Industrial & Commercial Bank of China Ltd., the world's largest lender by market value, posted a 33 percent gain in fourth-quarter profit as wider loan margins allowed Chinese banks to overcome a slowdown in credit growth.

Net income climbed to 37.9 billion yuan ($5.8 billion) in the quarter ended Dec. 31, based on figures released by the Beijing-based bank today. That exceeded the 36.6 billion yuan average estimate of 19 analysts surveyed by Bloomberg.

ICBC, whose full-year profit of $25.2 billion was more than a third bigger than that of JPMorgan Chase & Co., and rivals including Bank of China Ltd. benefited from widening margins on loans, which account for the bulk of their earnings. China's bank regulator said yesterday it will keep restraining lending this year, forcing lenders to slow expansion plans.

"Margin expansion will be more evident as an earnings driver this year," said Xie Aihong, a Beijing-based analyst at Rising Securities Co., before the earnings were announced. "But banking shares may still underperform because their operating conditions deteriorate as the government keeps tightening."

ICBC's net interest margin, a measure of the profitability of loans, widened to 2.44 percent last year from 2.26 percent in 2009.

Smaller rival Bank of Communications Co., the nation's fifth-largest, today posted a 34 percent increase in fourth- quarter profit to 9.5 billion yuan, exceeding the average analyst estimate by 12 percent. The lender's net interest margin expanded 16 basis points to 2.46 percent in 2010. A basis point is 0.01 percentage point.

Eoin Treacy's view The banking sector was used as the primary conduit for China's stimulus program during the global financial crisis. As a result banks have borne the brunt of measures aimed at normalising policy and containing property prices. Reserve requirements, currently at 20%, have been raised repeatedly in an effort to inhibit credit growth and improve quality controls.

The continued wide spread between the 12-month deposit rate and the 12-month lending rate, currently at 306 basis points, helps to buttress bank balance sheets. However, the annualised CPI rate of 4.9% is a challenge for the banking sector.

The poor return on deposits, particularly against a background of higher inflationary pressures is one of the primary reasons the Chinese economy is so prone to speculation. Investors are not equitably rewarded for leaving cash on deposit and so invest primarily in property but also the stock market and increasingly gold.

The Xinhua A600 Banks Index has posted a progression of lower rally highs since July 2009. While this medium-term downtrend has lost momentum over the last year, the Index will need to sustain a move above 10,000 to confirm a return to demand dominance beyond the short term.

A reversal of the governments tightening policies, which seems unlikely at this stage or a relaxing of inflationary pressures, particularly in the commodity complex, could both potentially act as catalysts for a return to outperformance of the Chinese banking sector.