(Recasts with details)
MILAN, Nov 7 (Reuters) - Italy's biggest retail bank Intesa Sanpaolo further strengthened its capital position in the third quarter as net profit beat expectations thanks to rising fees and lower costs.
The bank confirmed its pledge to pay 10 billion euros in cash dividends in 2014-2017 and said full-year net profit would rise compared to 2016 even excluding a cash contribution it received from the state for taking on two failing rivals.
Intesa agreed in June to buy for 1 euros the healthy assets of two Veneto region banks Italy is liquidating on condition the deal did not harm its capital ratios and dividend policy. To offset the impact of the purchase it received a 3.5 billion euro capital injection from the state.
Intesa said third-quarter net profit was 650 million euros ($751 million), ahead of an average estimate of 636 million euros in a Reuters poll of seven analysts.
The figure includes 81 million euros in losses stemming from the operations of the two banks it acquired.
"We place great emphasis on quickly resolving this situation and bringing them back to profitability," CEO Carlo Messina said.
Intesa expects the two Veneto banks to boost its earnings per share from 2018.
The bank said its pro-forma fully-loaded CET1 ratio, a key measure of a lender's financial strength, rose slightly in the three months through September to 13.4 percent, one of the highest in Italy.
Excluding the operations acquired, net fees rose 7.6 percent year-on-year in the third quarter, countering a 5.9 percent drop in net interest income.
Trading income was also down from the previous year but the bank managed to cut costs, curbing the drop in overall operating income.
Intesa wrote down impaired loans for 646 million euros in the period, 30 percent less than a year ago, raising provisions to cover 49.5 percent of all doubtful loans.
It said gross inflows of new problematic loans stood at 990 million euros in the quarter, the lowest amount in the bank's history.
UBS analysts said in a note they expect Intesa to further improve asset quality with the 800 million euro gain it is set to book in the fourth quarter from the sale of mutual fund platform Allfunds.
($1 = 0.8647 euros) (Reporting by Valentina Za; Editing by Jon Boyle)