China banks’ profit boom seen despite tightening

Earnings rise continue amid government moves to restrain 5.4% inflation in the second largest economy.

Chinese banks are expected to report robust first-quarter profits this week despite more than a year of government efforts to tighten capital and fight inflation in the world's second-largest economy.

Analysts expect mostly double-digit profit growth for the quarter, as the banks increased their loan portfolios and the margins on those loans in the face of moves to take cash out of the system through increased required deposits with the central bank.

"Net interest margins for the quarter were higher, and that's the most important factor for Chinese banks," said James Antos, a banking analyst with Mizuho Securities. "Interest rates were raised twice in the fourth quarter and twice again in the first quarter and we're seeing that start to kick in."

Citi analyst Simon Ho expects an average 29 percent profit gain for banks across the sector, "driven by solid net interest income growth on the back of volume growth and net interest margin expansion and strong fee income growth," he said in a note to investors.

The burgeoning profits of China's top banks comes amid persistent moves by the government to soak up excess money in the market and cool lending as part of its efforts to rein in stubborn inflation, which reached 5.4 percent in the year to March.

The government has raised the required reserve ratio -- money that Chinese lenders must keep on deposit with the central bank -- 10 times in the last 16 months, bringing it to 20.5 percent for the country's biggest banks, up from 15.5 percent in January 2010.

View the full story in Reuters.