Bank of China, the country’s No 4 lender by market value, posted its biggest quarterly profit gain in a year, beating estimates, as interest margins widened following increased demand for credit. Net profit rose to 34.76 billion yuan (US$5.57 billion) in July-September from 29.8 billion yuan a year earlier. That compares with the average estimate of 32.7 billion yuan in a Reuters poll of 12 analysts. Net interest margin, which measures loan profitability, widened to 2.12 per cent at the end of September from 2.1 per cent at the end of June. The wider interest margin indicates Chinese banks are benefiting from the central bank’s decision in June to give lenders more flexibility in setting their own rates by raising the ceiling on deposit rates and lowering the floor on lending rates. The policy shift initially fuelled concerns that interest margins would be hit. Bank of China is the first of the so-called “Big Four” Chinese banks to report earnings for the third quarter, and its wider margins set a strong tone for its peers. Bank of China’s total loan book expanded about 9 per cent in January-September, pointing to rapid loan growth in the third quarter. In the first half, its loan book grew only 6.5 per cent. While increased demand for loans has boosted net interest margins, overall earnings growth remains constrained by new regulations implemented by regulators that restrict the kind of fees banks can charge. For many years, Chinese consumers were charged for services that are free in most other markets, such as changing an internet banking password and withdrawing cash from ATMs outside their home city. Banks dropped those fees this year. Fees and commission income, which fuelled much of Bank of China’s earnings growth in the past two years, remained flat in the third quarter from a year earlier at about 17 billion yuan. That compares with the 14 per cent growth it recorded last year. Widening worries about bad loans lurking in China’s banking system have also dimmed the outlook of lenders. Goldman Sachs analysts estimate that the actual system-wide non-performing loan ratio may be about six times higher than the official reported rate of 0.9 per cent. Bank of China said its non-performing loan ratio stood at 0.93 per cent at the end of September, down from 0.94 per cent at the end of June. However, overall non-performing loans rose to 64.1 billion yuan from 63.6 billion yuan at the end of June. Bank of China’s Hong Kong-listed shares are up about 10 per cent so far this year, lagging the 14 per cent rise on the benchmark Hang Seng index. The stock rose 1 per cent to close at HK$3.15 on Thursday, before the earnings announcement. Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank will report earnings through October 30.