Second-quarter net profit fell to 4.22 billion Swedish crowns (361.95 million pounds) from 5.23 billion crowns a year earlier, narrowly missing the 4.25 billion mean forecast by analysts, according to Refinitiv data.

Handelsbanken, which has faced criticism over rising spending due to IT system improvements and overseas growth, said higher costs to combat financial crimes and shutter its small-scale Baltic operations had hurt the results.

Additionally, it said it had taken costs to expand its head office functions in the UK - a counterintuitive move as several lenders have been forced to cut their operations in Britain amid Brexit uncertainty.

Total costs, a closely watched metric in the wake of rising spending in recent years, rose to 5.50 billion crowns from 5.20 billion a year ago, and was above the 5.36 billion forecast by analysts.

The bank has for years pursued a strategy different to most of its Nordic rivals, expanding in the West rather than East and keeping a large network of independent branch offices.

This choice to set up in markets such as Britain has so far sheltered its investors from the trouble looming over rivals Swedbank and Danske Bank, whose Baltic businesses have been marred by money laundering allegations.

Handelsbanken said interest income, which includes revenues in the increasingly competitive field of household mortgages, totalled 8.06 billion crowns in the quarter versus 7.90 billion a year ago and the 8.20 billion seen by analysts.

Meanwhile, net fee and commission income rose to 2.70 billion crowns from 2.55 billion a year earlier, topping analysts' mean forecast of 2.61 billion.

(Reporting by Niklas Pollard and Esha Vaish; additional reporting by Gdynia newsroom; editing by Gopakumar Warrier)