updated 2/8/2007 11:08:00 AM ET 2007-02-08T16:08:00

Shares of HSBC Holdings PLC fell Thursday after Europe’s largest bank by market capitalization said it is raising provisions for bad loans by 20 percent higher than the market had expected.

“Foreclosures have shown a higher severity” than expected, Chief Executive Michael Geoghegan said on a conference call. “The major impact was taking into account adjustable mortgage resets.”

HSBC gets its biggest share of pretax profit from the United States.

The consensus among 11 analysts had been that credit risk provisions would be $8.8 billion, HSBC said. That would mean loan provisions would rise to almost $11 billion.

Still, “over 90 percent of the portfolio is working,” Geoghegan said. “We are taking provisions for what might happen.”

HSBC bought Household International Inc. in 2003 for $15.5 billion to take advantage of rising house prices in the world’s largest economy. That business is now eating into earnings as the number of mortgage defaults rises.

Rising interest rates in the U.S. have made it harder for many Americans to repay their mortgages, and therefore leading to more defaults.

“The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in the more recent loans,” the bank said in a statement.

HSBC had said in December that the main risk in the near term was in personal lending in the United States, where increases in short-term interest rates are hitting people with adjustable-rate mortgages.

The bank also revealed in December that its underlying revenue growth had slowed despite an improvement in third-quarter profit. The slowdown was largely attributable to a weaker performance in HSBC’s investment banking arm.

HSBC plans to release its full-year results on March 5.

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