Italian bank UniCredit SpA said on Friday that second-quarter profits dropped 67 per cent as it reinforced its capital buffers by nearly €2 billion.

The net profit of €169 million ($207 million) compared with €511 million in the same period of 2011 and was below analyst forecasts for €269 million, according to a survey by Factset. The earnings were net of €477 million spent to buy back bonds in the first quarter.

UniCredit shares nevertheless rose 7.5 per cent to €2.76 as the wider Milan stock index vaulted six per cent higher.

The bank, Italy’s largest by assets, raised provisions for bad loans by 60 per cent to €1.9 billion “reflecting the deteriorating credit environment that unfortunately we see in Italy,” CEO Federico Ghizzoni told analysts.

The bank’s liquidity buffer stood at €116 billion, which UniCredit said would cover all wholesale funding maturing in the next 12 months.

The bank held €90 billion in sovereign debt at the end of the period, €41 billion from the Italian Treasury. Ghizzoni said the bank had decided to limit exposure to Italian debt with high yields.

Revenues in the quarter were down 3.2 per cent to €6.2 billion, with net interest income dropping 5.4 per cent to €3.69 billion.

The bank’s Core Tier 1 ratio, a key measure of a bank’s health, stands at 10.4 per cent, above European regulatory requirements.

Ghizzoni said the higher capital ratios, liquidity position and access to capital markets put the bank in a solid position “to face any potential future challenge arising from this very difficult, unprecedented, global economic turmoil”.