* Q3 reported pretax profit $843 mln vs $2.45 bln estimate
* $1.7 bln loss recognised on sale of Brazil business
* Core capital ratio rises to 13.9 pct at end-September
* Shares rise more than 4 percent on dividend hopes (Adds CEO comments on EU workers)
By Sumeet Chatterjee and Lawrence White
HONG KONG/LONDON, Nov 7 (Reuters) - HSBC Holdings warned of a dim outlook for its British business next year andurged the government to clarify the status of European Unionworkers in Britain as Europe's biggest bank grapples with theimpact of the vote to leave the EU.
"UK retail banking profit will be challenging next year,"Chief Executive Stuart Gulliver told Reuters on Monday, pointingto the Bank of England's muted economic growth estimates andforecast for sharply rising inflation.
Gulliver said that the financial industry has communicatedits priorities to the government. Because HSBC has a fullylicensed subsidiary in France it is in no hurry to set upbusinesses elsewhere to protect access to European markets.
"The thing I would say that is slightly more urgent isclarity around the status of EU nationals with jobs working inthe UK," Gulliver told reporters on a conference call.
HSBC employs around 42,000 workers in Britain of whom some2000 are from other EU countries. British firms are employingimmigration lawyers to advise such staff over fears around theirresidency, Reuters reported in July.
Against a backdrop of shrinking profits, HSBC reported asharp jump in its core capital ratio to 13.9 percent, as the keymeasure of financial strength was lifted by a change in theregulatory treatment of its investment in China's Bank ofCommunications.
The change in how Britain's Prudential Regulation Authoritytreats the investment eased analyst concerns about its abilityto build capital buffers to maintain its dividend payouts andlifted HSBC's shares 4.5 percent by 1400 GMT.
The ratio jumped to 13.9 percent from 12.1 percent at theend of June and 11.9 percent at the close of last year.
"This change more accurately reflects the nature of ourrelationship as a minority shareholder in BoCom," ChiefFinancial Officer Iain Mackay told Reuters.
Bernstein analysts said the higher capital ratio should beenough to allow HSBC to maintain next year's dividend out ofcapital, even as earnings decline.
"For yield investors, who have been the source of supportfor valuation of this stock, this keeps the stock in the safetyzone into the next 6-9 months," said the brokerage, which ratesthe stock as "underperform" due to its rich valuations.
HSBC posted an 86 percent fall in reported pretax profit to$843 million for the third quarter ended on Sept. 30, as it took a $1.7 billion loss on the sale of its Brazilian unit and facedfalling revenues from trade and adverse foreign currencymovements.
HSBC in August abandoned a timetable for reaching its 10percent return on equity target, as slowing growth in its corehome markets of Britain and Hong Kong hit revenues.
BREXIT CLOUDS
Executives at British lenders last month privately cautionedahead of reporting their earnings that economic conditions wouldprobably get much tougher next year when Britain is due toformally start the process to leave the EU.
Gulliver said on Monday that the bank had seen limitedimpact on its British business so far other than a temporarydrop in small business loan demand but warned of hard timesahead next year.
A seasonal decline in profits in the fourth quarter wouldlikely combine with dividend and British bank tax payments tohead off further boosts in capital in the near term, Mackay toldReuters.
"It's reasonable to assume that there's unlikely to be anyparticularly strong progress with respect to capital formationin the fourth quarter," Mackay said.
HSBC said in its earnings statement its $2.5 billion sharebuyback programme announced in August this year was now 59percent complete and it expected to finish by the end of thisyear or early 2017. (Reporting By Sumeet Chatterjee and Lawrence White, additionalreporting by Ritvik Carvalho; Editing by Stephen Coates andKeith Weir)
HSBC Holdings (HSBA)