Italy's largest lender, UniCredit, returned to profitability in the first quarter, as it cleaned up its balance sheet ahead of the upcoming euro zone bank health checks.
The bank posted a profit of 712 million euros ($979 million) for the first three months of 2014, after a massive 15 billion euro loss in the previous quarter. The results topped analyst forecasts and were helped by a 30 per cent reduction in bad loan charges.
First-quarter revenue was 5.58 billion euros, below expectations, while the underlying results showed a sluggish trend in net interest income and trading.
However, the bank also recorded its first decline in gross impaired loans since 2008—a rare piece of good news on the lending side. New lending in Italy rose 63.2 percent on the year.
The bank's chief executive, Federico Ghizzoni, said UniCredit was on track to reach its 2 billion euro net profit target for 2014 and that the lending trend was encouraging.
"I think the trend is sustainable," Ghizzoni told CNBC on Monday. "We may have some ups and downs, but the trend is for deceleration and stabilization of the inflows and a reduction of the stock (of gross impaired loans)."
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However, Deutsche Bank analysts have cautioned investors that they may need "some more patience" when it comes to the turnaround of Italian banks.
Deutsche wrote last week that while, "2014 will still be affected by low rates and high LLPs (loan-loss provisions), the longer-term outlook is improving with regards to lending and asset quality, though it will take time before this is reflected in P&Ls (profits and losses)."
Investors and analysts have lauded UniCredit's bold moves to clean up its loan book ahead of this year's European Central Bank-managed asset quality review (AQR) and stress tests.
"UniCredit may be in an advantageous position in light of the ongoing ECB Comprehensive Assessment, having cleaned up its loan books in the fourth quarter," analysts at Berenberg wrote in March.
More recently, Deutsche Bank analysts wrote: "Banks are going in the right direction, as the bad loan coverage has increased, and seem well-prepared to face the AQR, but generally have not yet restored the pre-crisis situation."
Ghizzoni said his bank felt, "Quite confident, both for the asset quality review and stress tests."
However, he added that for the European banking sector, "It will be a tough exercise overall."