Banks in South Korea saw their combined net profit surge about 40 percent in 2021 thanks to increased interest income from the central bank's rate hikes, data showed Wednesday.

The combined net profit of 20 local banks came to 16.9 trillion won ($13.6 billion) in 2021, up 39.4 percent from 12.1 trillion won tallied a year earlier, according to the preliminary data from the Financial Supervisory Service (FSS).

The rise stemmed mostly from increased interest income in line with the central bank's rate hikes. Also contributing to the rise was the state-run Korean Development Bank's profit worth around 1.8 trillion won from converting its holdings of top shipper HMM's bonds into stocks, the FSS said.

The Bank of Korea raised its key policy rate by a quarter percentage point in August, the first pandemic-era rate increase. It also raised borrowing costs by 0.25 percentage point again in November.

Those rate hikes mostly aimed at reining in growing inflation pressure had driven up lending rates by local banks that led to a marked increase in their profit from lendings.

The banks posted 46 trillion won in interest income last year, up 11.7 percent from a year earlier, the data showed. Their net interest margin (NIM), a key barometer of profitability, increased from 1.42 percent to 1.45 percent over the period.

Their return on assets rose from 0.42 percent in 2020 to 0.53 percent in 2021, while their return on equity also improved from 5.54 percent to 7.01 percent over the same period.

The banks' non-interest income, however, declined 4.1 percent on-year to 7 trillion won in 2021, the data showed. The fall was attributed to less profit from their trading of currency, derivatives and securities.

Their combined marketing and administrative expenses came to 26.3 trillion won last year, about 2.2 trillion won larger than a year earlier.

In particular, their write-offs of bad loans shrank 42.7 percent on-year to 4.1 trillion won, mainly due to a base effect and relatively low delinquency ratios.

The FSS said despite the improved profitability, local banks need to step up their capability of coping with the possibility of rising losses amid heightened uncertainty caused by the spike in coronavirus infections and the ongoing Russia-Ukraine war.

"We will consistently induce banks to increase their loan-loss reserves and equity so as to faithfully carry out their basic roles in the face of unexpected economic shocks from home and abroad," the financial regulator said. (Yonhap)