INCREASED competition for deposits and a narrowed interest rate spread kept Wing Lung Bank's interim profit growth to $157.4 million, a 12.6 per cent increase from last year's $139.7 million. The bank cited a less favourable banking environment, in particular squeezed interest rate margins, as the main cause for the result. The spread was under pressure on two fronts. ''Ever since the fourth quarter last year, banks have stepped up competition for deposits, thus pushing up our bank's interest expenses,'' said Chung Che-shum, general manager of the 28-branch bank. Meanwhile, the spread between the savings rate and prime lending rate contracted as a result of the rate rises in March and May, during which savings rates rose faster than lending rates. The much-restrained growth in mortgage lending also cut into the bank's interest income. Mr Chung said that banks in Hong Kong were experiencing an inevitable business cycle of peaks and troughs. ''In the past two years, banks' profit reached their peak. This year, banks are undergoing a consolidation period,'' he said. In dealing with the less favourable environment, he said Wing Lung Bank would diversify its income sources by expanding business. Developing more fee income sources was another alternative. It has been rumoured for months in the market that Wing Lung Bank is joining forces with Cheung Kong, Shougang and CEF to form a life insurance company. However, rising operating costs, in particular staff salaries and investment in automation, would continue to dampen banks' performance, Mr Chung said. ''I think the performance and profit growth in the banking industry will slow down in the second half as well,'' he said. The bank's interest expenses are not likely to come down soon, especially when the interest rate cap placed on time deposits is removed, as agreed by the Hong Kong Association of Banks. ''The extent to which the rates will go up will depend on how the players compete. But we are watching the development closely,'' said Mr Chung. He considered a 12 per cent profit growth respectable, in the context of a long term perspective. He said the public was accustomed to banks reporting 20 to 30 per cent profit growth. Earnings per share showed growth of 12.5 per cent from last year's interim rise, from $1.04 to $1.17. Dividends per share rose 20 per cent from 33 cents to 40 cents. Though he was cautious in his statements regarding banks' operations in the second half, he expected the external economic environment to improve. ''The renewal of China's Most Favoured Nation status might help sustain the domestic market and boost foreign investment and trading activities,'' the bank's interim report said. It added that the economies of major industrialised countries were expected to pick up later this year. In Hong Kong, infrastructure construction projects would stimulate both capital investment and domestic consumption, it said. The bank established its first presence in China by opening a representative office in Guangzhou earlier this month. On July 8, the bank issued $550 million of five-year floating rate certificates of deposit. ''The main purpose of the issue was to better match the bank's long-term commitments,'' the bank said.