Shares in Chinese banks may face the risk of correction if the lenders fail to deliver consistently strong performances in the second half of the year, analysts said.

The bank sector rallied last week on market expectations of strong first-half corporate results and policy makers' focus on policy stability plus a step back from more tightening measures.

The 14 A-share listed banks are expected to see an average 29 percent year-on-year rise in earnings for the first half, Shenyin and Wanguo Securities estimated.

Smaller commercial lenders are poised to post even stronger performances with Hua Xia Bank, Bank of Ningbo and China Merchants Bank forecasting a more than 60 percent surge in net profit for the first half of the year.

In addition, the valuation of the bank sector, which suffered the most from Beijing's credit-control policies, has fallen to an attractively low level that may trigger buying sentiment in the market in the coming weeks.

But analysts said that the bank stocks would still face downward pressure if the lenders fail to deliver consistently strong performances in the second half of the year.

"The sustainability of the rally depends on whether the lenders could continue to deliver strong corporate results that exceed market expectations in the third quarter," said Liu Jun, a banking analyst at Changjiang Securities.

The Agricultural Bank of China led gains in the bank sector last Friday by advancing 5.5 percent and 2.93 percent in Hong Kong and Shanghai respectively after the US investment bank Morgan Stanley raised its stake in the rural lender's Hong Kong-listed shares by 1.03 percentage points to 16.31 percent.

Analysts said that it reflected investors' confidence on the rural lender's long-term growth prospects although it does not have much of an advantage over valuation compared with its domestic peers.

However, the risk of rising bad loans remains a major concern among investors as the country's economic growth may slow in the second half and local government investment vehicles would struggle to repay their debts.

Bloomberg reported that Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan they have lent to local governments.

The lending to local government financing vehicles accounts for 18 to 20 percent of total loans in the Chinese banking system. If 30 percent of these loans turn sour, it could add four to six percentage points - or the equivalent of $400 billion - to the non-performing loan ratio of the banking system, Standard and Poor's warned in a recent report. But some analysts said that the Chinese banks are still a buy as the worries about non-performing loans could be exaggerated and loan growth will accelerate in the second half after plunging 37 percent year-on-year during the first half of 2010.