Bank of China, the mainland's second-largest lender, posted an 85 percent jump in its first-quarter net profits, driven by strong fee income and lower tax rates.

Bank of China's earnings hit 21.7 billion yuan. But the bank still holds $4.43 billion in subprime mortgage-related securities, it said in a statement.

It has made a $1.50 billion impairment allowance for these securities, representing 1.82 percent of the total investment securities.

Bank of China, hardest hit from subprime exposure among the mainland's banks, said it held $5 billion worth of such securities at the end of 2007, or 2.13 percent of its investment securities, incurring $1.58 billion in provisions and writedowns.

The bank's net interest income increased 18.74 percent to 40.8 billion yuan, while its net fee and commission income jumped 82.9 percent to 9.45 billion yuan.

The bank's annual return on equity was 20.2 percent, and the cost-to-income ratio was 41.5 percent. Income tax expenses decreased to 7 billion yuan from 11.6 billion yuan a year ago.

Mainland banks are working to diversify their revenue streams away from an historical dependence on lending to State-owned companies.

After a bumper 2007, many analysts expected mainland banks to face a tougher market in 2008 as Beijing imposes curbs on lending and takes other steps to head off inflation while their fee income may be affected by the volatile stock market.

But, "now they seem to be shrugging off most of the unfavorable factors and continue to grow robustly", said one analyst speaking on condition of anonymity.

Despite the government restricting loan growth, mainland banks may benefit from an increasing net interest margin, the analyst said.

He said the market now expects all mainland banks to report strong results in the first quarter. Their results may even be stronger in the second and third quarters, although the first quarter may have the largest year-on-year growth.

But Bank of China's valuation will likely remain lower compared with other banks in the short term as long as the subprime impact remains.

Bank of China trades at 12.3 times its 2008 earnings, compared with Industrial and Commercial Bank of China's 16.8 times.

Reuters contributed to the story.

(HK Edition 04/29/2008 page2)