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 percent weaker in early trading on Wednesday, after it said its underlying pretax profit was 36 percent 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 <0005.HK> 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.

By 0841 GMT, HSBC's London-listed shares were 2.8 percent weaker at 522.5 pence. The shares have so far fallen some 18 percent this year, still not as bad as a 31 percent drop in the wider DJ index of European banks <.SX7P>.

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 percent from 54.0 percent 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.

(Additional reporting by Sudip Kar-Gupta and Rosalba O'Brien; Writing by Douwe Miedema; Editing by Hans-Juergen Peters)

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