Monte dei Paschi Q3 earnings lifted by higher Italian bond prices

MILAN, Nov 6 (Reuters) - Italian state-owned bank Monte dei Paschi posted better-than-expected profits in the third quarter on Wednesday after sales of government bonds helped it offset a sharp drop in interest income.

Italian bonds have rallied following the appointment of a pro-European government in Rome in September and fresh stimulus measures by the European Central Bank.

Higher Italian government bond prices, which boost the value of banks’ sovereign holdings, lifted Monte dei Paschi’s core capital to 14.8% at the end of September from 14% at the end of June.

The bank said net profit in July-September totalled 94 million euros ($104 million), ahead of an 85.4 million euro average forecast on a Reuters survey of five analysts.

Revenues came in at 811 million euros, also slightly above expectations, boosted by a 90 million euro gain from the sale of securities, mainly government bonds.

By contrast, fees weakened and income from the bank’s traditional lending activity plunged due to falling interest rates and loan volumes, as well as a higher cost of funding after Monte dei Paschi tapped debt markets in the quarter.

Italy, which owns 68% of Monte dei Paschi following a 2017 bailout, by the end of the year must outline a strategy to-reprivatise the bank by the end of 2021 as agreed with European competition authorities. ($1 = 0.9019 euros) (Reporting by Valentina Za; editing by James Mackenzie)