China's five largest banks turned in better than expected 2016 financial performance last week, but analysts warned that the worst is not over as risks of a property market shock could threaten financial stability in the world's second largest economy.

Full-year earnings released between Tuesday and Friday last week, showed that lower operating costs helped four out of the five banks to register net profit growth of between 0.4 and 1.9 percent in 2016. Bank of China was the only bank that saw net profit fall by 3.7 percent.

However, the recovery in bad loan ratios was uneven across the banks and net interest margins – a measure of lending profitability – compressed further, according to the earnings reports.

"As far as I can see, the stabilization in profitability is due mainly to the change in business taxes, which lowered operating costs and income taxes, and neatly offset the fall in net interest revenues," Matthew Phan, senior research analyst at CreditSights, told CNBC.

"But I am not convinced the worst is over. In a recovery, banks should see NPLs fall, not just stabilize… The (central bank) has tightened monetary policy and the property market is now slowing and this is an economic risk in 2017," he said.

The increase in bad debt and loan defaults are major challenges that China's banking system has been grappling with over the past years amid slowing economic growth.

Four of the country's top five banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China – are the largest in the world by assets, according to a ranking by S&P Global Market Intelligence.