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Svenska Handelsbanken, Sweden's second-biggest bank by market value, reported higher-than-expected net interest income in the third quarter due to higher lending margins and volume increases. It's operating profit were in line with expectations.

"An increasing net interest income combined with lower expenses and lower loan losses counteracted a decrease in net gains/losses on financial items," the bank said.

The Nordic bank lending margins got a lift from two interest rate hikes by the Swedish central bank.

Between July and September the made a net profit rose 12 pecent 2.71 billion kronor (290.3 million euros, 402.2 million dollars) while its net interest income fell five percent on a year-on-year basis to 5.33 billion kronor, attributing the drop to an unfavorable exchange rate and weak lending demand from businesses. Compared to the previous quarter, net interest income was up 5.0 percent.

But the bank noted "the improving economic climate was reflected in an increased volume of credit commitments, which continued to rise during the quarter."

"Household credit volumes continued to increase," it said.

The bank slashed its losses on lending activities to 294 million kroner from 866 million kroner a year earlier, thanks to a 92-percent-drop in losses in Sweden, where the economy is healthier than elsewhere in Europe.

Handlesbanken has little exposure to Baltic countries which have been severely affected by the global economic crisis, in contrast to competitor banks Nordea, SEB and Swedbank which have taken big losses in the region.

"The absolute most important thing here is that they are showing the effects of rising short-term interest rates, and that is something we had expected to be visible in this quarter," Andreas Håkansson, an analyst at Credit Suisse, told Reuters.

Shortly after 1100 GMT, the bank's share price was trading down 1.82 percent at 221.5 kroner on a flat Stockholm stock exchange.