By Jill Treanor

Read the article on Guardian.co.uk

HBOS lost a fifth of its value on the stockmarket today, and other bank shares suffered heavy losses, as it revealed it had suffered a dramatic rise in bad debts over recent weeks.

The grim trading statement came ahead of a shareholder meeting to back an £11bn bail-out from the taxpayer and the emergency takeover by Lloyds TSB. The HBOS board faced hostile questioning from investors, who have seen the value of their shares slump by more than 80% this year, but the takeover was still voted through by a substantial majority.

Holders of 98.5% of the shares approved the deal in a proxy vote although, in terms of numbers, only 84% supported the deal, reflecting the unhappiness of the bank's army of small shareholders. Some 25% of the bank's shareholders are private investors, who were handed the shares when Halifax demutualised in 1997.

HBOS shares slumped to 69.8p, down from last night's close of 87.6p, as the group warned that its debts would jump even higher next year as the economy deteriorates further and its mortgage and business customers struggle to meet loan repayments.

The dismal statement from the bank sent shares sharply lower throughout the sector - Lloyds TSB tumbled by 18%, as did Royal Bank of Scotland.

HBOS directors apologised to shareholders at the meeting in Birmingham for the plight of the bank, which has been forced to accept the government-brokered rescue bid from Lloyds TSB.

Lord Stevenson said he was "neither happy nor proud" as chairman and told the meeting the world was living through "the most pronounced financial crisis since the Great Depression." Trading conditions were becoming "more difficult by the day," he said.

"I cannot say too strongly that your board looked at every possible solution ... we do not cede our independence lightly."

Andy Hornby, chief executive, also apologised: "I would like to say sorry for the anxiety our shareholders have felt during this exceptionally challenging period for HBOS."

Many shareholders were unimpressed - Peter Hapworth said he was "appalled" at how HBOS had been run over the last few years.

"Let's face facts, it is a bank like yours along with a number of other banks that have caused the crisis in the first place. You all went dashing for short-term gain to fulfil bonuses and salaries."

He accused the banks of trying to hide behind "the crisis that they had caused".

Another shareholder, Brian Lockley, said: "What I've heard so far reminds me of my old school reports - could do better."

HBOS, owner of the country's largest mortgage lender, the Halifax, admitted in its trading statement that margins were coming under pressure from the fall of the Bank of England's official base rate to a 57-year low of 2%. But it insisted it was "confident it could navigate through this difficult period" when it will be consumed by larger rival Lloyds TSB in a rescue takeover.

HBOS will also have to set aside £200m next year to make its contribution to the Financial Services Compensation Scheme. This covers payouts to savers of collapsed Icelandic banks.

Its level of bad debts on mortgages and unsecured lending has risen in just two months. Since September, the charge for mortgage customers has risen from £400m to £700m and for customers with unsecured loans arrears reached £1bn, up from £800m.

It said: "In light of the worsening economic climate, trends in retail impairment charges are likely to come under further pressure."

There has been a major deterioration in its corporate book – exposed to property and the retail sector – to £3.3bn compared with £1.7bn in September

HBOS said: "Global market and economic conditions, UK recession and increasing unemployment will continue to present a particularly challenging operating and credit environment.

"Lower interest rates should ease the debt burden but exert further pressure on net interest income. These factors will impact on HBOS capital ratios."

Today's meeting at the NEC in Birmingham followed attempts to derail the deal by Scottish business people who were concerned about the impact on the local economy, dominated by HBOS subsidiary Bank of Scotland.

The Competition Appeal Tribunal this week threw out a challenge to the decision by the business secretary, Lord Mandelson, to clear the takeover in the interests of financial stability even though it would breach conventional competition rules to create a bank which dominates the high street with more than 3,000 branches.

Up to 40,000 jobs from a combined workforce of more than 140,000 are at risk from the takeover, which was brokered by Gordon Brown in the days following the market mayhem caused by the collapse of Lehman Brothers in September.

Staff from both HBOS and Lloyds demonstrated outside the meeting, wearing T-shirts saying "secure jobs = secure bank" to remind shareholders that the voice of employees should not be ignored.

"Months of unremitting speculation about the future of HBOS has left long-serving employees feeling insecure in their jobs in an organisation they are very faithful to," said Derek Simpson, joint general secretary of union Unite.

No member of the current HBOS board is joining the board of the combined bank when the deal is completed next month. Hornby, though, who became chief executive two years ago, is being offered a consultancy role.

Once the takeover goes ahead, the taxpayer is expected to own almost 45% of the combined bank, which will be called Lloyds Banking Group.