Stephen Green announces the results in Hong Kong on Monday. (Reuters)

London, March 5 (Reuters): HSBC Holdings posted on Monday a 5 per cent rise in 2006 profits, just short of analysts’ expectations, as Europe’s biggest bank took a $10.6-billion hit for bad debts after problems in its US mortgage lending.

The London-headquartered bank reported a record 2006 pre-tax profit of $22.1 billion, up from $21 billion in 2005 and below an average forecast of $22.4 billion in a poll of analysts by Reuters Estimates.

The bank’s CIBM arm posted a 12 per cent rise in profits to $5.8 billion, aided by buoyant capital markets, although the unit’s profit growth slowed from 37 per cent in the first half. HSBC shares were up 0.9 per cent in early morning trade at 894 pence, valuing the bank at £103 billion ($200.9 billion).

The bank had warned a month ago that problems had deepened in its lending to lower quality US home borrowers.

It said the group impairment charge was up $2.8 billion, or 36 per cent, from 2005, and the “major setback in part of our mortgage business in the United States” caused a $725 million drop in its US personal finance profits.

“We are restructuring this business to avoid any repetition of the risk concentration that built up over the past two years,” it said. This included changes in management and strengthened risk controls and processes. HSBC said the bad debt deterioration was most marked in recent loans.

It said the level of future impairments will be sensitive to economic conditions.

the state of the housing market, the level of interest rates and the availability of financing options for sub-prime borrowers.

HSBC said its income rose 14 per cent to $70.1 billion, matched by a 14 per cent rise in cost growth.

Its costs as a ratio of income nudged to 51.3 per cent from 51.2 per cent in 2005.