By Niklas Pollard

STOCKHOLM (Reuters) – Swedish bank Handelsbanken beat expectations for second-quarter net profit on Wednesday as robust interest income and good credit quality helped mitigate persistently high costs, sending shares soaring.

Net profit fell to 6.79 billion krone ($641 million) from 7.10 billion a year earlier, but exceeded the 6.22 billion expected by analysts, according to LSEG estimates.

Shares in Handelsbanken, the oldest company on the Swedish stock exchange, stumbled earlier this year after the company reported a 12% increase in expenses – a closely watched metric at the bank that weighed on first-quarter earnings.

In the second quarter, spending rose 14 percent year-on-year to 6.42 billion, exceeding the 6.30 billion expected by analysts, reported the rival of Swedbank, SEB and Nordea.

But costs, which had been high in recent quarters due to increased spending on items such as personnel and IT, fell 1 percent compared to the first quarter and included restructuring costs for staff cuts of just over 300 million crowns.

“Revenues increased as net interest margins recovered and asset management and payment fees increased,” the statement said.

“Measures were taken in the second quarter to improve efficiency,” the bank added. Agreements were reached for the departure of 200 employees and the number of external consulting contracts was reduced by 15 percent.

Analysts at JP Morgan said in a research note they expected the results to lead to an increase in forecasts. “Overall, we expect a positive market reaction,” they said.

By 07:10 GMT, shares were up 7%.

The bank, whose main markets are Sweden, Norway and the UK, said net interest income, which includes income from mortgage loans, rose to 11.75 billion krone from 11.69 billion a year earlier, beating the 11.36 billion expected by analysts.

Both SEB and Swedbank reported higher-than-expected net profits on Tuesday as other revenue sources such as investment banking and slowly rising credit demand offset slowing interest income momentum.

Commercial banks’ commission income rose from 2.76 billion to 2.94 billion krone, exceeding the average forecast of 2.86 billion. Profits from financial transactions rose from 393 million to 580 million.

Handelsbanken said it had booked a cancellation of 133 million krone in provisions for net loan losses, compared with a loss of 58 million a year earlier. This was far better than the loss of 174 million expected by analysts.

(1 US dollar = 10.5852 Swedish kronor)

(Reporting by Niklas Pollard, editing by Miral Fahmy and Mark Potter)