The increase in interest rates will help banks expand net interest margins, Barclays Capital said yesterday.

The People's Bank of China increased the rates by 25 basis points on saving and lending rates from yesterday while demand deposits remained unchanged at 0.5 percent.

The one-year lending rate is now 6.56 percent and the one-year deposit rate is 3.5 percent.

"The structure of the hike is positive for banks' net interest margin, by increasing it on average by 1.3 basis points for 2011, and it seems as if the government is trying to avoid hurting banks," Barclays said in a report yesterday.

The structure of this hike is positive largely because of faster repricing of assets than deposits since the demand deposit rate remains the same.

The latest rate increase is different structurally from the four rate hikes between October and April, when deposit rates were raised slightly more than lending rates while demand deposit rates were raised by 0.04 percentage point and 0.1 percentage point in February and April.

The rate hike also removes market concern about a near-term asymmetrical rate hike with a greater increase in the deposit rate that would hurt earnings by banks.

"It seems like the government is trying to protect banks after recent negative news hit the sector," Barclays said.

It could trigger a short-term rally among bank shares after a sell-off over the past few weeks, said Barclays.