“(It’s) associated with higher pricing of loans as well as just pretty rapid growth in the loan book in the first half.”

Another important reason why the first half was so lucrative was a reduction in the corporate income tax to 25 percent from 33 percent. The tax took effect in the beginning of the year and significantly brought down tax costs for the banks.

“Some banks reported more than 100 percent growth in the first half, which is partly linked to the tax cut,” said Winnie Wu, a Hong Kong-based analyst with Merrill Lynch.

“The high growth is for after-tax result. The pre-tax growth is not that high,” she said.

She said some of the banks that posted 100-percent-plus after-tax profit growth probably saw a more moderate 70-to-80 percent growth in pre-tax profits.

More important, tax cuts are a distinct one-off, and there are already warnings from economists that bad loans are likely to rebound in the second half and in 2009.

Domestic firms, especially those focused on exports, will feel the pinch of a slowdown in the global economy and a deceleration in Chinese growth, and may have a hard time servicing their debt.

Qiu Zhicheng, an analyst with Haitong Securities in Shanghai, said some banks’ non-performing loan ratios have already started to rise in the second quarter, and the increase was expected to be more noticeable at year’s end. “Both the real estate sector and the manufacturing industry will have problems,” he said. “Banks’ growth rate will slow down gradually in the second half and by a larger margin next year.”

Investment in overseas assets by Chinese banks, such as their holdings of bonds in two struggling U.S. mortgage finance giants Freddie Mac and Fannie Mae, is another area where risks could emerge.

Fitch’s Chu said the exposure seen so far was relatively small compared to the size of the banks, but the overall impact on China’s banking sector remained unclear.

“We need to wait and see — there are big entities like Bank of China that are yet to announce (their exposure),” she said.

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