HSBC is writing off loans to struggling Americans at the rate of $38 million (£18.5 million) a day, it revealed yesterday, shareholders were told that the pace of souring loans could worsen if house prices in the United States fall further.

Defaults and late payments on US sub-prime mortgages and credit cards increased in the third quarter, leading the world’s second-biggest bank to take a provision of $3.4 billion against American consumer debt.

It wrote down $925 million from unsuccessful trading in credit securities and on leveraged buyout loans that it has extended but been unable to syndicate because of the credit crunch.

Knight Vinke, the rebel shareholder leading a campaign for boardroom and strategy reforms at HSBC, seized on the losses as evidence that the bank was too large and complex to be controlled properly.

However, traders marked HSBC shares 3 per cent higher to 866p as the bank said that it was trading strongly in most other areas of the business and that its third-quarter profits would be ahead of a year ago.

The bank said that revenues were growing faster than in the first half and costs were rising more slowly. It also said that it had virtually no exposure to collateralised debt obligations backed by sub-prime debt – the toxic securities that have affected many banks this autumn.

The latest provision brings to $12.4 billion HSBC’s total write-offs in US consumer lending in the past 15 months. Although HSBC prices in a relatively high level of defaults by sub-prime borrowers, the failure rate is roughly twice the level it would like.

HSBC pushed aggressively into sub-prime lending in the United States when it bought Household International, the leading player now renamed HSBC Finance, for $15 billion in 2003.

Eric Knight, founder of Knight Vinke, said of the Household deal: “I wonder whether it is something they are now deeply regretting. The magnitude of this is something HSBC doesn’t want to acknowledge.”

Douglas Flint, HSBC finance director and chairman of HSBC Finance, defended the acquisition: “To be in a credit distribution business in the world’s biggest credit market is not a bad place to be.”

The bank is closing another 260 HSBC Finance branches on top of 100 already shuttered, for a one-off charge of $55 million, leaving it with a network of about 1,000 branches. It also told shareholders that a change in the way in which it structures fees on credit cards in the US meant that income next year would fall by $225 million to $250 million.

Standard & Poor’s shaved HSBC’s outlook rating from “positive” to “stable” because of the problems in America.

HSBC has lent $178 billion to American consumers, of which $70 billion is unsecured. Of the unsecured portion, $45 billion was lent to sub-prime customers – people with impaired or nonexistent credit records. In the wholesale division, write-offs were split $760 million for credit trading losses and $175 million for write-offs on warehoused buyout debt. HSBC said that it had $3 billion to $5 billion of buyout debt on its books and was committed to lending another $4.25 billion.

Stuart Gulliver, head of the wholesale bank, said that the financial crisis was the worst since the Latin America defaults crisis of the 1980s and that he found the robustness of the equity market “really quite puzzling”. After stripping out bank shares, Wall Street was at an all-time high, he said. “Does that make sense? I don’t think so.”

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