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(Adds details on bad loan disposals)
MILAN, May 9 (Reuters) - Monte dei Paschi di Siena on Thursday reported an 85 percent drop in first-quarter net profit hurt by shrinking revenues and larger writedowns on problem loans due to Italy's weak economy, as well as some one-off hits.
Monte dei Paschi was bailed out by the state in 2017 and CEO Marco Morelli is working to turn the bank around to comply with restructuring commitments agreed with European Union competition authorities and make it attractive for a potential buyer.
Under the bank's 8 billion euro bailout, which handed Rome 68 percent of the world's oldest lender, Italy must submit an exit strategy to Brussels by the end of this year and bankers say turnaround efforts must bear fruit for a buyer to emerge.
In the first quarter, the bank said it had booked 37 million euros ($41.40 million) in provisions against problem loans after cutting its estimate for Italy's 2019 economic growth as required by new, forward-looking accounting rules.
Loan-loss provisions totalled 164 million euros in the period, up from 137 million a year earlier.
"The first quarter of 2018 was a totally different macro environment," CEO Morelli told an analyst call.
The European Commission said this week the euro zone's third-largest economy would expand by just 0.1 percent this year, halving an already gloomy 0.2 percent figure.
Monte dei Paschi's net profit stood at 28 million euros in January-March compared with 188 million euros a year earlier.
Shares in the bank closed 4.4 percent lower, underperforming a 2.8 percent drop in Italy's banking index.
Net interest and commission income both fell compared with a year earlier, with net fees decreasing 12 percent and the income from the bank's core lending activity down 3 percent annually.
The bank's core capital weakened slightly to stand at 13.3 percent of assets at the end of March, compared with 13.7 percent at the end of 2018.
Monte dei Paschi said it had booked 92 million euros in one-off charges in the first quarter, partly to settle disputes with clients over diamonds sales following a judicial probe that involves several Italian banks.
The bank also said it reduced its stock of soured loans by 1.3 billion euros in the quarter, lowering their proportion of total lending to 16.3 percent from 17.3 percent three months earlier.
Morelli told analysts the bank was working to sell 1.6 billion euros in unlikely-to-pay loans by mid-2019 to reach a full-year reduction target of 2 billion euros. ($1 = 0.8937 euros) (Reporting by Valentina Za, editing by Jane Merriman)