HSBC, Europe's biggest bank, revealed this morning that it had suffered $3.4 billion (£1.6 billion) in bad debts linked to the sub-prime lending crisis in the third quarter.

Charges related to bad debts rose by nearly 30 per cent in the third quarter and the bank warned that it may deteriorate further. But HSBC said its profit for the period was still ahead of expectations.

HSBC said the US loan impairment charge was $1.4 billion more than the trend for the first half. That total included $700 million related to mortgages, with the remainder owing to branch unsecured loans and card portfolios.

Bear Stearns also announced today that it will write down the value of assets linked to sub-prime mortgages by $1.2 billion.

However, speaking at an investors' conference, Samuel Molinaro, chief financial officer at Bear Stearns, appeared to put the worst behind the bank that saw its third quarter profits fall by 61 per cent, by stating that the latest write down would be sufficient in accurately valuing its assets.

Stephen Green, HSBC's chief executive, said nobody was sure how likely a deterioration was. He said: "I wouldn't want to put a percentage on it. It depends on the housing market and the overall US economy."

The bank claimed the rate of delinquencies was broadly in line with its rivals.

It said underlying revenue growth in the third quarter was higher than in the first half, and underlying cost growth was moderately lower. Shares rose 39.5p to 882p in early trading, as the market responded with relief.

The bank said this morning: “Deterioration in US housing markets is affecting consumer finance credit quality more broadly than hitherto and loan impairment charges are expected to remain high in these conditions.

“There is the probability of further deterioration if the current housing market distress continues and further impacts the broader economy.”

HSBC closed Decision One, its sub-prime lending arm, after it reported Wall Street's first writedown in February. It has also stopped buying sub-prime mortgages from other lenders and last week closed its mortgage-backed securities unit.

The latest charge is on top of last year’s $10.6 billion exposure to bad debt, which led to the first profits warnings in HSBC’s history. An estimated $13.6 billion has been set aside to cover bad debts this year.

HSBC's investment bank also suffered a $900 million writedown, but this was offset by performances elsewhere in the operation.

The hit on the investment banking arm was dampened by HSBC's limited exposure to collateralised debt obligations, which are the complex packages of debt that helped spread the sub-prime lending crisis.

Knight Vinke, the activist shareholder headed by Eric Knight which has been campaigning for a change in strategy, seized on the update as proof that HSBC need a change of focus.

It said: "HSBC’s announcement today of further substantial provisions for losses in US sub-prime and debt trading underscores the risks associated with not focusing sufficiently on businesses where HSBC has comparative advantage and of building a group that may have become too large and too complex to be controlled effectively."

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