Italy's third-largest bank said its net profit for the three months through June was 206 million euros ($209 million), well above a 180 million-euro forecast in a Reuters analyst poll and down 21% from a year earlier.

Banco BPM, whose largest shareholder is French bank Credit Agricole, said it expected to decide by the end of the quarter over a possible new insurance partnership it would limit to the sole non-life sector.

Credit Agricole and French insurer AXA are the lead contenders for the deal. Banco BPM is also considering sticking to a strategy to own in full its insurance business after recently repurchasing French partner Covea's stake in their joint venture.

Second quarter revenues stood at 1.12 billion euros, slightly above expectations and down 6.4% compared to the previous year when they had been boosted by trading gains.

Core revenues made up of net interest income and net fees rose both on quarterly and on a yearly basis.

Analysts had anticipated a drop in fee income due to difficult markets but Banco BPM said commercial banking fees had performed strongly rising 3% quarter-on-quarter.

Banco BPM said it was geared to benefit significantly also from rising rates, despite the less favourable terms of European Central Bank longer-term funds, adding a 100 basis point rise in interest rates translated into a 443 million euro income boost.

Banco BPM said it expected net earnings of more than 40 euro cents per share in 2021 with a payout ratio of 50%.

($1 = 0.9864 euros)

(Andrea Mandalà, editing by Valentina Za)