UPDATE 2-UniCredit points to early recovery signs in Italy
* Q2 net profit 361 mln euros vs consensus of 349 mln
* Loan loss charges rise to 1.7 bln euros in Q2
* CEO Ghizzoni says sees first signs of recovery (Adds detail on bad loans, analyst)
By Silvia Aloisi
MILAN, Aug 6 (Reuters) - UniCredit, Italy's largest bank by assets, pointed to early signs of economic recovery in its home country even as it set aside more money for bad loans due to a prolonged recession in the euro zone's third-biggest economy.
Like domestic rival Intesa Sanpaolo, UniCredit increased provisions in the second quarter to cover bad loans, which continued to climb, although at a slower pace than in the previous quarter, according to results released on Tuesday.
Those provisions rose to 1.7 billion euros, up 35 percent from the previous quarter, totalling 2.9 billion euros in the first six months of 2013.
Bad loans have become one of the main troublespots for Italian banks ahead of a health check-up on banks' assets to be carried out early next year by the European Central Bank as it takes over supervision of euro zone lenders.
Chief Executive Federico Ghizzoni said net growth in bad loans had decelerated for a third straight quarter in Italy, which is stuck in its longest recession since World War II.
"UniCredit is seeing the first signs of a trend reversal," Ghizzoni said. In the last week of July, UniCredit saw the best demand for mortgages since the start of 2013, which is unusual at this time of the year, just before the summer break, he said.
UniCredit, which has a strong presence in central and eastern Europe, makes 40 percent of its revenue in Italy.
The shares extended gains after the results and closed 2.2 percent higher at 4.26 euros.
"The numbers were good overall but nothing exceptional. The indications that a turning point is in the air were positive," said Stefano fabiani, fund manager at Zenit SGR.
Analysts said that despite the improvement in credit quality, so-called "sofferenze" - loans that are the least likely to be ever paid back - still rose 3 percent over the quarter in Italy, to 32.5 billion euros.
UniCredit's second-quarter net profit rose slightly more than expected to 361 million euros ($478 million), compared with a forecast of 349 million euros in an analyst consensus distributed by the bank.
Results were helped by a 254 million euro capital gain on a bond buyback, and cost cuts. UniCredit staff numbers fell by 4,700 over the period, mainly due to the sale of its Kazakh business, and have declined by 30,000 units since 2008.
The Bank of Italy said last week it had intensified inspections of the loan books of eight lenders, although a source close to the matter said none of Italy's top five banks were among those under extra scrutiny.
UniCredit said its Basel III-compliant Common Equity Tier 1 ratio, a key measure of financial strength, had risen to 9.72 percent at the end of June after the sale of Turkish insurance business Yapi Kredi, from 9.46 percent at the end of March.
It also said it had paid back 2 billion euros of the 26.1 billion euros in cheap funds it had borrowed from the European Central Bank at the height of the euro zone debt crisis. ($1 = 0.7553 euros) (Additional reporting by Stephen Jewkes and Gainluca Semeraro. Editing by Jane Merriman and Thomas Atkins)
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