MILAN UniCredit (CRDI.MI) returned to profit in the first quarter of the year and said bad loans had fallen for the first time since 2008 as the Italian economy shows the first signs of recovery.
Italy's biggest bank by assets beat analyst expectations with a net profit of 712 million euros ($979 million), up nearly 60 percent on a year earlier and compared with a consensus forecast of 550 million euros distributed by the bank.
UniCredit had posted a shock 14 billion-euro loss for 2013, the biggest ever for an Italian bank, after sweeping clean its balance sheet in preparation for a sector-wide health check by European regulators. In 2013 alone, the bank booked huge loan writedowns of 13.7 billion euros.
Italian banks have been struggling to keep a lid on mounting bad debts that have eaten into their capital base as the euro zone's third biggest economy grappled with the worst recession in 70 years.
While big banks UniCredit and Intesa Sanpaolo (ISP.MI) were able to absorb the full impact of the loan writedowns without additional fundraising, nine of the 15 banks in Italy being checked out by European regulators, mostly mid-sized lenders, have announced capital increases amounting to 11 billion euros.
UniCredit's strategy to aggressively write down the value of its soured loans in 2013 appeared to pay off in the first quarter, with bad loans falling for the first time in six years, by 1.3 percent quarter-on-quarter.
Charges against loan defaults - which are in any case seasonally weaker at the beginning of the year - fell 28.5 percent from a year earlier.
"This allows us to look at the future with confidence, with the belief that we are best positioned to support the economic recovery that is staring to materialize," CEO Federico Ghizzoni said in a statement.
New loans in its Italian home base - where UniCredit earns around 40 percent of its revenues - rose 63 percent from a year earlier after years of tight credit availability and weak loan demand.
UniCredit shares extended gains after the results were released, rising 3.3 percent by 1343 GMT with traders citing the much higher-than-expected profit.
On a less positive note, revenues fell 3.6 percent to 5.6 billion euros compared with a year earlier, and gross operating profit was 6.4 percent lower, highlighting the struggle Italian banks face to reverse years of weak profitability.
The bank said its Common Equity Tier 1 ratio, a measure of financial strength, stood at 9.5 percent compared with 9.3 percent at the end of December.
(Reporting by Silvia Aloisi. Editing by Jane Merriman)