HSBC has started an internal review of its troubled American banking business, which is expected to reveal writedowns today of up to $11 billion (£5.5 billion) from defaults on mortgages sold to poor-risk homebuyers.

The bank, which will announce its 2007 results today, faces new calls to dispose of HFC, its business in the United States. Knight Vinke, the activist asset manager, which since May has criticised HSBC for its management structure, remuneration plan and strategy, has told Stephen Green, the bank’s chairman, that he should sever ties with HFC.

HSBC bought HFC five years ago for about $15 billion, but writeoffs for the past two years are expected to come to well over the price paid for the business.

In a proposal revealed on its website on Friday, Knight Vinke laid out four options for how HSBC might cut off HFC. The fund manager, which holds less than 1 per cent of the bank’s stock, described HSBC’s decision to enter the American sub-prime business as a “catastrophic strategic error” and said that its share price would be £2 to £3 higher if it had got rid of HFC in June last year, before the peak of the sub-prime meltdown.

Although HSBC has defended HFC, insisting that a recovery is possible, late last year the bank is thought to have started a review of the strategic options available for the subsidiary. The bank has not set a timescale for the review.

The most nuclear of Knight Vinke’s four suggestions is to put HFC into receivership. HSBC did not guarantee HFC’s $150 billion of debt when it bought the business, although the debt sits on HSBC’s balance sheet. The bank, however, is thought to be concerned about the damage to its reputation that it would suffer by leaving HFC’s bondholders with $150 billion of junk debt. Walking away from the business would also involve HSBC losing its investment in HFC and possibly a $15 billion loan that it gave the business.

The second option set out by Knight Vinke is for HSBC to ask HFC’s creditors to restructure the debt, which could include asking them to agree to a debt-for-equity swap that would allow HFC to carry on as a standalone subsidiary, with no further support from the main group.

The third option would be for HSBC to recapitalise HFC with $10 billion to $15 billion in cash, or for HSBC to write off the $15 billion loan, then sell HFC. Finding a buyer could be difficult, given the collapse of the sub-prime business in America.

The final option is for HSBC to recapitalise HFC, list it, then spin it off to the group’s shareholders. Knight Vinke said that this would allow investors to decide whether they wanted to retain their exposure to HFC.

All of these options would see HSBC’s vital tier one capital rise by more than 10 per cent, making the bank one of the best-capitalised in the sector, according to the asset manager.

HSBC is expected to take a charge of $11 billion this year from its exposure to the American sub-prime mortgage market.

The sub-prime business often involves selling mortgages to people with damaged credit histories and no deposit, then raising their monthly repayments. When customers default, profit is made on repossessing the properties and selling them. The business model broke down last year when record defaults coincided with a downturn in America’s property market, leaving banks with thousands of unsold houses. Knight Vinke believes that HSBC’s involvement in the sub-prime market is at odds with its sophisticated advertising, which appeals to global travellers looking for a world bank.

Investors will be interested today to learn about HSBC’s exposure to so-called Alt-A mortgages. The mortgages are also called near-prime, because often they are sold to people without credit histories or those who certify their own income and are considered less risky than sub-prime but more risky than prime mortgages.

Other British banks reporting over the past two weeks have revealed surprisingly high exposures to Alt-A mortgages. Securities backed by Alt-A mortgages have fallen in value in the credit crunch, as investors shun any mortgage-related product. An analyst said that the banks should be commended for giving as much disclosure as possible about their investments in the mortgages, but another analyst said that the exposures would be watched carefully in case contagion spread from sub-prime to Alt-A.

He said: “While defaults in Alt-A remain low, they’re being beaten up in trading as if defaults are going to rocket. For example, JPMorgan’s Alt-A exposure is worth 4.4 per cent of its market capitalisation, but HBOS’s is 30 per cent. If Alt-A remains fine, that’s not a problem but if the situation changes, it could be.” The American mortgage market is expected to be the only blot on HSBC’s full-year results. Figures from the Asian operations are expected to be good, as indicated by Standard Chartered’s results last week.

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