November 6, 2018 / 4:56 PM / 10 months ago

UPDATE 2-Intesa CEO bullish on Italy after Q3 profit beat

* CEO bullish on Italy, sees 2019 GDP growth of at least 1 pct

* Has 40 bln euros in ECB deposits, can avoid issuing bonds

* In the process of repricing client loans (Recasts after conference call)

By Valentina Za and Gianluca Semeraro

MILAN, Nov 6 (Reuters) - Italy’s top retail bank Intesa Sanpaolo stuck to full-year profit and dividend goals after topping expectations with its third-quarter net income and keeping its core capital intact despite Italy’s sovereign debt problems.

Italy’s populist government has locked horns with the European Commission over an expansionary 2019 draft budget, sparking a sell-off of Italian assets and driving up Rome’s debt costs.

Italian banks have seen their capital hurt by the falling value of their large sovereign holdings, which is also pushing their funding costs higher.

But Intesa Sanpaolo CEO Carlo Messina dismissed concerns over Italy saying the country’s fundamentals were “really strong” and predicting a 1 percent expansion for the Italian economy next year.

“In the (current) accounts of Intesa you have the movements of the real economy and that’s the real situation,” Messina told an analyst call.

“We’re not in any kind of Armageddon scenario ... if you want an Armageddon you can go to the movie theatre,” he said when asked about the depressed market values of Italian banking shares.

Italy’s banking index has fallen by a third since mid-May, when the ruling coalition’s spending plans first leaked. Lenders trade at a small fraction of their book values.

A slowdown in the Italian economy casts a shadow over the country’s weaker banks, which are still wrestling with a bad debt pile left behind by the last recession.

But Messina said Intesa would not see loan losses rise even if economic expansion slowed to as little as 0.5 percent.

The bank has cut its gross soured loan burden to 9.2 percent of overall loans thanks to a deal with Swedish debt collector Intrum which the CEO said would close by early December.

Shrinking assets - including the repayment of a 5 billion euro loan part of a deal over Russia’s Rosneft - helped Intesa offset a 45 basis point capital hit from higher Italian bond yields in the last two quarters.

Core capital ratio stood at 13.7 percent at the end of September, fractionally up from three months earlier.

Fees, which are key to Intesa’s business model built around its wealth management operations, dropped around 3 percent both quarter-on-quarter and versus the previous year. Net interest income growth, however, was a positive surprise.

Net profit came in at 833 million euros ($951 million), compared with 785 million euros in a consensus forecast of six analysts compiled by Reuters.

Shares in the bank turned positive after the results to close up 1.3 percent.

“Solid third-quarter results should provide some grounds for short-term relief, but with the economic backdrop uncertain, the sustainability for future quarters will remain in question,” Jefferies analysts said in a note.

$1 = 0.8763 euros Reporting by Valentina Za; Editing by Adrian Croft and David Evans

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