MILAN (Reuters) - UniCredit <CRDI.MI>, Italy's largest bank by assets, said on Tuesday it saw the first signs of credit improvement in Italy even as it set aside more money for bad loans due to a prolonged recession in the euro zone's third-biggest economy.
Like domestic rival Intesa Sanpaolo <ISP.MI>, UniCredit increased loan-loss provisions over the second quarter. These rose to 1.7 billion euros, up 35 percent from the previous quarter.
Bad loans have become one of the main troublespots for Italian banks.
UniCredit's second-quarter net profit rose slightly more than expected, coming in at 361 million euros ($478 million), compared with a forecast of 349 million euros in an analyst consensus distributed by the bank.
Results were helped by a 254 million euros capital gain on a bond buyback, and cost cuts. UniCredit staff numbers fell by 4,700 over the period, mainly due to the sale of its Kazakh business.
Chief Executive Federico Ghizzoni said net new inflows of bad loans had decelerated for a third straight quarter in Italy, which is stuck in its longest recession since World War II.
"Despite negative growth in Italy, UniCredit is seeing the first signs of a trend reversal," Ghizzoni said in a statement.
The Bank of Italy said last week it had intensified inspections of the loan books of eight lenders, although a source close to the matter said none of Italy's top five banks were among those under extra scrutiny.
The shares extended gains after the results, and were up 2.3 percent at 4.27 euros by 0843 ET.
"The numbers look ok," said an analyst asking not to be named. A Milan-based trader said signs of a recovery in Italy were helping the shares.
The bank said its Basel III-compliant Common Equity Tier 1 ratio, a key measure of financial strength, had risen to 9.72 percent at the end of June after the sale of Turkish insurance business Yapi Kredi, from 9.46 percent at the end of March.
It also said it had paid back 2 billion euros of the 26.1 billion euros in cheap funds it had borrowed from the European Central Bank at the height of the euro zone debt crisis.
(Reporting by Silvia Aloisi, additional reporting by Stephen Jewkes and Gainluca Semeraro. Editing by Jane Merriman)