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MILAN May 15 (Reuters) - Italy's biggest retail bank, Intesa Sanpaolo, swung back to profit in the first quarter helped by a tentative pickup in the economy, although provisions for bad debt remained high at more than 1 billion euros ($1.37 billion).
Intesa booked a net profit of 503 million euros ($690 million) on Thursday, well above a forecast of 323 million euros in a Reuters poll of eight analysts. Intesa said that was its highest quarterly net profit in two years.
Provisions for bad debts were 1.1 billion euros against 1.16 billion euros a year ago. The stock of impaired loans, which fell in the first quarter at rival UniCredit for the first time since 2008, was broadly stable for Intesa, at 31.16 billion euros, up 0.6 percent from a year earlier.
Bad loans are the number one problem for Italian banks, which are slowly emerging from the country's deepest recession in 70 years, as they force them to set aside cash to protect themselves against defaults, denting their profits.
Like UniCredit, Intesa had set aside billions of euros to cover soured loans in the final quarter of 2013 in preparation for a Europe-wide health check of banks, resulting in a full-year loss of 4.55 billion euros.
Intesa's shares, which were down more than 4 percent before the results in a broadly weaker Italian banking sector, pared some losses to fall 3 percent to 3.27 euros by 1220 GMT.
Its net interest income, a measure of how much money a retail bank makes from its core lending business, was up 4.1 percent year-on-year, while net commissions rose 8.3 percent.
The bank also further boosted its core capital ratio, an indicator of financial strength that was already among the highest in the euro-zone's third biggest economy. Its Common Equity Tier 1 ratio rose to 12.6 percent at the end of March from 12.3 percent three months earlier.
"The results are very good, all the trends are going in the right direction," said one analyst who did not want to be named. "I did not jump on my chair but I can't see anything negative."
Highlighting the fragility of the recovery, Italy's economic output fell unexpectedly in the first quarter of the year, by 0.1 percent. ($1 = 0.7294 Euros) (Reporting by Silvia Aloisi and Gianluca Semeraro; Editing by Erica Billingham)