UPDATE 1-China's ICBC posts best quarter, cautious on H2

* Net profit 43.1 bln yuan vs 39.2 bln yuan market view

* Bank expresses caution over the second half

* NPL ratio 1.26 pct; capital adequacy ratio 11.34 pct (Adds details, company comment, background)

By Michael Wei and Doug Young

BEIJING, Aug 26 (Reuters) - Industrial & Commercial Bank of China (ICBC) (1398.HK), the world's biggest bank by market cap, cited multiple factors as challenges in the second half of the year after posting a record quarterly profit on new lending and improved margins.

ICBC and other Chinese banks' recent profits have been turbocharged by government-directed lending in 2009, but uncertainties -- from rising bad loans, to a slowing recovery in interest margins and a tightening regulatory environment -- are mounting.

"In general, the implementation of industrial and regional development strategies will create large opportunities for the bank's development," ICBC said in a filing to the Hong Kong stock exchange on Thursday.

"However, uncertainties in domestic and international economic environment and increasingly rigorous financial supervision also present challenges to business expansion of domestic commercial banks," the Beijing-based lender said.

The bank said there were a slew of factors to worry about, such as increasingly intense competition, pressure on an interest margin rebound, concerns over market liquidity as well as loans to local government and the property sector.

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For StarMine comparative table: r.reuters.com/nat37n

For the full Hong Kong stock exchange report: here

For graphic on China banks' fundraising:

r.reuters.com/vyq26n)

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ICBC (601398.SS), in which Goldman Sachs (GS.N), Allianz Group (ALVG.DE) and American Express (AXP.N) hold stakes, said net profit for the April-June quarter was 43.1 billion yuan ($6.34 billion) compared with 31.27 billion yuan a year earlier

The profit compared with the 39.22 billion yuan forecast on average from seven analysts surveyed by Reuters and represents the bank's best ever quarter since it went public in 2006, surpassing last quarter's 41.6 billion yuan.

ICBC'S non-performing loan ratio fell to 1.26 percent at the end of June from 1.54 percent a year earlier.

Its capital-adequacy ratio -- a key measure of a bank's financial strength -- stood at 11.34 percent, slightly below the official requirement of 11.5 percent for large-sized lenders.

ICBC, like other Chinese banks, is tapping investors to raise capital with a plan to sell up to 25 billion yuan in convertible bonds as well as up to 45 billion yuan in shares in Hong Kong and Shanghai.

At the end of June, loans and advances totalled 6.35 trillion yuan, up 10.8 percent from the end of 2009, ICBC said.

Net interest income rose 23.3 percent to 143 billion yuan in the first half as the bank's net interest margin climbed to 2.28 percent from 2.13 percent a year earlier.

Earlier this week, China Construction Bank (0939.HK) (601939.SS), the world's No. 2 bank, posted a forecast-beating 20 percent rise in quarterly profit. Bank of China (601988.SS) (3988.HK), which also reported on Thursday, said its earnings grew 15 in the second quarter.

Shares of ICBC, which has a market value of more than $210 billion, were 0.18 percent lower on Thursday in a largely flat Hong Kong market ahead of the results.

ICBC's Hong Kong-traded shares have fallen 13 percent so far this year, underperforming the benchmark Hang Seng Index .HSI, which has declined 5.6 percent. ($1=6.799 Yuan) (Reporting by Michael Wei and Doug Young; Editing by Muralikumar Anantharaman and Jacqueline Wong))