Korean banks saw their earnings almost halve in 2015 from the previous year as they earned less interest income and had to set aside more loan-loss reserves, the financial watchdog said Thursday.

The combined net income of 18 commercial and state-run banks stood at 3.5 trillion won ($2.85 billion) last year, down 42.6 percent from 6 trillion won the previous year, according to the Financial Supervisory Service (FSS).

The 2015 figure was their weakest bottom line since 2003, when local banks registered a combined net profit of 1.7 trillion won in the wake of a crippling credit card crisis.

The watchdog attributed the sharp decline to low interest rates and a surge in loan-loss reserves.

"Banks swung to a net loss in the fourth quarter as low interest rates made a big dent in their interest income and they put up a large amount of loss provisions against loans to embattled large companies," it said.

In June 2015, the Bank of Korea, the country's central bank, cut the benchmark interest rate to a record low of 1.5 percent and has frozen it until this month amid a weak recovery and unfavorable external conditions.

Their loan-loss reserve jumped 26.8 percent on-year to 11.7 trillion won last year amid major corporate restructuring moves, including at the STX Group. In the October-December period alone, local banks posted a combined net loss of 2.1 trillion won.

Local banks' interest income came to 33.5 trillion won in 2015, down 4 percent from the previous year, as their net interest margin shed 0.21 percentage points to stand at 1.58 percent.

But their non-interest income grew 29.1 percent to 5.9 trillion won.

Their return on assets, a key gauge of profitability, fell 0.15 percentage points to 0.16 percent, and the return on equity, another index measuring profitability, shed 1.91 percentage points to 2.14 percent. Both were the lowest levels since 2000, the watchdog said.

The tumble in 2015 earnings, meanwhile, has sparked concern that local banks' financial soundness may worsen should they continue to become less profitable down the road.

As of end-September, their capital adequacy ratio became 13.96 percent, down 0.13 percentage points from the previous quarter.

The ratio, a key barometer of financial soundness, measures the proportion of a bank's capital to its risk-weighted credit. The Basel, Switzerland-based Bank for International Settlements, an international organization of central banks, advises lenders to maintain a ratio of 8 percent or higher. (Yonhap)