Agricultural Bank of China reassured investors yesterday that a decline in a key liquidity measure and a rise in local government debt were caused by stricter banking regulations. At its interim results briefing yesterday, the country's third-largest bank by market capital said outstanding loans to local government financing vehicles (LGFV) rose 34 per cent to 530 billion yuan (HK$647 billion) by the end of June, from about 397 billion yuan in December. The bank met market expectations and posted a record 66.68 billion yuan in net profit for the first half, up 45.4 per cent from a year earlier, thanks to higher interest rates. The rise in loans by the vehicles - companies set up to borrow on behalf of local governments - coincides with the bank's share price coming under pressure in the past month. Investors have become increasingly worried over possible bad loans after a lending spree to local governments. A substantial amount of that money might have funded infrastructure building that might not be able to generate enough cash flow to repay interest or principle payments. 'The rise in these loans is because we have clearer definitions of what qualifies as one,' said Zhang Yun, vice-chairman and president of the bank. 'The China Banking Regulatory Commission acknowledges our definition of the loans.' Outstanding loans to LGFVs was about 10 per cent of total outstanding loans in the first half, a normal standard for most large Chinese banks, said Stanley Li, an analyst at Mirae Asset Securities. The bank tried to reassure investors that 90 per cent of the LGFV loans were at least 80 per cent covered by cash flow. It pointed to its non-performing loan ratio of 1.67 per cent, down 36 basis points year on year. Analysts said one concern was the fall in the bank's core capital adequacy ratio (CAR) by 39 basis points to 9.36 per cent from the end of last year. The ratio is a measure of liquidity that calculates retained earnings and common equity against risk-weighted assets. A basis point is a hundredth of a percentage. Shi Shenglin, deputy general manager of the bank's finance and accounting department, said stricter measures of risk-weighted assets was behind the fall. Shi said the bank had no need to seek funds in the near term after a 50 billion yuan subordinated bond sale in the second quarter. The sale put the bank's capital adequacy ratio - the measure of a bank's capital against risk-weighted assets - above the required 11.5 per cent to 11.91 per cent a rise of 32 basis points. 'The challenge for Agricultural Bank is whether it will be able to sustainably maintain its core CAR,' said Michael Werner, a senior analyst at Sanford C. Bernstein. 'We expect they might have to come back to the markets to raise capital some time in the second half next year.' The bank's share price rose 0.26 per cent to HK$3.83 yesterday.