Other variables that could affect individual banks' performances in the past six months include changes in net interest margin and provisions, and fee income.

Analysts generally expected interest margins in the first half to disappoint, mainly due to the failure of the prime lending rate to catch up with the almost 300 basis-point rise in the Hong Kong interbank offered rate (Hibor) this year. Prime rates at Hong Kong banks had risen only half of that margin during the same period.

'Net interest margin was the key factor leading to divergent interim results among banks in the first half,' said Steven Chan Sik-tin, assistant director of Hong Kong research at BNP Paribas Peregrine. 'However, no banks are expected to report widening net interest margins.'

Other analysts expected big local banks such as Hang Seng Bank to be able to take advantage of the rising Hibor via interbank lending.

Ken Yeung, an analyst at Sun Hung Kai Securities, predicted that net interest margins at large banks could rise between five and 10 basis points compared with a year ago, while those borrowing heavily from the interbank market, such as Dah Sing Bank, might see theirs drop more than 20 basis points.

But even with an improved interest margin, Hang Seng's first-half results would probably be characterised by an earnings decline because of the exceptional gains recorded last year.

Mr Chan expected Hong Kong's second-largest bank to post a 12 per cent drop in net profit to $5.5 billion for the first half, as it would be unlikely to repeat the large provision write-back it made a year ago.

'The drop would not be due to fundamental reasons,' Mr Chan said. 'Hang Seng had a more than $700 million write-back of bad debt charges and exceptionally good fee income at the same time last year.'

He said the bank should record above-industry-average 10 per cent loan growth, leading to a 2 per cent pre-provision profit growth.

On the other hand, Mr Yeung expected BOC (Hong Kong) to emerge as the biggest beneficiary of a provision release induced by an improved economy. 'When the economy gets better, those with a larger portion of non-performing loans tend to benefit more,' Mr Yeung said.

'But for banks such as HSBC and Hang Seng, their bad debt ratios are already very small so there won't be much room for improvement in this regard.'

Mr Chan is maintaining a positive outlook on Hang Seng for the second half because of the margin pressure relief, pick-up in fee income and gradual release of excess general provisions.

He expected the banking industry to keep benefiting from mainland business, adding that Hang Seng might increase its 15.98 per cent stake in Industrial Bank. The stake is expected to contribute 100 million yuan to Hang Seng's income in the first half.

'Hang Seng is a well managed franchise in our view,' said ABN Amro banking analyst Simon Ho. 'But we have concerns it would be difficult for the bank to further improve its return on assets and return on equity from the current high levels.'