(Adds CEO quotes, details on bad loans)
MILAN May 10 UniCredit on Friday reported a bigger than expected net profit in the first quarter thanks to lower bad debt provisions, a sign there might be light at the end of the tunnel soon for Italy's biggest bank by assets.
UniCredit's net profit came in at 449 million euros ($587.97 million), down 51 percent from a year ago. But this easily beat an analyst consensus forecast of 156 million and first quarter profits in 2012 had been boosted by a one-off gain.
The bank, the first of Italy's retail banks to release results for the quarter, said inflows of new bad loans had fallen in its home market for the second quarter in a row.
"We know macroeconomic conditions are still very difficult but there is some reason to be a bit optimistic," CEO Federico Ghizzoni told analysts in a conference call.
Like other Italian banks, UniCredit has been struggling to keep a lid on mounting bad debts that have piled up as a result of the longest recession in 20 years in Italy, the euro zone's third biggest economy.
The bank is cutting thousands of jobs to lower costs, reorganising its Italian network and selling some assets in central and eastern Europe to strengthen its finances.
After setting aside nearly 10 billion euros for souring loans in 2012, UniCredit benefited from lower loan-loss provisions in the first three months of the year.
Those charges stood at 1.2 billion euros in the period, down 73 percent from the fourth quarter of 2012 and 9 percent on an annual basis.
The bank confirmed an outlook for slightly lower loan-loss provisions in 2013 compared to last year.
"The results are good and the loan losses are low," said Alberto Gallo, credit strategist at Royal Bank of Scotland.
"What we are seeing is a two-tier banking system in Italy and Spain, where the top two banks are doing well while the smaller ones are stuck with a lot of non-performing loans," he said.
But some analysts pointed out that the fact the bank was sticking to its 2013 outlook for loan-loss provisions meant the decline in the first quarter was not a game-changer.
Overall, analysts expect bad debts at Italian banks to grow throughout 2013 - UniCredit alone had 45.4 billion euros of non-performing loans at the end of March, up 2.3 percent from end-2012.
The bank's results, also helped by strong trading income, marked a return to profit from the fourth quarter of last year, when UniCredit posted a 553 million euro loss.
Ghizzoni said markets were still too volatile for the lender to present new financial targets, which the bank has said will be lower than previously stated because of the prolonged recession.
The bank said its Core Tier 1 ratio - a key measure of financial strength - stood at 9.46 percent at the end of March, and at 9.64 percent taking into account a series of recent disposals. The ratio stood at 9.2 percent at the end of 2012.
($1 = 0.7637 euros) (additional reporting by Francesca Landini, editing by Jane Merriman)