Banco BPM has lagged larger rivals in reducing bad debts, which became the focus of investor concerns over Italian banks following a deep recession.

To speed up the process Banco BPM is now considering selling its debt collection business, which has drawn strong interest from potential buyers, to cushion the hit from a large disposal.

Among the bidders shortlisted is a consortium comprising Italy's top loan recovery firm doBank, U.S. fund Fortress and SPAXS, a new bank being set up by veteran banker Corrado Passera.

A second consortium is made up of Italian bad loan specialist Credito Fondiario and U.S. fund Elliott, while the third bidder comprises U.S. funds Christofferson Robb & Company, Davidson Kempner and Prelios.

Banco BPM CEO Giuseppe Castagna told analysts that suitors had bid for almost all of Banco BPM's bad loans, but a decision on the size of the deal would be taken only towards the end of the year.

"We have mentioned ... 5.5 billion euros but not because 5.5 billion is the maximum amount that we can do but just to make an example, which would bring [our soured loan ratio] immediately below 10 of total lending," he said on an analysts' call on Friday.

Rival UBI Banca said on Friday it was bringing forward to mid-2019 a goal to cut its soured loan burden below 10 percent of total lending.Bad loans are normally sold below their book value so the hit to capital limits the amount banks can shed on the market.

Banco BPM said it had written down soured loans by 686 million euros in the fist half of the year, helping reduce the gap with market prices.

The bank reported on Friday a net profit of 129 million euros for the second quarter, down from 223 million euros in January-March, and analysts said a drop in fees was particularly disappointing.

The bank put the fall down to an internal reorganisation and market turbulence as investors sold Italian assets amid rising political risks under Rome's new anti-establishment government.

Banco BPM said a sharp drop in the value of its Italian government bonds had driven its core capital down to 11.4 percent in June, from 12.1 percent three months earlier.

(Reporting by Valentina Za; Editing by Crispian Balmer and Susan Fenton)

By Valentina Za