* Core revenues up from previous quarter
* Market turmoil leads to trading loss, hurts capital
* CEO says H2 profit guidance assumes current spread level (Recasts after conference call)
By Valentina Za and Stephen Jewkes
MILAN, Aug 3 (Reuters) - Rising political risk in Italy dented Monte dei Paschi di Siena’s financial strength in the second quarter, casting a shadow over a nascent recovery at the country’s fourth-largest bank.
Italian banks, which hold 380 billion euros of the country’s government bonds, are paying the price of a spike in sovereign borrowing costs under a new anti-establishment government which markets fear could weaken Rome’s public finances.
State-owned Monte dei Paschi said its core capital had fallen to 13 percent in the three months through June, down from 14.4 percent at the end of March, hit by a drop in the value of the bank’s portfolio of domestic government bonds.
Shares were almost 4 percent lower by 1120 GMT with traders saying concerns about Italy’s uncertain political situation outweighed a decent set of results.
“I’ve always said Monte dei Paschi’s journey to recovery is a long one,” Chief Executive Marco Morelli told analysts.
“I think the first and second quarter demonstrate we’re on the right track ... and that we’re able to cope with pretty stormy waters (given) the macro-environmental situation in our country.”
Morelli said profit guidance for the rest of the year assumed Italy’s debt costs remained broadly at the current level. Investors, however, are nervously awaiting the next budget law in the autumn to assess slippage risks.
“Excluding several non-recurring items ... second-quarter results show a bank well on track in its recovery path,” Banca IMI analyst Manuela Meroni said in a note.
“The main positive news ... relates to core revenues, which increased by 2.8 percent quarter-on-quarter ... (but) the capital base continues to be a point of weakness.”
A bank’s core capital measures its ability to withstand potential losses and is closely monitored by regulators.
Unable to raise capital from investors after a string of cash calls in recent years, Monte dei Paschi risked buckling under bad loans and an oversized exposure to Italian government bonds until it received 8 billion euro rescue package last year.
The state owns a 68 percent stake as a result of the bailout.
Overall revenues fell 5 percent hit by a trading loss due to market turmoil in the quarter, driving net profit down 46 percent from January-March to 101 million euros ($117 million).
That compares with a 3 billion euro loss in the second quarter of 2017.
Monte dei Paschi, which suffered massive deposit flights during its crisis years, said it had added 4.1 billion euros in sight and time deposits from end-December.
Gross bad loans accounted for 20 percent of total lending at the end of June, down from 34 percent at the end of March after a record 24 billion euro securitisation sale it completed with help from a state-sponsored, privately funded bank support fund.
Morelli said he was working on further disposals and saw room to improve a 2021 target for the bad loan ratio to around 10 percent.
The former investment banker is striving to turn the bank round to improve its appeal to potential buyers. State aid can only be temporary under European Union rules and a merger would give Italy’s government a way out.
“We need to implement a cumbersome restructuring exercise ... and at the same time relaunch the commercial performance and put the bank in a safe and sound position,” Morelli said. “I don’t think we can solve the bank’s problems in a few quarters.”
($1 = 0.8636 euros)
Additional reporting by Stefano Bernabei; editing by Jason Neely and Kirsten Donovan