Bank of China, the mainland's No. 2 lender by market value, said on Thursday second-half profit more than doubled, beating expectations on strong loan growth and returns from its investment portfolio.
Bank of China, in which Royal Bank of Scotland owns nearly 4.5%, posted second-half earnings of 23.3 billion yuan (US$3.0 billion), compared with 10.7 billion yuan in 2005.
Analysts on average were expecting Bank of China to earn 21.1 billion yuan, according to Reuters Estimates.
The bank said its annual profit would be up more than 50%, partly due to a government ruling that would cut its corporate tax bill by 4.6 billion yuan.
Its full year-profit was 42.8 billion yuan, compared with 25.9 billion yuan in 2005.
Bank of China, one of the country's "Big 4" state-backed lenders, is trying to diversify its revenue stream beyond its traditional business of lending to big state-run companies, and offer more retail banking services.
On Tuesday it announced a plan to team up with RBS to launch a private banking venture in China, where the number of millionaires grew at nearly 7% in 2005, with a combined wealth of $1.6 trillion, a Merrill Lynch/Capgemini report said.
Bank of China's 2006 net interest income, largely derived by lending, rose 20% to 121.4 billion yuan in the year-ago period. Its net interest margin grew to 2.45% from 2.33% and loan growth was 8.6%. Interest income from investment securities rose 50% to 22.3 billion yuan.
Non-interest income, which comes from fee- or commission-bearing products like investment funds, grew 12% to 27.0 billion yuan. But non-interest income as a percentage of operating income slipped to 18.2% from 19.3% in 2005.
Loan impairment losses rose to 12.3 billion yuan from 11.5 billion yuan in 2005 and operating expenses rose 14.6 percent to 68.7 billion yuan.
Its ratio of impaired loans to gross loans -- a closely watched metric due to a long history of non-performing debt problems in China's banking sector -- fell to 4.2% in 2006 from 4.9% the year before.
Chinese banks are working to become more service oriented to sell products such as credit cards and funds to the country's enormous retail market, where the population of 1.3 billion people has more than $2 trillion sitting in savings deposits.
Domestic lenders are also facing increased competition as foreign players Bank of East Asia, Citigroup, HSBC and Standard Chartered have been granted approval for local incorporation.
Incorporating locally will allow the four banks -- and eventually a host of others -- to sell banking services to local Chinese for the first time as the industry opens up under World Trade Organisation obligations.
Bank of China raised US$11.2 billion in a Hong Kong IPO last year, the world's fifth-largest ever, and its shares rose 45% between their June 1 debut and the end of last year. That lagged a 55% gain in shares of Hong Kong-listed Chinese companies over the same time period.