By Lawrence White and Engen Tham

China's five biggest banks reported sharply rising bad loans for the third quarter as the economy slows, with one adding that a credit crunch squeezing small companies in the country's export-oriented eastern provinces may be spreading westwards.

Four of the five, including sector leader Industrial and Commercial Bank of China (ICBC) , posted their largest quarterly rise in bad loans in two years as the slowdown stretched more companies' ability to repay debts.

Earlier this year, lenders said customers were hardest hit in the eastern regions of the country, reflecting a credit crunch in the powerhouse Yangtze and Pearl River delta regions with their large percentage of private sector firms that have less access to funds than state-owned peers.

Now, smaller- and medium-sized companies in provinces further west may suffer as the funding drought for companies without powerful state backing envelops them, Bank of Communications Co Ltd (BoCom) said.

"In the future, the possibility that risks will gradually spread from small and micro enterprises to large and medium enterprises ... and from eastern region and coastal areas of China where risks have concentrated to central and western regions will be intensified," BoCom, China's fifth-largest listed bank, said in its results filing.

That confirmed analysts' expectations of a westward expansion of the funding problems for smaller companies in China.

"In the second half of this year we're seeing a migration of asset quality problems to western China, as stress migrates along supply chains, and the East Coast/export issues become more of a domestic demand issue," said Josh Klaczek, head of Asia financial services equity research at JPMorgan.

Slowing profit growth

Quarterly profit growth has generally been slowing over the past year at China's big banks after a period of double-digit rises.

On Thursday, Agricultural Bank of China Ltd (AgBank) reported a slightly less-than-expected 6 percent rise in third-quarter net profit to 48.4 billion yuan ($7.92 billion). Bank of China Ltd's net profit rose 5 percent to 41.4 billion yuan, roughly as forecast.

A day earlier, BoCom posted a less-than-forecast 6.3 percent rise in net profit to 14.7 billion yuan while ICBC's profit climbed 7.7 percent to 72.4 billion yuan, in line with expectations. China Construction Bank Corp last week reported its slowest profit growth in more than five years.

China's listed banks are expected to report an overall 15 percent year-on-year drop in revenues for the third quarter, according to Thomson Reuters StarMine SmartEstimates, making them the weakest-performing banking sector in the Asia-Pacific region.

Investor wariness of the banks' prospects is reflected in their share prices. Chinese banks are trading at an average one-year forward price-to-earnings ratio of 4.3, making them the cheapest in Asia according to SmartEstimates.

The slowing economy has compounded worries, with data last week showing China's gross domestic product grew only 7.3 percent in the third quarter from a year earlier, the lowest rate since the global financial crisis..

Premier Li Keqiang has stated repeatedly that authorities would tolerate growth slightly below target as they try to reshape the economy so it is driven more by domestic consumption and less by exports and investment.

That decline in fixed asset investment could hit western provinces hard, JPMorgan's Klaczek said, since growth there in recent years has been largely driven by construction.