The soaring profitability of China's top banks is diverting attention from rising credit risks as they aggressively expand their loan books, Standard & Poor's Ratings Services said in a report released today.

'The profitability of the top 50 banks has significantly increased because of ballooning net interest income, explosive fee and commission income growth, improved cost efficiencies, and favorable credit costs,' S&P credit analyst Ping Chew said.

'The rapid industry-wide expansion of credit exposure suggests that many banks prioritize expanding their asset base and market share over strengthening their capital. Banks need to engage in a careful balancing act between short-term profitability and long-term sustainability,' he said.

The industry will face significant challenges to maintain its current low credit costs over the long term.

Loan-loss provision coverage has significantly improved, but remains inadequate.

'If the banks in our top 50 banks survey had set aside sufficient reserves to cover latent credit costs, it's likely that they'd have at best only managed to break even in 2006,' said S&P credit analyst Ryan Tsang.