"We noticed NPLs among banks are rising in China, but it will be fine given the lenders are already very well prepared for the thorny scenario," said Eric Raynaud, CEO of BNP Paribas Asia-Pacific. The bank currently holds a 12.7 percent stake in Bank of Nanjing Co Ltd.

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"Following reform, asset or liability management has become increasingly important for banks. Provided listed banks effectively manage the above risks and develop appropriate measures in response to the changing trends, they will be well positioned in the new competitive environment," Ho said.

While uncertainties over asset quality loom large, lenders' profitability will be further confined by the government's attempts to liberalize interest rates and slower fee income growth, indicating that the writing off of these bad loans will be more difficult.

The 10 banks posted a combined net profit of 513.2 billion yuan in the first half, a 17 percent increase year-on-year, said the report. But the rate of growth has slowed considerably from 34 percent during the same period in 2011, it said.

The growth would probably slow down to a level between 10 and 15 percent in the next 12 months, as the interest spread narrows, said Jimmy Leung, PwC China banking and capital markets leader.

China's central bank has made two asymmetric cuts in deposit and lending interest rates since June, and announced that deposits were allowed to float upwards, which was viewed as a historical change to the uniform deposit rate scheme long practiced in the banking industry.

"What this means is that it's no longer viable for banks to take in deposits at low costs. In the future, it would be crucial for banks to improve their asset and liability management in order to cut capital costs," said Leung.

The central bank's recent effort to liberalize interest rates in June and July was almost not reflected in the interim results.

The average net interest margin, a key measure of banks' profitability from lending, stood at 2.75 percent, a slight increase compared to the end of 2011, he said.

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