* H1 earnings up 21 pct
* Net interest income jumps 22 pct
* Shares have dropped around 3 pct this year (Adds details, quotes)
JOHANNESBURG, March 4 (Reuters) - FirstRand, South Africa's second largest bank, sees its full-year results largely in line with the 21 percent increase in first-half earnings reported on Tuesday, despite an expected drop in lending.
South African banks are bracing themselves for an increase in bad debts and non-performing loans after the central bank raised its benchmark interest rate by half a percentage point in January, signalling the start of higher borrowing costs.
"We expect to see wage inflation and consumption as well as government spending slowing down, which will result in slowing ... GDP growth and increased pressure on disposable income," Chief Executive Sizwe Nxasana told Reuters.
"Interest rate hikes will likely continue and that will lower the retail credit extension and will result, obviously, in increasing non-performing loans and bad debts."
However, a weakening local rand currency would underpin growth by boosting manufacturing and exports, he said.
South African banks are struggling to boost lending as corporate demand for credit remains slack and many households remain under pressure, given rising fuel costs, high unemployment and weak growth in Africa's largest economy.
FirstRand said its portfolio provisions were 0.97 percent of its total performing book, well above bad debt charges of 0.77 percent.
The bank is now more reliant on its retail arm First National Bank, and Wesbank, its vehicle and asset finance business, for revenues than it is on investment banking operations, as was the case a few years ago.
INTEREST INCOME BOOST
FirstRand said diluted headline earnings totalled 159.1 cents in the six months to end-December, from 131.2 cents a year earlier.
Headline EPS, the main measure of profit in South Africa, excludes certain one-time items.
The results were expected after FirstRand said last month that earnings could rise as much as 22 percent.
Net interest income, or earnings from lending, increased by 22 percent to 12.38 billion rand ($1.14 billion) driven by growth at its retail unit.
Non-interest income, which includes fees and commissions, grew by 13 percent.
Smaller rivals Barclays Africa recently reported a 14 percent increase in full-year earnings, while Nedbank posted a 15 percent rise.
Leading lender Standard Group is scheduled to report on its performance on Thursday.
All four banks are expanding operations in Africa, where burgeoning economies are beckoning investment from across the globe.
Shares of FirstRand are down around 3 percent this year, underperforming a 3.7 percent rise in Johannesburg's benchmark Top-40 index ($1 = 10.8163 South African rand) (Editing by Mike Collett-White)