HSBC yesterday issued a gloomy outlook for the banking sector as it reported a sharp rise in US bad debt charges while indicating that emerging markets would not escape the credit squeeze.

In a trading update, the bank, the world's second largest by market value, said it had set aside $3.4bn for bad debts in its US consumer finance business as problems in the subprime mortgage market spilled over into its consumer lending arm.

HSBC's performance is under close scrutiny from investors and rivals looking for signs of a worsening crisis in the US. The bank was one of the first large institutions to signal problems with subprime mortgages last year.

Merrill and Citi expected to mull listing brokerages

By David Wighton in New York

Published: November 17 2007

The new leaderships of both Citigroup and Merrill Lynch are likely to consider floating minority stakes in their brokerage arms, according to bankers at rival Wall Street firms.

Such moves would allow the groups to unlock some value from the businesses without losing control, the bankers say.

"It is an obvious thing for them to do. The shares in the brokerage business would be much more highly rated than the parent's stock," said one banker.

John Thain, who was this week appointed chairman and chief executive of Merrill Lynch, has a reputation as a dealmaker following his three years at the New York Stock Exchange.

Brokerage businesses trade on much higher earnings multiples than those of banks, which can be in single figures. Charles Schwab trades on about 20 times earnings andAG Edwards was acquired for a similar multiple by Wachoviathis year.

Citigroup, whose balance sheet is under strain, could sell shares in its brokerage arm, Smith Barney, to help bolster its capital ratios. "It could be one of the more attractive ways for it to raise capital," said one banker.

However, one analyst said Smith Barney represented too small a part of Citi for such a sale to have a significant impact. "It would not move the needle for Citi which does not need any more complexity."

For Merrill, a partial flotation could boost the share price by highlighting the value of its brokerage arm, bankers say.

Analysts value Merrill's brokerage arm at up to $36bn while its stake in BlackRock was worth $11bn yesterday.

On that basis, Merrill's market value of $47bn implies a negative value of $2bn for its markets and banking business, which made pre-tax profits of $7.1bn last year.

Meredith Whitney, analyst at CIBC World Markets, cautioned that while such partial spin-offs can look attractive theoretically they often fail to work in practice.

Merrill insiders add that it would be extremely complicated to separate the brokerage arm from markets and banking because of significant shared costs.

Other bankers say it would be extremely disruptive and would make the markets and banking business vulnerable to takeover. But one analyst said turning the brokerage arm into an independently listed company would be popular with Merrill's 16,600 brokers.

Many Citi investors hope the group will be broken up by the successor to Chuck Prince, who stepped down as Citi's chairman and chief executive two weeks ago.

One proposal is that it should be split into four new companies: US and international consumer businesses; the markets and banking operation; and wealth management, primarily Smith Barney.

But senior executives have strongly backed Mr Prince's claim that there are significant benefits from having the businesses in one group.

*Citigroup yesterday named Jorge Bermudez, a 30-year veteran who was previously head of its commercial business group, as chief risk officer. He replaces Dave Bushnell, 53, who is retiring. In September, Mr Bushnell became chief administrative officer while remaining chief risk officer for a "transitional period".