Mainland banks last year posted their highest profits in at least four years, despite a slight rise in bad loans for some in the fourth quarter amid a slowing economy. About 3,800 institutions on the mainland, including policy banks, commercial, city and rural commercial lenders, earned about 1.25 trillion yuan (HK$1.53 trillion) profit last year - up 39 per cent year on year - according to the China Banking Regulatory Commission's annual report. Mainland banks have come under fire recently for racking up fat profits while continuing to pay depositors meagre interest rates that do not even keep up with inflation. With the central government becoming more vocal about breaking the banks' 'monopoly' and pushing interest-rate liberalisation, many lenders have been trying to rely less on interest income and strengthen earnings through fee income and treasury business. Mainland banks' fee income contribution to overall income rose 2 percentage points to 14 per cent last year. Net interest income contribution continued to increase, by 20 basis points, to 66.2 per cent, due to a fall in treasury and other income. Bad loans, which came under scrutiny following a lending spree in the aftermath of the global financial crisis, continued to drop in both volume and ratio even though they rose slightly for some banks in the final quarter last year. Overall, non-performing loans (NPL) in China's banking system fell to 1.05 trillion yuan at the end of last year. The non-performing loan ratio fell 0.66 percentage points to 1.77 per cent. Underlining this year's priorities, Shang Fulin, the newly appointed CBRC head, said the regulator would continue to control the volume of new local government financing vehicle (LGFV) loans and monitor risks. LGFVs are companies set up to borrow from banks on behalf of local governments, which are often barred from doing so. Even though banks' total loan loss reserve, which is money set aside for potential bad loans, reached 1.19 trillion yuan and the loan loss coverage ratio rose 60.4 percentage points to 278.1 per cent, some analysts remain sceptical over whether banks are setting aside enough money for loans that may turn sour. A loan loss coverage ratio of 278.l per cent means that for every 100 yuan of potential bad loans, the bank has 278.1 yuan to cover them, a relatively high standard even compared with international peers. The banking watchdog is also requesting lenders maintain a loan-loss reserve ratio of 2.5 per cent, or set aside 2.5 yuan for every 100 yuan of loans made. 'The issue is what you think the actual, as opposed to reported, NPLs are likely to be,' ' said Tsinghua professor Patrick Chovanec. If 2 per cent of the total outstanding loan portfolio is going to go bad and banks have a 20 per cent recovery rate, then mainland banks are covered by setting aside a 2.5 per cent loan loss reserve ratio, said Chovanec. But if the banks' NPLs rise to 10 per cent, they will have losses they have not provided for.