Bank of China Hong Kong, the overseas arm of Bank of China, expects loan demand to weaken even further in the current half as Hong Kong's economy suffers from the uncertain outlook in Europe and the United States. The bank's net profit fell 6.3 per cent year on year to HK$11.24 billion due to the absence of the one-time recovery of provisions related to Lehman Brothers products in the year-earlier half. He Guangbei, vice-chairman and chief executive of BOCHK, said Hong Kong banks would probably face compressed lending profitability and tougher competition in the current half. "Interest income affects our revenue quite substantially, so we will take prudent measures in setting our interest rates," he said. The bank's loans grew 6.8 per cent to a total of HK$746 billion in the first six months compared with the end of last year. It expects loan growth to be even weaker in the current half, as the economy remains sluggish and risks rise. The bank's net interest margin improved 0.2 percentage points to 1.64 per cent compared with the end of last year, as it shifted its deposit strategy to minimise the squeeze on profit from its low-yielding yuan clearing business. Cost-to-income ratio rose 16.5 percentage points to 29.68 per cent. This was mainly because last year, the bank benefited from a one-time recovery of provisions for Lehman Brothers-related products. Excluding this effect, the bank's cost-to-income ratio would have fallen 2.24 percentage points year on year. "We will continue to maintain a tight control on our costs," chief financial officer Zhuo Chengwen said, adding the bank's goal was to keep cost efficiency below 35 per cent. The bank's capital adequacy ratio, which measures capital against risk-weighted assets, rose 0.53 percentage points to 17.43 per cent.