Despite government efforts to cool down some overheated sectors of the economy, particularly property, China's commercial lenders have notched up impressive growth in the first half of the year by riding the wave of rapid economic growth.

Given the average double-digit rise in earnings between January and June, lenders are widely expected to grow at the rate forecast at the beginning of 2006.

But analysts warned that measures to further tighten liquidity could influence banks' longer-term performance, noting that this could be illustrated by an obvious slowdown in profit growth as soon as the second quarter of next year.

The slowdown could be further exacerbated by a reduction in loan demand by many industrial enterprises, the analysts said.

Two of the "big four" State-owned banks posted strong half-year results, while joint-stock commercial lenders witnessed even more impressive growth.

For instance, Bank of China, China's second-largest lender, posted a better-than-expected 28 percent rise in first-half earnings.

It notched up a net profit of 19.5 billion yuan (2.45 billion U.S. dollars) in the first half, compared with last year's 15.2 billion yuan (1.9 billion dollars).

Its total loans rose 7.6 percent to 2.4 trillion yuan (300 billion dollars) from the end of 2005, while its loans on the mainland grew 9.6 percent.

"The loans, especially those offered to enterprises, increased rapidly earlier this year," said Qiu Zhicheng, an analyst with Haitong Securities Co.

According to China's central bank, M2 supply surged by 18.4 percent year-on-year to 32.3 trillion yuan (4.1 trillion dollars) by the end of June, while M1 supply rose 13.9 percent to 11.2 trillion yuan (1.4 trillion dollars), two percentage points higher than the same period last year.

M1 is an antecedent index of national economic performance, reflecting the change in the amount of money in circulation, while M2 shows the demand of the whole of society and indicates possible inflation.

A widening gap between loan and deposit rates contributed to the growth of profits.

The central bank raised the benchmark one-year lending rate by 27 basis points from 5.58 percent to 5.85 percent in April this year in a bid to cool down the fast-growing economy, but left deposit rates unchanged, a move which may also have contributed to profit growth, Qiu said.

"The government's macroeconomic controls and stringent monetary policy have had hardly any impact on banks' performance in the first half of 2006," he added.

On top of the widening margin between loan and deposit rates, intermediary services also proved highly lucrative for banks.

For example, the Industrial and Commercial Bank of China (ICBC), China's biggest lender, saw its operating profit jump 27 percent in the first half of this year.

Meanwhile, and for the first time, the ICBC's combined revenue from intermediary services, or fee-based services, and capital transaction deals is now bigger than the fees garnered from the gap between deposit and lending rates in the same period, the bank revealed last month.

Shanghai Pudong Development Bank's intermediary business increased by as much as 95 percent to generate an income of 420 million yuan (52.50 million dollars) in the first half of 2006, the bank said. But revenue generated from the business accounted for a mere 3 percent of the bank's total revenue income.

"Revenue earned from intermediary services usually accounts for no more than 10 percent of profit growth for a bank," said Gao Yuan, a banking analyst with Guangda Securities Co. Ltd. "But that business grows very fast."

In a statement released last month, the Shanghai branch of China Banking Regulatory Commission said the intermediary business income of the city's domestic lenders jumped by a yearly average of 28.2 percent from 1.43 billion yuan (179 million dollars) in the first half of 2003 to 3 billion yuan (375 million dollars) in the first six months of 2006.

Intermediary business is accounting for an increasing proportion of lenders' net income, it said, while the trend points to a shift in the sector from its previous overwhelming reliance on the spread between deposit and lending rates as its major income and a greater emphasis being placed on comprehensive financial services.
    
China's commercial banks reduced their ratio of non-performing loans to total lending to 7.5 percent by June, amid signs that the drive to improve risk controls may be making progress, the regulator reported last month. This also contributed to banks' positive performance in the first half of the year.

Gao said a slowdown was expected in banks' lending to enterprises in the second half of this year, but analysts' expectations for whole-year performance would not change because of the better-than-expected growth in the first half.

"Lenders' achievements could be maintained for 2006," she said. The authorities' efforts to rein in excessive growth "will not have an immediate impact, while there will be a narrowing margin between loan and deposit rates in the longer term."

Editor: Yan