be as bad as the third quarter last year, despite no Katrina and no change in the bankruptcy rules”, said Antony Broadbent, a London- based analyst at Sanford C. Bernstein & Co. “This is evidence of our forecast for a sharp downturn in consumer credit in 2007 and 2008” in the US economy, said Broadbent, who has a ‘market perform’ rating on the stock.

HSBC’s U.S. operation contributes around two thirds of the British bank’s bad-debt charges, estimates Broadbent. Worldwide, HSBC reported a 19 percent rise in first half bad debts to $3.89 billion. The US contributes almost a third of the London-based bank’s total pretax profit.

Shares in HSBC fell 0.9 percent to 999 pence in London, valuing the company at about 114.9 billion pounds ($218 billion).

Changes in US insolvency rules last year have made it harder for individuals to write off debts. Financial companies with operations in the US also suffered insurance losses as hurricanes including Katrina contributed to the costliest year ever.

HSBC Finance, the US consumer-finance unit, said profit for the third quarter almost doubled as revenue increased. Net income rose to $551 million from $281 million in the year-ago quarter, the company said. Revenue rose 20 percent to $3.97 billion. Costs rose 12 percent to $1.7 billion.

HSBC USA Inc. said net income fell 3.2 percent to $244 million from $252 million in the year-earlier quarter, the company also said in a separate statement today. Net revenue rose 10 percent to $1.39 billion, and operating expenses rose 22 percent to $819 million.

“Although profits look healthy, provisions for credit losses in the latest quarter were up,” said David Dodds, an Edinburgh- based fund manager at SVM Asset Management, which oversees about $1.2 billion. Though bad debts at the consumer finance unit rose “only marginally,” the comparative figures year on year should have been an “easy beat,” because last year was exceptionally bad due to U.S windstorms and higher individual bankruptcies, he said.

“The much anticipated investment case of a soft landing does look to be fraying at the edges,” said Dodds, who holds the stock.

HSBC, after spending more than $17 billion on acquisitions in the US, is preparing for a housing slowdown, said unit head Bobby Mehta said in September. US home prices are falling for the first time since 1993 as a record number of homes for sale gives buyers the advantage in negotiations, according to the National Association of Realtors.

HSBC bought HSBC Finance, the former Household International Inc. in the US, for $15.5 billion in 2003 to lend to people with credit problems. It purchased Metris Cos. Inc. for $1.56 billion in 2005 to bolster its credit-card business.