Liu Chong Hing Bank said the combination of high customer deposit rates and cost of funds, coupled with a decline in the volume of lending is threatening sector profits. Executive director Nam Lee-yick said yesterday that interest margins had fallen to an average of 2.96 per cent from last year's 3.31 per cent. 'Interest margins were especially squeezed in the second half of last year - to 3.1 per cent - making operating conditions more difficult,' he said. Liu Chong Hing's overall loan book declined 6 per cent in the first quarter of this year, Mr Nam said. 'We have a very tight credit policy, so the quality of our loan assets is quite satisfactory,' he said. Mr Nam said the ratio of non-performing loans to total loans remained at 0.5 per cent, the same as the last quarter of last year. Liu Chong Hing had been more active in the mortgage market in the first quarter of the year relative to other banks, posting growth, he said. 'We participated in several home-ownership scheme programmes, as well as several sales programmes from the four largest local developers.' In the first quarter, the bank's mortgage loan book grew 2.77 per cent, with the bulk of activity in March. 'Higher levels of mortgage lending continued in April and we expect a 10 to 20 per cent increase in our mortgage book this year,' he said. Expectations for the second half will largely be influenced by the the next meeting of the United States' Federal Reserve in July, when the US prime rate is tipped to be raised at least 25 basis points. An increase would put further pressure on local stock and property prices, further dampening Liu Chong Hing's loans business. However, Mr Nam said there had been a slight pickup in customer deposits in the past two months even though deposits had decreased 2 per cent in the first quarter. 'With upward pressure on interest rates in the US we should hopefully see the small growth trend in customer deposits continuing,' he said.