July 14, 2015 / 5:53 AM / 2 years ago

UPDATE 2-SEB Q2 interest income hit by low rates, shares fall

* SEB Q2 operating result better than expected

* Important NII disappoints as bank feels impact of low rates

* Shares fall 2.3 percent (Adds details, CEO and analyst quote)

By Johan Ahlander

STOCKHOLM, July 14 (Reuters) - Swedish bank SEB reported second-quarter profit above expectations on Tuesday but its loans operations were hit by Sweden's negative interest rates and its shares fell.

Swedish banks have seen their rate margins squeezed by the central bank's ultra-dovish monetary policy. The Riksbank cut rates in the second quarter to an unprecedented -0.35 percent and stepped up bond purchases to force stubbornly low inflation closer to its 2 percent target.

Consumer prices tumbled in Sweden in June, falling 0.4 percent year on year. It was mainly due to the central bank's own rate cut lowering mortgage costs. Without that, prices were up 0.6 percent year on year, still a concern for the Riksbank.

The central bank now charges Swedish banks for depositing money in its accounts. That costs SEB roughly 300 million crowns per quarter, a cost that is hard to pass on to customers.

"We have chosen not to charge retail customers," SEB CEO Annika Falkengren told Reuters. "We don't want customers to withdraw money from the bank and stick it under their mattresses."

As a result SEB's net interest income, which includes revenue on mortgages and loans to companies, fell to 4.63 billion crowns in the quarter, compared to 4.94 billion last year and 4.89 billion expected in poll of analysts.

Nick Anderson, banking analyst at Berenberg Bank, said although the result was better than expected the interest income figure disappointed.

"Net interest income is permanent while the issue with fees is that there's always a slight sense that maybe it's seasonal and maybe temporary," he said.

SEB shares fell 2.3 percent by 1103 GMT, underperforming a pan-European banking index, which was down 0.4 percent.

The weak interest income was somewhat mitigated by strong financial income, which includes risk management for customers, as the Greek crisis increased demand for hedging.

Net financial income fell to 766 million Swedish crowns from 845 million in the year-ago period. A previously communicated tax hit of 820 million crowns weighed on the result but it easily beat expectations of 90 million crowns.

"When there is market turmoil, we are the biggest market player, and we benefit from these flows," Falkengren said.

SEB saw operating profit in the quarter unchanged at 5.25 billion Swedish crowns ($618 million) beating a mean forecast for 4.57 billion in a Reuters poll and compared with 5.25 billion in the year-ago period.

$1 = 8.4923 Swedish crowns Additional reporting by Sven Nordenstam; Editing by Alistair Scrutton and David Evans

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