UPDATE 3-Stabler Baltics boost SEB Q3; loan income weak

* Q3 operating profit 388 mln SEK, above forecast

* Loan loss provisions smaller than expected

* Sees slower growth of non-performing loans in Baltics

* Core lending income below forecast

* Shares down 3.4 percent (Adds CEO, CFO quotes)

By Sven Nordenstam and Mia Shanley

STOCKHOLM, Oct 21 (Reuters) - Swedish banking group SEB (SEBa.ST) beat forecasts with third-quarter profits thanks to a slowdown in bad loan growth in the crisis-hit Baltics, but rattled investors with news of weak core lending.

SEB was the second Swedish bank in a row to signal an improving situation in the Baltic states, following reassuring noises on Tuesday from the region's biggest lender, Swedbank (SWEDa.ST). [ID:nLK536034]

Nordic banks poured out loans to consumers and businesses in Latvia, Lithuania and Estonia during recent years of red-hot growth, but have since been forced to put aside billions of dollars' worth of provisions as a cushion against the effects of steep recession.

There are now signs the rate at which loans are going sour in the region may have peaked.

SEB's quarterly net credit provisions and losses of 3.3 billion Swedish crowns ($477.2 million) landed below a mean Reuters poll forecast of 4.1 billion, and was an improvement over the previous quarter.

Chief Financial Officer Jan Erik Back told Reuters the bank stood by its view that Baltic currency pegs would hold.

"There is always a risk, and that is why we have built up power to resist those headwinds," Back said. "We have a strong balance sheet, a strong funding position and reserves. One must take into account that this (a devaluation) can happen, but it is not our main scenario."

That view comes a day after Swedbank, the biggest Nordic bank in the Baltics, said that a 15 percent devaluation was very much on the bank's planning cards.

Swedbank said on Tuesday it had put aside a further 6.1 billion crowns in the third quarter to cover losses, although it forecast the second half of the year would be less punishing than the first in terms of bad loans and provisions.

WEAK INCOME WEIGHS

For SEB, analysts said disappointing net interest income was weighing on sentiment for a bank which is producing just a fraction of its quarterly profits compared to previous years.

"Asset quality trends are better, but they weren't expected to be that bad for SEB compared to Swedbank," said Chintan Joshi, an analyst at Nomura Securities. "I think focus will be more on the top line given their higher valuation."

Shares in SEB fell 3.4 percent at 1032 GMT, underperforming a Stockholm market that shed 1.4 percent .OMXS30.

Operating earnings in July through September slid to 388 million Swedish crowns ($56.1 million) from a year-ago 2.5 billion, beating a mean forecast of a 273 million profit seen in a Reuters poll.

But core lending income of 4.5 billion crowns missed a forecast of 5.0 billion.

"It is funding effects and a one-off effect in the bond portfolio that are larger negatives than expected," said a second analyst, who declined to be named.

SEB CEO Annika Falkengren said that the bank had started to see a stabilisation in the rate of increase in bad loans in the Baltics and that the view had brightened since the second quarter.

"Now, we are starting to see more positive signs in the rest of the world, and that naturally is having a positive impact on the Baltics," she said.

NO LENDING GUARANTEE

SEB opted not to apply for an extension of the Swedish government's lending guarantee, put in place to help financial institutions through the worst financial crisis in decades. The bank has not utilised the programme.

The bank made a cash call earlier this year to shore up its balance sheet and analysts have expected tougher times for SEB due to a delayed impact of the financial crisis on Lithuania's economy, where it is the biggest banking player.

While the Baltics remained challenging, SEB said there were signs of stabilisation as the impact from a rapid period of double-digit economic contraction started to ease.

Estonia's central bank said earlier on Wednesday it could adopt the euro in 2011 after meeting the adoption criteria next spring. It forecast a bigger-than-expected 14 percent GDP drop this year but growth in 2010 that was higher than previously forecast. [ID:nLL15735] (Additional reporting by Eva Odefalk and Simon Johnson; editing by John Stonestreet and Rupert Winchester)