South Korea's banks reported a sharp rise in profits in the third quarter, highlighting the extent of the recovery in AsiaPacific's fifth-largest economy in recent months.

Korea's financial watchdog said yesterday that profits at the 18 banks rose 53 per cent to Won2,300bn ($1.9bn) in the July to September period, from Won1,500bn a year ago. Loan-loss provisions fell 36 per cent to Won1,600bn.

The Financial Supervisory Service also forecast that profitability at the country's lenders would improve gradually as net interest margins increased with market rates, and provisions for bad debt fell.

Korean banks were hit harder than their Asian rivals by the global financial crisis because of their heavy reliance on overseas funding and many faced questions about their ability to service debts at the height of the crisis.

In the first six months of the year Korean banks suffered a 57 per cent year-on-year decline in net profits.

The government last year offered a $130bn rescue package to banks. The bailout involved guaranteeing debts, buying bank bonds and offering dollars to provide short-term liquidity after capital adequacy ratios fell to their lowest in more than seven years. Non-performing loans also rose amid the slowdown.

Korea's economy grew 2.9 per cent in the third quarter compared with the previous quarter as exporters benefited from Chinese demand. Factory output also rebounded, while consumer confidence hit a seven-year high in October.

The financial regulator cautioned that lenders still had to clean up their distressed assets after the government advised them to lower their bad-loan ratios from 1.5 per cent to 1 per cent by the end of this year.

Shinhan Financial Group, the country's second-largest financial group, reported a better-than-expected 52 per cent rise to Won491.3bn.

Net profit at Korea Exchange Bank, which is 51 per cent owned by US fund Lone Star, increased from Won151bn a year ago to Won422bn.

Over the past few weeks Woori Financial Group and Hana Financial Group - in which Singapore's Temasek Holdings and Goldman Sachs own a combined 18 per cent stake - have both reported a return to profit.

But KB Financial Group suffered a 69 per cent drop due to its relatively heavy small companies' exposure.