HSBC, the largest banking group in Europe, confirmed the dire state of its American operations today as a shock $10.6 billion (£5.5 billion) impairment charge against sour loans overshadowed annual profits that rose more than 5 per cent to above $22 billion.

Final confirmation of HSBC's American woes, after it bought the US lender formerly known as Household for $14 billion in 2003, follows a profits warning last month and the ousting of two top US executives. The bank parted company with Bobby Mehta, the chief executive of HSBC North America, and Sandy Derickson, the chief executive of HSBC Bank USA.

It also comes as the US housing market bubble appears finally to have burst, with relatively less risky borrowers now beginning to experience problems repaying their mortgage loans.

The vast majority, or $6.8 billion, of the impairment charge was in the US. The bank set aside $2.2 billion to cover problem loans in Europe, almost all in the UK, compared with $1.9 billion last year.

But Douglas Flint, the finance director, maintained that profits were still resilient. "If you think of the issues that HSBC faced with Argentina and in the Asia crisis, in each of those years profits fell," he said.

"We have changed the management, we have looked very carefully at the products that we underwrite; there is a whole bunch of products that we are no longer offering," Mr Flint added.

Mr Flint said that HSBC was comfortable that it had contained its US mortgage lending problem and saw no risk of "contagion" flowing into higher-quality loans.

However, he said the bank's view, in line with what he described as market consensus, was that personal bankrupcties will virtually double in 2007, after a hiatus in 2006, although they will be significantly lower than in 2005.

HSBC's profitability in North America slumped last year. The bank admitted that profits there rose by 21.1 per cent to $4.7 billion, compared with a 28 per cent rise in 2005 when profits reached nearly $6 billion. North America last year was the No 2 profits driver for HSBC. This year it ceded that position to Hong Kong.

Stephen Green, HSBC's chairman, described the bank's problems at its American mortgage business as a "major setback", noting that pre-tax profits in its personal finance businesses fell by $725 million last year.

He said that the problem was caused by just one portfolio of sub-prime mortgages that was bought by Mortgage Services, a subsidiary of the US Consumer Finance division.

The portfolio, composed of loans to people with problematic credit histories, experienced a "much higher delinquency rate than had been built into the pricing of these products", Mr Green said.

He said that the business had now been restructured and internal risk controls strengthened to avoid a repeat performance.

The final dividend was increased by 11 per cent to 81 cents a share. Shares in HSBC rose 8.5p, or almost 1 per cent.

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