Foreign banks in China made an extraordinary turnaround in 2011 as their performance outpaced their domestic counterparts, according to a report released by auditor KPMG LLP on Wednesday.

But analysts said it will be difficult for foreign lenders to keep their growth rate this year as the international financial environment struggles and the interest spread narrows in China.

Net profits of foreign banks in China grew by 109 percent last year, with interest income up by 57 percent, and non-interest income gaining 27 percent.

"While there is a variance from bank to bank in terms of business models, what is clear is that most foreign banks did well last year and saw profits reach record levels," said the report, which surveyed 197 banks that represent 88 percent of all banking assets in China.

It included the financial information for 33 of the 37 foreign banks that were locally incorporated before year-end 2011.

The surge in profits was in large part due to net interest income both in terms of volume and margin, and improved performance in the global markets and treasury business lines, as well as increased activity in bond and foreign exchange trading, KPMG said.

Banks in China, including both foreign and domestic ones, reported a 39 percent increase in profits last year, according to data from the China Banking Regulatory Commission.

Interest income growth among the foreign players was driven more by an increase in net interest margin than by loan growth, which was only 6 percent from 2010 to 2011, the report said.

And the average cost income ratio across the 32 foreign banks that released such information went down from 66 percent in 2010 to 52 percent in 2011.

Foreign banks also exceeded domestic players in terms of asset growth as their assets expanded 24 percent in 2011, compared with the 18 percent average growth of the overall sector.

While still modest as a percentage of total banking assets in China, foreign bank assets now account for 1.95 percent of total banking assets, up from 1.87 percent in 2010.

The deposit pressures that have plagued foreign banks in the past also seem to be easing, with total deposits increasing 24 percent from 2010 to 2011, although this is down from the 44 percent from 2009 to 2010.

And total non-performing loans, or NPLs, for the 20 foreign banks that disclosed such figures for both years are down 9 percent, leading to an NPL ratio of 0.24 percent, well below total sector averages.

"By most metrics, with certain exceptions such as loan-to-deposit ratio and cost income ratio, foreign banks have largely outperformed their domestic peers," said the report.

Simon Gleave, regional head of financial services at KPMG, was cited by the Wall Street Journal as saying: "In the two to three years prior to 2011, (the) banks had invested significantly ... and last year they started to see the beginning of the return on that investment."

But despite the rapid growth, foreign banks still cannot form any substantial threat to their Chinese counterparts, and the surge in profits was mainly due to the fact that they have much less basis, said Zhao Xijun, deputy dean of the School of Finance at Renmin University of China.

"And rising uncertainties in international financial markets will have more of an effect on foreign players than domestic banks," he said.

The KPMG report also said that "China is still a challenging environment, and increasingly conservative regulation from the CBRC is impacting both foreign and domestic banks alike".

The CBRC has released tougher capital requirements that branch-status foreign banks should follow. In addition, "despite the remarkably improved performance of foreign banks, they are still underrepresented as a percentage of net profits in comparison to their percentage of total banking sector assets".

At the end of 2011, foreign banks accounted for 1.4 percent of total sector net profits.

wangxiaotian@chinadaily.com.cn