March 19 (Bloomberg) -- Bank of China Ltd., the nation's second-largest, said 2006 profit may have risen by more than 50 percent, buoyed by a tax credit and an expanding economy. The shares rose in Shanghai and Hong Kong.

The bank, which paid 4.6 billion yuan ($595 million) less in levies last year after being granted pretax deductions for staff costs, didn't provide a profit figure in its statement to the Shanghai exchange. Net income in 2005 was 27.5 billion yuan, based on domestic accounting standards, the company said.

Bank of China extends a third of the country's foreign- currency lending, helping it boost interest income as a record trade surplus powered economic growth of 10.7 percent last year. Smaller rival China Minsheng Banking Corp. yesterday said 2006 profit jumped 43 percent.

Bank of China ``has the highest exposure to Hong Kong, Macau and other overseas markets which benefit from stronger China trade inflows and offshore investments,'' Tracy Yu, a Hong Kong-based analyst at Citigroup Inc. wrote in a report this month.

Shares of the Beijing-based bank rose 5.8 percent to 5.29 yuan, the second-highest close ever, on the Shanghai Stock Exchange. The H shares rose 1.9 percent to HK$3.84 in Hong Kong.

Also benefiting Chinese banks, the interest rate spread between loans and deposits widened last year as the central bank twice raised lending rates to cool the economy, while raising deposit rate only once.

Higher Interest Margin

The People's Bank of China yesterday raised the country's lending rate to 6.39 percent and increased the interest on one- year deposits to 2.79 percent to cool the economy and stem inflation. All mainland banks' shares rose today.

The increase may boost Bank of China's net interest margin by 0.8 basis point and bolster the company's 2007 net profit by 0.6 percent, according to an estimate published today by UBS AG analysts Sally Ng and Victor Wang.

China's public companies are required to issue public statements via the country's stock exchanges if they expect earnings to rise or fall by more than 50 percent.

Bank of China has more than 600 overseas branches, about five times more than larger rival Industrial & Commercial Bank of China Ltd. It makes more than a third of its profit from outside mainland China, mainly in Hong Kong and Macau.

Bank's Businesses

The bank agreed to buy out Singapore Aircraft Leasing Enterprise for $965 million in December, the first major acquisition by a Chinese bank. It also owns an insurance unit in Hong Kong and an investment bank in China. The value of shares on the Shanghai and Shenzhen stock exchanges more than tripled in the past year, topping $1 trillion.

Shares of Bank of China have gained 27 percent since its debut in Hong Kong on June 1, lagging rivals such as Bank of Communications Ltd. and Industrial & Commercial Bank of China. The stock trades at 2.2 times its estimated 2007 book value, an 18 percent discount to other Chinese banks.

``Bank of China's profits were driven in 2006 by strong loan growth and net interest margins, but we don't see as much earnings growth this year,'' said Brian Hunsaker, the Hong Kong-based head of research at Fox-Pitt Kelton Asia Ltd.

To contact the reporter on this story: Luo Jun in Shanghai at jluo@bloomberg.net; Jianguo Jiang in Shanghai at jjiang@bloomberg.net

Last Updated: March 19, 2007 04:18 EDT