After-tax net profits of Chinese banks have nearly doubled in the past five years, from 446.7 billion yuan in 2007 to 1.25 trillion yuan by the end of 2011, according to an annual report of the China Banking Regulatory Commission on Tuesday.

In 2011, financial institutions in China including policy banks, commercial lenders, rural credit cooperatives and foreign banks, earned a combined net income of 1.25 trillion yuan, up 39 percent from a year earlier, the CBRC said.

The regulator also said that China’s financial institutions had 1.05 trillion yuan of non-performing loans by the end of 2011, accounting for 1.8 percent of their total advances.

Underperforming assets

Compared with the robust gains in profits, growth in these banks’ return on assets (ROA) and return on equity (ROE) has far lagged behind, which means that the rapid expansion of interest-bearing assets was the main reason for profit growth.

ROA reflects how profitable a company’s assets are in generating revenue while ROE measures a firm’s efficiency at generating profits from every unit of shareholders’ equity. ROEs between 15 percent and 20 percent are generally considered good.

In 2011, Chinese commercial banks’ ROA stood at only 1.3 percent, up 0.4 percentage points from that in 2007 and the ROE grew 3.7 percent from 2007 to 20.4 percent, according to the report.

High growth hard to sustain

China’s banks posted their fastest profit growth for 2011 in at least four years, but a slowing economy in the country could make it hard to sustain that pace in 2012, analysts say.

Several lenders have trimmed down forecasts for this year’s growth amid worries of the impact from the supposed further liberalization of its interest rate, and risks from non-performing loans.

There are also factors cited by economists as being behind a likely rally in the future. China will maintain a steady growth, despite a downgrade of the economic growth this year by Beijing, which indicates that credit should expand further at a relatively fast pace, and thus push up banks’ profits, said Xiang Songzuo, chief economist with the Agricultural Bank of China, one of China’s biggest four state-owned banks.

A higher interest rate which took effect from the beginning of this year will also give a lift to banks’ net interest income, economists say. China’s central bank hiked the interest rates three times in 2010.