MILAN UniCredit (CRDI.MI), Italy's largest bank by assets, set aside nearly 10 billion euros ($13 billion) to cover bad loans in 2012 and said the country's longest recession in 20 years would continue to hit earnings this year.
The bank also announced that it is selling its Kazakh unit ATF Bank ATFB.KZ and will review its business targets through to 2015 in light of the "exceptionally difficult" economic environment.
Almost half of the 2012 writedown related to the last three months of the year. That 4.6 billion euro slice was more than three times the amount set aside by rival Intesa Sanpaolo (ISP.MI) for the final quarter and compared with 1.42 billion euros in the same period a year earlier.
Chief Executive Federico Ghizzoni told analysts that the drastic increase, which is almost entirely down to the Italian bad loan portfolio, was a voluntary decision and not the result of a Bank of Italy audit.
The central bank has been carrying out simultaneous inspections of Italian lenders and asked several - particularly smaller banks - to boost their provisions for bad loans.
Ghizzoni said the Bank of Italy had only asked UniCredit to make a "marginal adjustment" of about 60 million euros in its loan writedowns.
"Our balance sheet is definitely stronger than it was a year ago," he said, adding that the bank now had the highest coverage ratio for Italian bad debts among domestic lenders.
However, reflecting a cautious mood among bankers, Ghizzoni said that there was no point in releasing revised business targets while markets remain volatile.
"It makes no sense to come to you with a new plan; we need more clarity on the macro front," he said.
Charges against loan losses this year should come "slightly below" the 20
12 level, UniCredit said, forecasting a drop in 2013 net interest income - a key measure of how much money a bank makes from its core business - after a 6 percent decline in 2012.
Because of the high provisions, UniCredit posted a 553 million euro loss in the fourth quarter of 2012, against a consensus estimate of a 173 million euro loss in the bank's poll of analysts.
Full-year net profit was 865 million euros, missing the analysts' 1.24 billion euro consensus forecast.
Analysts said that the thorough clean-up of the loan portfolio was positive, but the outlook remained challenging.
"UniCredit only expects a slight improvement from the underlying loan-loss charges," said Ronny Rehn at Keefe, Bruyette & Woods. "We look for 16-25 percent consensus cuts on these numbers."
The bank said it had reached an agreement to sell ATF Bank to a Kazakh entrepreneur and Ghizzoni said the price would be close to ATF's book value of $550 million. UniCredit bought ATF for $2.1 billion in 2007 at the height of the credit boom.
UniCredit said that because of the sale it had booked a 260 million euro one-off charge in the fourth quarter.
On a brighter note, after scrapping its 2011 dividend following a net loss of 9.2 billion euros on big goodwill writedowns, UniCredit said it would make a payout of 0.09 euros per share for 2012.
The bank also said it would receive a 1 billion euro extraordinary dividend from its German unit, in addition to a 1.5 billion euro ordinary payout, boosting its ability to inject capital where needed in the group.
(Editing by David Holmes and David Goodman)