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(The Wall Street Journal)
Updated: 2007-08-02 15:26

China's major banks are expected to record a bumper increase in first-half earnings, thanks to a booming economy, wider net-interest margins and strong growth in fee income driven by a red-hot stock market.

Combined net profit for the six months ended June 30 at the five biggest listed banks in the country by assets is expected to rise 49 percent from the same period a year earlier to 114.02 billion yuan ($15.06 billion), according to a survey of five analysts by Dow Jones Newswires.

The Hong Kong- and Shanghai-listed banks -- Industrial & Commercial Bank of China Ltd, Bank of China Ltd, China Construction Bank Corp, Bank of Communications Co and China Merchants Bank Co -- have been treated as proxies for China's surging economy, and investors have sent their share prices soaring.

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The banks are due to issue financial results for the first six months by the end of August, with China Merchants slated to go first on Auguest 10.

Analysts said the banks will record rapid growth in interest income and fee-based intermediary businesses.

Interest-rate increases have widened net-interest margins, so the banks are extending new loans just as aggressively as in the past.

"The cumulative central bank rate hikes since April 2006 (excluding the latest in July 2007) contributed eight to 12 basis points to the 2006 net interest margin expansion of these banks, and could add another five to eight basis points in full-year 2007," Bear Stearns said in a recent research note. A basis point is a hundredth of a percentage point.

The People's Bank of China has raised interest rates five times since April 27, 2006. Now the one-year benchmark deposit rate is 3.33 percent and the one-year lending rate stands at 6.84 percent.

Data from the central bank show a total of 2.54 trillion yuan in yuan-denominated loans were extended in the first six months of this year, compared with 3.18 trillion yuan in new loans in the full year of 2006.

Meanwhile, an exuberant stock market has been prompting local residents to shift time deposits into lower-yield demand deposits, flooding commercial banks with cheap interbank deposits from securities firms.

The benchmark Shanghai Composite Index is up more than 60 percent since the start of the year.