Nevertheless, net earnings at the country's third-largest lender soared to 42.18 billion yuan (HK$48.23 billion), as healthy returns on lending and rising fee income offset losses on United States securities holdings.

BOC booked year-on-year profit growth of 42.78 per cent in the first half, compared with gains of 57.25 per cent at Industrial and Commercial Bank of China and 71 per cent at China Construction Bank Corp.

'We have had an overall satisfactory operating environment so far this year,' said BOC chairman Xiao Gang. 'But we have also seen the emergence of more risk factors and uncertainties.'

At the end of June, the bank held US$10.6 billion of bonds issued by beleaguered US mortgage companies Fannie Mae and Freddie Mac, while holdings of US subprime-related securities were worth US$5.47 billion.

BOC president Li Lihui said the value of the bank's original Fannie Mae and Freddie Mac holdings had decreased by US$4 billion as of August 21 after some bills were disposed of.

'Trading of these securities has not created any losses. We anticipate that Fannie Mae and Freddie Mac will not have an adverse impact on Bank of China,' Mr Li said.

BOC, the hardest hit of the big mainland banks by the meltdown in the US housing market, said it had set aside US$2.4 billion for subprime securities in the first half.

'The market is more concerned about the risks the bank faces rather than other aspects such as profitability or earnings growth,' said Haitong Securities analyst Qiu Zhicheng.

Although the ratio of non-performing loans at BOC fell from 3.12 per cent last year to 2.58 per cent at the end of June, analysts warned that a further softening in the domestic economy could see asset quality deteriorate.

'There is a risk of higher non-performing loans on slowing GDP and export growth and property price fluctuations this year,' said HSBC analyst Todd Dunivant.

Mr Dunivant estimated a rise of 25 basis points in bad loans could see the bank's earnings drop 13 per cent for the year.

Future earnings for the bank also remain vulnerable to reduced interest spreads with domestic margins expected to narrow in the second half.

HSBC expects the central bank to raise term deposit rates by 27 basis points but leave loan rates unchanged, which will lop 6.5 per cent off BOC's earnings next year.

Mr Li blamed the bank's relatively slow profit growth on its heavy overseas exposure as US rate cuts squeezed foreign currency spreads and foreign assets lost value against the appreciating yuan.

'There is a gap between us and our rivals,' said Mr Li. 'But in purely domestic business terms, our indicators are as good as our competitors'.'

BOC saw non-interest income expand an impressive 99.06 per cent to 37.34 billion yuan in the first half while net interest income grew 14.78 per cent to 81.52 billion yuan.

Separately, Wang Zhaowen, the general manager of BOC's executive office, denied allegations BOC transferred millions of dollars to Hamas and Islamic Jihad, despite Israeli government demands to halt the practice. 'We will not offer financial services to problematic parties,' he said.