The recent Europe-wide health check on banks is producing results for Italy, whose top two lenders on Tuesday posted a strong rise in quarterly profits after cleaning up their finances in anticipation of the test.
While nine smaller Italian banks failed the test, putting a negative spotlight on Italy's failure to generate economic growth, UniCredit and Intesa SanPaolo, the country's two biggest banks, passed with strong marks.
Ahead of the test, the two banks cleaned out their books by writing off bad loans, a painful process that seems to be paying dividends. On Tuesday, both reported profits in the three months ending Sept. 30 more than doubling, early signs of recovery in the banking sector.
UniCredit CEO Franco Ghizzoni told an analyst conference call that the test had rewarded "the strong effort UniCredit has made in the last year to strengthen our balance sheet."
UniCredit, Italy's largest bank by assets, exceeded analyst forecasts by posting net income for the quarter of 722 million euros ($958 million), up from 204 million euros a year earlier. Analysts had forecast 422 million euros. Revenues were down 3 percent.
The bank said the results were due to cost-cutting, a strong performance by its Italian commercial bank as well as operations in central Europe, in particular Poland.
Intesa SanPaolo SpA said its third-quarter profits rose to 483 million euros ($600 million) from 218 million euros last year, as it benefited from higher interest income and commissions.
The bank said it was committed to helping the economy by lending more — it said it would lend 170 billion euros to Italian families and business over the next four years.
The bank reported it has lent 25 billion euros so far this year. The bank also said the amount of provisions it set aside for bad investments fell 13 percent in the first nine months compared with a year earlier.
UniCredit said it has lent 2.8 billion euros in the third quarter, for a total of 8.7 billion euros this year, a 50 percent increase driven by home mortgages.
Shares in Unicredit dropped 3.3 percent to 5.41 euros, while Intesa SanPaolo's earnings shed 0.2 percent at 2.24 euros.
Despite the improvements, many of Italy's smaller lenders remain troubled and wary of lending.
Italy's third-largest and oldest lender, Monte dei Paschi di Siena, fared worst in the European stress test and was forced to raise new money. It has since said it would seek a 2.5 billion euro capital increase to strengthen its balance sheet. It will be the bank's fourth capital increase in six years.