Bank of China <601988.SS>, the country's No.3 lender by market value, posted on Thursday a near 10 percent rise in first-quarter net profit but the figure fell below expectations as flat net interest margins offset a rise in fee income.

Bank of China <3988.HK> is the first of China's four largest banks to report earnings for the quarter which still showed the effects of Beijing's earlier policy-tightening moves to engineer a soft-landing for the economy.

China's annual rate of GDP growth slowed to 8.1 percent in the first three months of 2012, down from Q4 2011's 8.9 percent.

The results could foreshadow similarly underwhelming numbers when the three remaining major banks report their results on Friday.

Bank of China is also the first 'Big Four' bank to report after premier Wen Jiabao's comments in early April that the country's state banks act as a monopoly that make money far too easily.

Bank of China, the country's biggest foreign exchange bank, said it made a net profit of 36.8 billion yuan ($5.83 billion) compared with the 33.4 billion yuan profit in the first quarter a year ago. That was below the 38.9 billion yuan average estimate of four analysts polled by Reuters.

Net fee and commission income amounted to 21.2 billion yuan, an increase of 13.8 percent. That figure, however, did not make up for the lack of growth in other key metrics.

It was a bit of a disappointment in terms of net interest margin, said Mike Werner, senior analyst at Bernstein Research, who covers Chinese banks.

Werner expected a Bank of China profit of 37.2 billion yuan, with his consensus figures showing a 37.3 billion yuan target. Werner pointed out that the flat net interest margin of 2.11 percent was a surprise, as he thought Bank of China and others would report an improvement.

China's banks have traditionally made most of their money on the difference between the rate they pay on deposits and the rate at which they lend to customers. Net interest income for Bank of China in the quarter accounted for around two-thirds of the bank's income at 60.6 billion yuan, as against 34.3 billion of non-interest income.


Political and popular pressure on China's major banks has built in the last few quarters, as the huge profits made by the institutions are helped by a steady growth in fee income.

China banks are notorious for poor customer service, and annoying and costly fees, such as charging for setting up a password for an online bank account. Unnecessary fees are gaining traction beyond customers, with politicians such as Wen and others lashing out at China's banks and their money making.

With Agricultural Bank of China's <1288.HK> <601288.SS> IPO in 2010, still the largest IPO ever, China completed the public listing of its four major banks. As recently as 2005, these institutions were technically insolvent after years of extending loans as policy banks.

Now public, China's Big Four are among the ten largest banks in the world by market capitalization. Agricultural Bank -- the least profitable of the four -- has more customers than the population of the United States.

The Big Four reported a combined 14 percent rise in total assets last year, to 51.3 trillion yuan, or roughly the size of the German, French and British economies combined.

Bank of China's loans and advances to customers rose 3.9 percent to 6.6 trillion yuan, in line with its peers' renewed burst of lending following loosening by Beijing.

Chinese banks lent a whopping 1.01 trillion yuan in March, in their biggest lending surge in 14 months as the government relaxed credit restrictions.

The spike in loans underlined easier credit conditions in China this year, with lending rates in the grey market pulling back from sky-high levels of as steep as over 80 percent last year, when Beijing was still tightening policy.

(Reporting By Lawrence White and Michael Flaherty; Additional reporting by Kelvin Soh; Editing by Muralikumar Anantharaman)