More than £2 billion was wiped off the market value of HSBC today after Europe's biggest bank gave warning that bad debts at its troubled US mortgage lending business would rocket by 20 per cent or about $1.77 billion.

Shares in HSBC lost just over 2 per cent, falling 19.5p to 911.5p after closing at 931p yesterday. HSBC put out its warning late yesterday evening. Last night the City valued the bank at nearly £108 billion.

James Hutson and Mark Thomas, analysts at Keefe, Bruyette and Woods, predicted today that HSBC would suffer a slide in reported pre-tax profits for 2006 of about 7 per cent as a result of the problem US debts. They said the concensus forecast would be for a 9 per cent fall.

"It is unclear as to how much of this problem will have been ring-fenced by this increased provision, but we imagine the continued slowdown in the housing market will have negative connotations for consensus 2007 revenues and impairments also," they added.

A 7 per cent slide in HSBC's annual pre-tax profits for 2006 would reduce consensus forecasts of £12.34 billion by £567 million.

HSBC blamed the impact of slowing house price growth, which it said is being reflected in accelerated delinquency trends across the US sub-prime mortgage market. It said that the level of loan impairment provisions for 2006 for its mortgage services operations will be higher than is reflected in current market estimates.

Analysts had previously expected HSBC to report a bad debt charge of $8.8 billion (£4.5 billion), but most analysts upgraded that to more than $10.5 billion today.

The warning comes less than four weeks before HSBC’s full-year results, and follows its caution at its pre-close trading update in December that bad debt trends among US mortgage borrowers were deteriorating at a faster than expected rate.

City analysts had expressed alarm at the time that customers were defaulting less than six months after taking out their loans, a situation viewed as virtually unprecedented.

Last night’s alert will deepen concerns over the ability of HSBC’s US mortgage operations to model accurately default trends. When HSBC bought the operation, then called Household International, for $15 billion in 2003, it placed much emphasis on the strength of its computerintensive techniques to model consumer behaviour. Before the acquisition, HSBC had no experience of lending in the US sub-prime market.

In its statement, HSBC also cited the effect of higher payment obligations on borrowers as adjustable mortgage rates reset to higher interest rates from the level at which the loans were taken out.

HSBC said last night that Michael Geoghegan, group chief executive, is continuing to co-ordinate the necessary actions to manage the bank’s response. It also said that, apart from the mortgage services operations, the performance of the rest of its businesses was in line with its expectations.

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