Two of China’s largest banks on Thursday revealed a rise in quarterly net profits on the back of an unprecedented government-directed expansion of new loans.

Industrial and Commercial Bank of China, the world’s largest bank by market capitalisation, said net profits in the third quarter rose 19 per cent to Rmb33.6bn ($4.9bn) compared with the same period last year.

Bank of China, the country’s third-largest lender, recorded a 19 per cent rise in net profits to Rmb21.1bn over the same period.

Late last week, China Construction Bank, the country’s second-largest lender by market value and assets, also reported a rise in net profit of 18.6 per cent to Rmb30.3bn.

Chinese banks extended a total of Rmb8,670bn in new loans in the first nine months of this year, 75 per cent more than in all of 2008, after the government ordered the state-controlled sector to flood the economy with credit to ward off the financial crisis.

The volume of new loans fell significantly in July and August but picked up again in September to hit Rmb517bn for the month.

But the huge expansion in new loans has not translated into correspondingly larger profits for the banks after the government slashed lending rates faster than deposit rates at the end of last year in response to the financial crisis.

Most Chinese banks still rely on the spread between government-set deposit and lending rates for about 80 per cent of their income.

“Net interest margins are likely to rise over the next year after this year’s substantial decline,” according to She Minhua, an analyst at Haitong Securities.

“We expect profits at the major banks to increase around 20 per cent next year if interest rates are not adjusted but the growth will be much higher if the government does lift interest rates.”

The flood of credit has raised concerns that a new crop of future bad loans could be being created by the banks’ rush to lend.

China’s banking regulator said on Thursday that the bad loan ratio of the country’s commercial banks dropped to 1.66 per cent at the end of September from 2.42 per cent at the start of the year.

But the regulator has repeatedly warned about possible future deterioration in asset quality and ordered banks to lend at a “reasonable” pace.

For the nine months to the end of September, all three of China’s largest banks reported net profit gains in the low single digits, indicating acceleration in profit growth in the third quarter.

ICBC’s new loans in the third quarter more than doubled to Rmb144bn from Rmb65bn a year earlier.

BoC issued Rmb388bn worth of new loans in the same period, more than eight times the Rmb48bn it lent a year earlier.

ICBC’s Hong Kong-listed shares ended down 2.7 per cent ahead of the results, while the overall market fell 2.3 per cent.