Bank of China Ltd, China's third-biggest lender by total assets, registered its slowest profit growth pace in three years as the economy slows down and the interest spread narrows.

In a statement on Thursday, it reported profit growth of more than 5 percent in the second quarter, with net income climbing to 34.8 billion yuan ($5.5 billion) from 33.1 billion yuan a year earlier.

In the first half, the lender made a profit of 71.6 billion yuan, up 7.6 percent year-on-year.

Excluding the impact of some one-off factors, such as Lehman Brothers' related products, profits would have increased 12.2 percent, it said.

Its non-performing loans totaled 63.6 billion yuan, an increase of 309 million yuan from six months ago. The ratio of such loans to total loans stood at 0.94 percent, a decrease of 0.03 percentage point from the first quarter.

The lender attributed the weaker profit growth to the faster rise of interest-bearing liabilities than income from interest-earning assets.

"The renminbi has entered a cycle of lower interest rates, the process of interest rate liberalization has accelerated, the floating band between borrowing and lending interest rates has expanded, and customer deposits have tended to feature longer durations," the bank said in the statement.

In addition, the foreign currency interest spread narrowed as foreign currency deposits grew more rapidly due to slowing appreciation of the yuan, but demand for foreign currency loans remained subdued, it said.

Its net interest margin was 2.1 percent by the end of June, down 0.01 percentage points from three months earlier.

As the economy loses steam and there is a further relaxation of monetary policy, Chinese banks have been struggling with rising non-performing loans, falling market valuations, weaker loan demand and narrower lending margins.

As of Wednesday, among five commercial lenders that have already released their half-year results, four reported a decline in profit growth ranging from nine to 21 percentage points compared with the end of 2011.

These banks were Hua Xia Bank Co Ltd, Shanghai Pudong Development Bank Co Ltd, Ping An Bank Co Ltd, and China Merchants Bank Co Ltd. Industrial Bank Co Ltd was the only exception.

But compared with the first quarter, Industrial Bank also registered a decline in profit growth of nearly 19 percentage points to 40 percent, while China Merchants Bank's profit growth slowed by more than six percentage points to 26 percent.

According to the China Banking Regulatory Commission, in the second quarter the net interest margin (NIM) among banks stood at 2.7 percent, down 0.1 percentage point from three months ago.

Analysts forecast the fall in NIM means that the profit growth of 16 listed banks will fall by two or three percentage points from the first quarter's 20 percent.

NIM is a measure reflecting the difference between interest income and the amount of interest paid for deposits, which makes the biggest profit contribution to Chinese lenders.

Interest income accounted for 66.2 percent of the total income of Chinese banks, according to figures from the banking regulator.

By the end of June, China Merchants Bank's NIM dropped by 10 basis points to 3.11 percent from the first quarter, while that of Shanghai Pudong Development Bank declined by 16 basis points to 2.64 percent.

Chinese lenders may see a drop of 50 percent in profit growth this year as earnings generated from their NIM shrink and fee income growth slows, said May Yan, director of Barclays Capital Asia Ltd.

Their average profit growth of more than 30 percent last year will fall to a range of 11 to 15 percent this year, she said.

Mu Hua, a banking analyst at GF Securities, said the impact of interest rate liberalization will become obvious next year, and the first quarter would probably witness a "turning point" in bank profits.

wangxiaotian@chinadaily.com.cn