BEIJING Shares in China's banking sector dropped on Wednesday on worries that a reduction in existing mortgage rates will dent the profitability of lenders already reeling from a worsening property sector crisis and slowing economy.

China's benchmark banking sector index fell 0.5% in early trade. Hong Kong's Hang Seng Mainland Banks Index edged down 0.13%.

China's CSI300 index gained 0.3% while Hong Kong's Hang Seng Mainland Properties Index rose about 1%.

Some Chinese state-owned banks will soon lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, as authorities ramp up efforts to revive the property sector.

The reduction in mortgage rates, however, is expected to further weigh on the banking sector's profitability.

Three of China's largest banks said in interim financial reports that their net interest margin (NIM) - a key gauge of profitability - contracted in the second quarter this year.

Vivian Xue, director of APAC Financial Institution at Fitch Ratings, said revenue pressure of the banking sector was expected to persist in the second half of this year and into 2024, due to narrowing NIM and tepid retail loan demand.

(Reporting by Ziyi Tang and Ryan Woo; Editing by Sumeet Chatterjee, Robert Birsel)