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* 2016 volumes struggle to match record-breaking 2015 levels
* Metals contracts also down due to weak global demand
* HKEX cautions on challenging outlook amid political uncertainty (Adds details of results, comment on outlook)
HONG KONG, Feb 27 (Reuters) - Hong Kong's stock exchange operator said on Monday its 2016 net profit fell 27 percent due to a decline in fees generated by stocks and metals trading on the bourse as it struggled to match stellar volumes seen during 2015's record rally.
Hong Kong Exchanges and Clearing Ltd (HKEX) reported a net profit of HK$5.8 billion ($747.36 million) for 2016, slightly below analysts' average estimate of HK$6 billion, according to Thomson Reuters data.
"The global financial markets were volatile and overshadowed by political and economic uncertainties. At home, there were concerns that mainland China’s economy was slowing down and that interest rates would rise. All these contributed to cautious sentiment among investors and created a challenging market environment for the Group," HKEX said in a statement.
Average daily trading on the bourse in 2016 fell 37 percent to HK$70 billion compared with the previous year. Group profits were also dented by the bourse's London Metal Exchange subsidiary, which saw trading volumes fall 8 percent year-on- year due to subdued metals demand causing commodities-related revenues to decline 10 percent to HK$1.6 billion.
Stocks trading volumes struggled last year to match the records seen in 2015, when a dramatic rally on the mainland drove frantic activity on the Hong Kong bourse.
The exchange cautioned that the operating environment for financial markets is expected to remain challenging and volatile this year due to "many political and economic uncertainties".
HKEX chief executive Charles Li has banked on deepening the bourse's ties with mainland China to sustain profit growth, despite fears over the Chinese economy which is saddled with rising bad debt. The bourse said on Monday it would continue to broaden its connectivity schemes with the mainland.
The exchange's shares have risen around 8 percent this year, compared to a 9 percent year-to-date rally in the main Hang Seng benchmark. ($1 = 7.7607 Hong Kong dollars) (Reporting by Michelle Price; Editing by Muralikumar Anantharaman)