OREANDA-NEWS. February 11, 2015. Italian banks set aside less cash than expected to cover for soured loans in the last quarter of last year, signalling they might be starting to see the light at the end of the tunnel as Italy's economy is set to emerge from a recession.

Italy's biggest retail bank, Intesa Sanpaolo kicked off the reporting season by raising its shareholder payout and Popolare di Milano also returned to paying a dividend for the first time in four years.

Intesa's net profit for the last three months of 2014 was 48 million euros (\\$54 million), way below analyst forecasts of around 142 million euros, due to a 160 million euros charge in Hungary and a 13 percent rise in staffing costs. But the bank's shares extended gains to close up 4 percent with traders and fund managers saying the market was cheering the higher dividend of 7 euro cents a share and robust fee income.

Last year, Intesa paid a dividend of 5 euro cents.

Provisions for bad loans were just over 1 billion euros in the quarter, around 400 million euros below analysts' forecasts. At 137 million euros loan loss charges were also better than expected at smaller domestic rival Banca Popolare di Milano.

Exane Paribas for example had an estimate of 163 million euros.

The mid-tier bank, tipped as a potential target in an expected consolidation wave among Italian cooperative or 'popolari' banks, posted a net profit for the fourth quarter of 13 million euros and will pay a dividend of 2.2 euro cents.

Bad loans have become the number one problem for Italian banks, which fared the worst in a Europe-wide health check of the sector last year.

Things are looking brighter this year. "I believe this could be a turning point for (loan loss) provisions," Intesa Chief Executive Carlo Messina told a conference call of analysts.

The Italian economy is expected to grow more than previously forecast in 2015 and 2016 as a result of the European Central Bank's bond buying programme, Bank of Italy Governor Ignazio Visco said at the weekend.

Italy has not posted a single quarter of growth since the middle of 2011.

And, underscoring the rosier outlook, Intesa's Messina said his bank would not take part in any state-sponsored "bad bank" project because it did not want to miss out on an expected recovery of the real estate market.

That would in turn lead to an increase in the value of property used as collateral for bank loans. "I don't want to lose this upside," he said.

The government is working on several options to tackle bad loans and strengthen banks' balance sheets, including setting up a bad bank - a special vehicle to pool together lenders' bad debts.

Both banks also reported a strong capital base.

Intesa Sanpaolo said its core capital ratio - a key measure of financial strength - had further risen to 13.3 percent, one of the highest levels in Italy.

Popolare Milano posted a Common Equity Tier 1 ratio of 11.6 percent.

UniCredit, Monte dei Paschi and a raft of smaller popolari bank report their results on Wednesday.