(Adds details, CEO comment, background)
By Silvia Aloisi and Stefano Bernabei
MILAN Aug 7 Italy's third biggest bank, Monte dei Paschi di Siena, posted a worse-than-expected loss in the second quarter as charges on souring loans rose, underlining the challenges the bailed-out lender still faces to turn itself around.
The bank, which received 4.1 billion euros ($5.47 billion) in state aid last year, said the net loss in the three months between April and June stood at 178.9 million euros.
That compared with an average forecast for a 57.5 million euros loss in a Reuters poll of eight analysts where the range of estimates went from a loss of 150 million euros to a profit of 15 million euros.
It was the bank's ninth consecutive quarterly loss.
Net impairment losses on loans stood at around 1.2 billion euros in the first half, up 17.4 percent on a year earlier, bucking a declining trend seen by bigger domestic rivals Intesa Sanpaolo and UniCredit.
Loan loss charges rose 53.5 percent quarter on quarter - with the bank saying this was due to the "transition of impaired loans to higher risk positions" and also "revised estimates of losses on certain non-performing loans".
Bad loans are the major problem for Italian banks ahead of a pan-European review of lenders' assets and they are a major troublespot for Monte dei Paschi in particular because it has the highest proportion of soured loans among Italian lenders.
Official figures released on Wednesday showed Italy unexpectedly slid into recession for the third time since 2008 in the second quarter, making it even harder for banks to keep a lid on bad debts.
"The work is very hard due to the macroeconomic scenario," said CEO Fabrizio Viola.
Other Italian lenders that released results on Thursday also struck a cautious tone.
Credito Valtellinese, whose loan loss provisions soared around 70 percent in the first half, said the ongoing weakness of the Italian economy and uncertainties linked to the banking review would weigh on its prospects for the current year.
On a more positive note, Monte dei Paschi said its Common Equity Tier 1, a key measure of financial strength, stood at 12 percent after a recently completed 5 billion euro capital increase - well above an 8 percent requirement set by the European Central Bank (ECB).
The bank paid back 3 billion euros of state aid plus interest after the cash call. On Thursday it said it had reduced its exposure with the ECB to 18 billion euros after reimbursing 10 billion euros of cheap three-year loans it took in 2011 and early 2012. It plans to reimburse another 4 billion euros of those loans by the year-end.
Monte dei Paschi has been selling assets, closing branches and cutting jobs to boost its finances, which were drained by the costly acquisition of smaller rival Antonveneta in 2007, the euro zone's debt crisis and a scandal over loss-making derivatives trades.
Viola, appointed in 2012 to turn the bank around, said costs had fallen by 760 million euros, or 22 percent, since end-2011, putting the bank well ahead of its targets on that front.
(1 US dollar = 0.7491 euro) (Reporting by Silvia Aloisi, editing by David Evans)