UPDATE 2-Trading gains lift Intesa, UniCredit profits

Tue Nov 13, 2012 9:18am EST

* Intesa Q3 pretax 962 mln eur vs f'cast just above 800 mln

* UniCredit net 335 million euros vs f'cast 135 million

* Intesa Core Tier 1 ratio 10.5 percent

* UniCredit Core Tier 1 9.3 percent

By Silvia Aloisi

MILAN, Nov 13 (Reuters) - Italy's two biggest banks, Intesa Sanpaolo and UniCredit, delivered higher than expected profits and strengthened their capital bases even as they both set aside billions of euros against risky loans.

An easing of the euro zone debt crisis since the summer boosted trading gains for both banks, which are cutting thousands of jobs and closing hundreds of branches to cut costs and revive sluggish earnings.

Intesa said its pretax profit came in at 962 million euros ($1.2 billion) in the third quarter, beating a Thomson Reuters analyst consensus of just above 800 million.

UniCredit's net profit reached 335 million euros over the period, compared with 135 million in an analyst consensus distributed by the bank.

"All in all, these are good numbers, above expectations" said a Milan-based trader on Tuesday.

Both lenders improved their capital position and posted a rise in customers' deposits. Intesa's Core Tier 1 ratio, a key measure of financial strength, stood at 10.5 percent under Basel III requirements, while UniCredit's was 9.3 percent - higher than the end-2012 previous target of 9.1 percent.

However, a deep recession in Italy forced both banks to set aside a combined 8.4 billion euros in the first nine months of the year in the face of rising bad loans.

BAD LOANS

Intesa earns 80 percent of its revenue in Italy, compared with less than 50 percent for UniCredit.

Analysts said the bad loans picture is unlikely to improve until 2014, as Italy's economy is expected to keep shrinking next year.

The above-forecast profits and strong capital ratios could go some way towards quelling recent press speculation that Intesa and UniCredit may need to merge in a defensive move against the possibility of a foreign takeover.

Executives at both banks have denied the speculation, but sources close to the matter have told Reuters the banks' foundation shareholders are worried about the lenders' low market valuation.

Intesa and UniCredit have a market capitalisation of around 19 billion euros each. By contrast, Spain's top two banks - Santander and BBVA - have a value of 56 billion euros and 33 billion respectively.

Italian banks have been spared the real estate bubble that hurt their Spanish peers, but they too have been hit hard by the euro zone debt crisis because of their vast holdings of domestic government bonds.

Sovereign pressures have eased since the end of July, following a pledge by European Central Bank president Mario Draghi to do whatever it takes to save the euro.

However, analysts say a grim macroeconomic picture in Italy, lower loan volumes and low interest rates continue to weigh on lenders' underlying profitability.

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