SEOUL, Oct. 13, 2009 (Xinhua News Agency) -- South Korean banks saw an earning increase in the third quarter mainly due to higher interest income, analysts said Tuesday.

According to local analysts, top financial companies, led by KB Financial Group (NYSE:KB) , are estimated to have earned around 1.8 trillion won (1.54 billion U.S. dollars) to 1.9 trillion won (1.63 billion U.S. dollars) during the third quarter of 2009, up 20 percent from the previous quarter.

The rise in third-quarter earnings was attributed to improvement in local banks' net interest margin (NIM), a key gauge of profitability, amid rising lending rates, analysts said.

Although South Korean banks' NIM has stayed sluggish as low- record benchmark interest rates narrowed their loan-deposit spread, recent signs of an economic recovery and expectations on a rate hike began to pull up market rates like returns of certificates of deposit (CD).

Analysts also said that local banks would continue with its earning improvement in the fourth quarter on the back of higher interest income, but earnings momentum is not likely to be as strong.

"No more posting of solid earnings is expected for the fourth quarter as local banks have to secure more loan-loss reserves and dispose of bad debts to make their balance sheets cleaner," a local analyst said.

The nation's financial watchdog ordered local banks to lower their bad loan ratio to around 1 percent by year-end, which made local banks clear nearly 20 trillion won (17.1 billion U.S. dollars) in bad loans from their balance sheets.