August 24, 2017 / 9:52 AM / a year ago

UPDATE 2-China's BoCom optimistic on interest margins after H1 profit growth

* H1 net profit 39 bln yuan vs 37.7 bln yuan a year-ago

* Fastest pace of profit growth for Jan-June in three years

* Implies better-than-expected Q2 profit of 19.65 billion yuan

* Net interest margin steadies after long stretch of drops (Recasts, adds details from press briefing)

By Engen Tham and Matthew Miller

SHANGHAI/BEIJING, Aug 24 (Reuters) - China’s Bank of Communications Co Ltd , the country’s No.5 lender by assets, saw its net interest margin steadying after nine quarters of drops and said the gauge for profitability could further improve in the second half of 2017.

While there are concerns that lenders may face headwinds later this year from higher funding costs and slower loan growth amid a shadow banking crackdown, BoCom said it planned to shore up margins by reducing cost of liabilities and operations as well as hiking asset pricing in the second half.

Net interest margins (NIM) - the difference between interest paid and earned by banks - have fallen sharply for Chinese banks following six benchmark interest rate cuts in 2014-15.

BoCom, the first to report six-month results among China’s “Big Five” listed state-owned banks, said its NIM steadied at end-June versus 1.57 percent at end-March.

The NIM is expected to stabilise or possibly widen in the second half, BoCom Chief Financial Officer Wu Wei said in an earnings briefing on Thursday.

Earlier in the day, BoCom reported a 3.5 percent rise in its net profit for the first half of the year, the fastest pace of growth for January-June recorded by the lender in three years.

This implied a better-than-expected 19.65 billion yuan profit for the second quarter. Four analysts on an average had expected 19.1 billion yuan, Reuters data shows.

The bank’s non-performing loans stood at 1.51 percent at the end of June, versus 1.52 percent at end-March.

The rest of the Big Five lenders - Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China Ltd - are scheduled to report their first-half results next week.

Industry experts will be waiting to scour these financial statements for any sign of impact from government measures to reduce overall leverage and risky lending.

Analysts estimate banks have used 80 percent of their yearly credit quota over January-June, versus the usual 60 percent, amid the regulatory push to bring shadow financing activities to the main loan book, meaning lenders will have less money with which to make profits in the second half.

China’s economic growth showed signs of fading in July as lending costs rose, but a hard landing is unlikely with Beijing keen to ensure stability ahead of a once-in-five-years Communist Party leadership reshuffle later this year.

Moody’s Investors Service recently changed its outlook for China’s banking system to stable from negative, in its first revision of the sector in two years.

$1 = 6.6617 Chinese yuan renminbi Reporting by Engen Tham and Matthew Miller in Beijing, additional reporting by David Lin in Shanghai and Shu Zhang in Beijing; Editing by Himani Sarkar

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