UPDATE 2-Nedbank sees FY profit lower, bad debts weigh

* Q3 net interest income up 1.1 pct to 12.198 bln rand

* Sees FY diluted headline EPS 25-35 pct lower

* Retail impairments remain challenging

* Credit loss ratio expected to improve slowly

(Adds analyst comment, shares)

By Serena Chaudhry

JOHANNESBURG, Nov 5 (Reuters) - South Africa's No.4 bank Nedbank (NEDJ.J) forecast lower full-year profit on Thursday due to rising bad debts as its customers grapple with the country's first recession in 17 years.

Nedbank, majority-owned by insurer Old Mutual (OML.L) (OMLJ.J), said it expected diluted headline earnings per share and diluted EPS to be between 25 and 35 percent lower for 2009.

The bank said advances for the nine months to end-September rose 2.8 percent to 443.3 billion rand ($57.1 billion), while net interest income rose 1.1 percent to 12.20 billion, compared with 12.07 billion a year ago.

Non-interest revenue was up 19.6 pct to 8.54 bln rand.

"I think at face value, it initially looks a little bit better than people may have expected, (but) there's nothing here that actually points to a much sharper improvement or anything ... it's more a confirmation that results are in line," said one Johannesburg-based analyst with an international bank.

"The non-interest revenue was really strong ... So it looks as though it could be slightly better, but the impairments I think will be key ... Retail is still tricky. I don't think retail is coming off (improving) as fast as they (Nedbank) anticipated."

Nedbank's shares were 0.5 percent higher at 114.13 rand by 0838 GMT, outperforming a weaker JSE banking index .JBANK and Top-40 index .JTOPI of blue chips.

Nedbank lowered its 2009 earnings outlook in August after reporting a slide in first-half profit as bad debts surged at its corporate and retail units. [ID:nL5142341]

Its rivals have also taken a knock from rising defaults as consumers struggle to pay back debts and the country grapples with its first recession since 1992.

Nedbank said retail impairments remained challenging, adding the difficult trading environment would hit transaction volumes and asset growth. However, it said there had been no large corporate defaults in the third quarter.