Industrial and Commercial Bank of China <1398.HK> and Agricultural Bank of China Ltd <1288.HK>, the country's top and No.3 lenders, respectively, on Thursday reported record first-half profits on better pricing power for loans and dismissed rising concerns over loans to local governments.

The two banks join second-ranked China Construction Bank <0939.HK> and No.4 Bank of China <3988.HK> in unveiling record six-month profits, benefiting from the mainland's move to raise interest rates and further helped by fast-rising fee income.

Going forward, they're not going to be able to post these type of earnings, Ken Peng, senior economist at BNP Paribas said. The regulators are starting to catch onto the types of grey areas in the banking system. Also, interest rates should be normalizing.

China has been trying to pull back on bank lending by steadily raising interest rates and ordering banks to keep more reserves with the central bank, to keep inflation under control. Rising rates typically improve the margins of banks.

ICBC <601398.SS> and AgBank <601288.SS> also dismissed concerns that the massive lending to local government financing vehicles (LGFVs) in 2008 and 2009 could go sour, pointing to their falling non-performing loan ratio as evidence of that.

ICBC, also the world's biggest bank by market value, said LGFV loans had an NPL ratio of 0.25 percent, while AgBank said its LGFV loans had an NPL ratio of 1 percent. This is lower than the two banks' overall bad-loan ratio.

I have been asked about LGFV loans so many times I have already memorized my answer, ICBC's President Yang Kaisheng told a news conference after the results. I will say that the risk is manageable, the loans are properly spread out, we have enough provisions, and the assets are of good quality.

AgBank had total outstanding LGFV loans of 530 billion yuan, while ICBC's total outstanding LGFV loans clocked in at 931 billion yuan, according to executives at the two banks.

LGFV loans have been highlighted as a possible hotspot for souring loans by China's banking regulators. Unable to borrow directly from banks, many local governments set up financing vehicles that borrow on their behalf to fund infrastructure projects.

ICBC PROFIT UP 29 PCT

ICBC, in which Goldman Sachs and American Express hold stakes, reported a January-June net profit of 109.5 billion yuan ($17.14 billion), slightly better than analysts' expectations for 106.9 billion yuan, according to a Reuters survey of nine analysts.

It was also 29.4 percent higher than the 84.6 billion yuan it made the same period last year.

Net interest margin, which measures the profitability of loans, widened to 2.6 percent from 2.44 percent at the end of 2010. Non-performing loans stood at 0.95 percent, down from 1.08 percent at the end of 2010.

Helping boost earnings was fee and commission income, which rose 46 percent to 56.8 billion yuan from a year ago. ICBC's investment banking arm is Hong Kong-based ICBC International, which has snagged several high-profile deals, including Brazilian oil giant Petrobras'

$70 billion share sale.

AgBank recorded a 66.67 billion yuan profit for January-June, up from 45.8 billion yuan a year earlier. The result was roughly in line an with the average estimate of 67 billion yuan from nine analysts surveyed by Reuters.

The bank, which was set up in 1951 to fund rural causes, also dismissed concerns that it could soon head for another round of fundraising just a year after its bumper $22 billion IPO in Shanghai and Hong Kong.

Of course everyone is concerned if the CBRC hikes capital requirements, AgBank's President Zhang Yun said, referring to the China Banking Regulatory Commission. But for now, all the big banks have high levels of capital and we have no plans for fundraising in the near future.

AgBank, whose key investors include sovereign wealth funds such as the Qatar Investment Authority, was sticking to its previously stated plan of having no more equity fundraising for at least three years from its IPO, Zhang added.

Net interest income for the quarter was 144.7 billion yuan, up 29 percent from a year earlier. Net interest margin was 2.79 percent versus 2.47 percent in the first half of last year. Its non-performing loan ratio stood at 1.67 percent, compared with 2.03 percent a year earlier.

ICBC shares in Hong Kong ended up 1.9 percent on Thursday, compared with the benchmark Hang Seng Index's <.HSI> 1.5 percent gain. AgBank shares closed up 0.3 percent.

($1 = 6.388 Chinese Yuan)

(Additional reporting by Eva Dou in BEIJING; Writing by Muralikumar Anantharaman and Kelvin Soh; Editing by Anshuman Daga)

China BNP Paribas