MILAN, Oct 24 Reuters UniCredit posted on Tuesday a bigger than expected annual rise of 36 in thirdquarter profit, as higher rates kept up income from lending, while the strain on borrowers is still modest.

Core capital also strengthened above expectations in the period, rising to 17.2 of riskweighted assets, up from 16.6 at the end of June.

Italy39;s only bank deemed by supervisors of global systemic relevance said net profit was 2.3 billion euros in the three months through September, well above an analysts39; consensus gathered by UniCredit of 1.9 billion euros 2.0 billion.

Income from the gap in lending and deposit rates, on which Italy in August slapped a surprise oneoff tax, rose 45 from a year before.

While it confirmed its 2023 profit and investor reward goals, UniCredit said it now saw the net interest margin in the full year totalling at least 13.7 billion euros, driving a slight upgrade of the revenue guidance.

After spooking investors in Italian banks with the extraordinary levy, Italy has backtracked, giving lenders the option to set aside money as reserves instead of paying it.

UniCredit said it had decided to put aside as reserves 1.1 billion euros because of the government measure.

Most Italian banks, including market leader Intesa Sanpaolo, are expected to forego paying the tax, which could be damaging to shareholders, and strengthen capital instead, sources have told Reuters.

1 0.9369 euros

Reporting by Valentina Za, editing by Alvise Armellini…