The golden days for mainland banks, when they were able to report reductions in bad loans and non-performing loan (NPL) ratios, appear to be over. The mainland's eight largest listed lenders were unable to make such a boast in the first half of this year, with worse yet to come. In interim reports released over the past two weeks, decent year-on-year growth in banks' second-quarter profits - ranging between 9.7 per cent and 22 per cent - has been overshadowed by concerns about worsening asset quality down the road, bankers and economists said. "Banks will not have easier days for the rest of this year," said Zhao Xijun, deputy director of the Finance and Securities Institute at Renmin University. "Banks financing bad performers in the economic slowdown and losers in economic restructuring are set to see more loans turn sour." China Construction Bank chairman Wang Hongzhang said it was likely to come under pressure from an increase in bad loans during the second half of this year as economic deceleration set in, especially in eastern areas. The sluggish performance of manufacturers in eastern provinces including Jiangsu and Zhejiang has seen bad loans in the region soar at many banks. Those with a heavier presence in the east posted the highest increases in NPLs in the first half of the year, with outstanding NPLs rising by 17.3 per cent, or 4.67 billion yuan (HK$5.87 billion), at Bank of Communications and surging by a third, or 4.12 billion yuan, at China Citic Bank. Analysts said local government financing vehicles (LGFVs) would also be a major source of problematic loans. LGFVs received the bulk of bank loans in the mainland's 4 trillion yuan economic stimulus package in 2009 and 2010, but many were later found to have solvency problems. Outstanding loans to LGFVs stood at 9.7 trillion yuan at the end of June, according to the China Banking Regulatory Commission (CBRC). Citic Bank president Zhu Xiaohuang said it would avoid lending to LGFVs and instead design trust and wealth management products for new local projects backed by local government assets which had positive cash flows. The China Banking Association, a semi-governmental organisation, said bad loans at mainland banks were expected to increase by up to 100 billion yuan this year. Figures from the CBRC also show that NPLs at mainland commercial banks grew by 46.6 billion yuan in the first half of the year, resulting in an overall NPL ratio of 0.96 per cent. However, the real situation could be more serious than the official data suggests. Simon Ho, a Citi analyst, said the NPL ratio could be much worse if off-balance-sheet exposure - such as from wealth management products and corporate bonds - was taken into account. The erosion of capital by NPLs will leave banks hungry for additional capital, and Professor Guo Tianyong, from Beijing's Central University of Finance and Economics, said it would mean more banks attempting to tap the capital market in the next few years. UBS analysts have said that H-share mainland banks are experiencing a capital shortfall of 300 billion yuan. China Construction Bank said on August 23 that it planned to sell up to 22 billion yuan of debt to replenish capital. China Merchants Bank also said last month that it had obtained regulatory approval to sell about 680 million shares in Hong Kong and 3.07 billion shares in Shanghai to existing shareholders, to raise as much as 35 billion yuan.