(Adds comments on lending recovery, Monte dei Paschi)
By Lisa Jucca
DAVOS, Switzerland Jan 23 (Reuters) - A health check of euro zone lenders led by the European Central Bank is likely to trigger mergers among mid-sized Italian banks and big disposals of bad loans, the head of Italy's No. 1 retail bank Intesa Sanpaolo told Reuters TV on Thursday.
Carlo Messina, who took over as chief executive in September, said larger Italian banks such as Intesa Sanpaolo were in a better position to withstand the ECB's Asset Quality Review (AQR), which he said would be a very tough exercise - and not just for Italian banks.
Intesa Sanpaolo has a common equity ratio of 11.5 percent, among the best in Europe, said Messina.
But some smaller local banks with a weaker capital base will have to either raise funds or engage in consolidation.
"They can do capital increases or probably it will also be possible to do some mergers among medium-sized banks in Italy," Messina said in an interview on the sidelines of the World Economic Forum in Davos.
Messina said the outlook in Italy - where Intesa makes 80 percent of its revenue - was improving as the country slowly emerges from its longest post-war recession.
He expected demand for bank lending to start recovering in the second quarter of this year, putting an end to a credit crunch that has pushed many small Italian firms out of business.
Messina also said he was seeing signs of stabilisation in non-performing loans (NPLs), whose steep increase during the recession forced several Italian banks to book big writedowns in 2012 and 2013.
This should lead to a reduction of the cost of credit for banks in 2014, he said.
As banks take big writedowns on NPLs, it is getting easier to sell those portfolios to investors prepared to take a bet on Italy's economic recovery. Last month, UniCredit reached an agreement with Cerberus European Investments LLC to sell a portfolio of non-performing loans with a gross value of around 950 million euros ($1.3 billion).
"The AQR will be something of a turning point in the evaluation of bad loans and it will be possible to make massive disposals of NPLs," Messina said, adding his bank would also consider offloading some bad loans.
"We are seeing a lot of demand, not only for small transactions but also for big ticket deals," he said.
Like other European lenders under ECB scrutiny, Intesa is cleaning up its balance sheet and selling non-core or loss-making assets.
Earlier on Thursday the bank said it would book a net loss of 100 million euros from the sale of its Ukrainian unit Pravex-Bank for 74 million euros. Intesa had bought Pravex-Bank in 2008 for about $750 million.
Intesa also signed a binding accord to sell a 19.9 percent stake in Chinese insurer Union Life. The sale is expected to yield a net gain of around 30 million euros..
Speaking about domestic rival Banca Monte dei Paschi di Siena, Messina predicted Italy's No. 3 bank would succeed in tapping investors for a vital 3-billion-euro capital increase even after its top shareholder, a debt-laden banking foundation, forced a delay of the cash call until mid-2014.
The Tuscan bank, which took 4.1 billion euros of state aid after being hit by the euro zone crisis and a derivatives scandal, is considered one of Italy's weakest. Its Chairman Alessandro Profumo has warned that if the capital increase failed this would threaten Italy's entire bank sector.
"My opinion is that they will succeed in raising capital," Messina said. "This is not a major risk for the Italian economy."