* Q1 interest and commission incomes disappoint
* Q1 operating profit beat driven by reversal of provision
* Shares drop 1.7 pct (Adds CFO comments from conference call, updates shares)
By Niklas Pollard and Esha Vaish
STOCKHOLM, April 17 (Reuters) - Sweden’s Handelsbanken reported higher than expected quarterly earnings on Wednesday as the bank unexpectedly took back a provision for an employee profit-sharing payout, saying it could not be justified due to sharply rising costs.
Income from lending and commissions also grew less than predicted in the quarter, contributing to send Handelsbanken shares down 1.7 percent by 1027 GMT.
First-quarter operating profit rose to 6.11 billion Swedish crowns ($661 million) from 5.16 billion crowns in the previous year, easily beating a mean forecast for 5.19 billion crowns as seen in a poll of analysts.
Profit was boosted by it withdrawing a provision related to its profit-sharing plan called Oktogonen, amounting to 827 million crowns, a gain not included in analysts’ estimates, and it also refrained setting aside funds for the past quarter.
It was only the fourth time since the scheme was set up in 1973 that Handelsbanken has balked at paying into it, with previous moves occurring amid financial crises in 1993 and 2009, as well in 2016, then due to tougher capital requirements.
“The special situation we had in 2018 was that costs increased at a much higher speed than income increased,” Handelsbanken CFO Rolf Marquardt said.
“When it comes to 2020 and 2021, if the bank performs well and is back on track, of course we want to contribute to Oktogonen.”
Sweden’s top bank by market value since the headquarters move of Nordea to Finland has for years pursued a different strategy than many of its Nordic rivals, keeping a large network of independent branch offices and expanding in the West rather than East.
While Swedbank and Danske Bank have seen their stocks tumble amid allegations of money laundering, Handelsbanken’s choice to set up in markets such as Britain has so far sheltered its shareholders from similar hits.
But Handelsbanken has faced criticism over rising spending due to IT system improvements and overseas growth. It said on Wednesday quarterly costs dropped 12 percent to 4.40 billion crowns, below the 5.36 billion forecast, largely due to the provision reversal.
Spending at the bank surged 10 percent in 2018, an increase that failed to live up to the board’s expectation of a better cost development than that of rival banks and needed to be met to justify the profit-sharing payout.
“Looking at the figures for last year overall, the board reached the conclusion that this was not what the year looked like,” Carina Akerstrom, who took over as CEO earlier this year, told Reuters.
The bank’s spending to combat money laundering had increased by nearly 100 million crowns during the quarter. Akerstrom told a news conference that although such spending would continue, she expected the overall development of costs this year to be “considerably more reasonable” than in 2018.
Handelsbanken’s interest income, which includes mortgage revenue, rose 4 percent to 7.93 billion crowns but missed the 8.07 billion seen by analysts. A less than expected 2 percent rise in commission income and a 40 basis points shortfall on its common equity tier 1 ratio also weighed on its shares.
“A slightly weaker mix on the income statement ... and weaker capital are likely to be the key focuses today,” said KBW analyst Richard Smith, who has a “underperform” rating and a target price of 105 Swedish crowns on the stock.
$1 = 9.2217 Swedish crowns Reporting by Niklas Pollard and Esha Vaish, Editing by Sherry Jacob-Phillips and David Evans