In a widely expected move, Italy's two largest banks - Intesa Sanpaolo SpA (ISP.MI) and UniCredit SpA (UCG.MI) - Tuesday announced capital-strengthening plans and decided not to seek expensive Italian government-sponsored bonds, reflecting the improved condition of the banking sector and capital markets.

The moves by UniCredit and Intesa Sanpaolo follow French BNP Paribas' (BNP.FR) decision to launch a EUR4.3 billion rights issue to buy out the French government's stake, making it that country's first bank to reimburse state funding issued at the height of the financial crisis.

Intesa Sanpaolo, Italy's largest retail bank, said a Tier 1 hybrid bond worth up to EUR1.5 billion would strengthen its capital ratios and would be strong enough to meet with future Basel II regulatory changes. It added that it will also speed up capital-management actions on non-core assets as set out in its business plan. According to people with knowledge of the situation, in future weeks Intesa Sanpaolo could sell its custodial operations as well as a majority stake of asset-management company Banca Fideuram.

The chairman of Intesa Sanpaolo management board, Enrico Salza, said that the bank doesn't need to sell its non-core asset at any cost. "We have to sell at the right price," he said.

The bank said in its statement that the move was made "in light of better trends in the group’s performance and the economic scenario than those foreseeable at the beginning of the year."

The decision not to use state-aid packages was widely expected by investors because of the high cost of this type of financial instrument and their list of restrictions that come with them, such as on dividends and bonuses. Only two Italian banks, Banco Popolare (BP.MI) and Banca Popolare di Milano (PMI.MI), have received government sponsored bonds.

Separately, UniCredit, Italy's largest bank by market capitalization, said Tuesday it is launching a EUR4 billion rights issue to boost its capital ratios to 7.65% as of the end of December, according to a Dow Jones calculation, adding that its board approved a "future EUR2 billion capital increase" at its unit Bank Austria, the bank that controls UniCredit's Central and Eastern Europe operations.

When UniCredit announced its second-quarter results, it said its core Tier 1 ratio at the end of June was 6.85%, while its Tier 1 ratio was 7.66%.

JP Morgan analysts Tuesday said in a report that a UniCredit EUR4 billion capital hike was "not a big deal," as they believed that raising capital now represents a positive management shift.

The move comes at a time of improving financial prospects for European banks and is the latest example of how they are trying to shake free of or avoid state aid. The process is already well under way in the U.S., where banks including J.P. Morgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) have repaid bailout cash.

UniCredit has a market value of EUR47 billion, while Intesa is at EUR36 billion.

Company Web site: http://www.unicreditgroup.eu

http://www.intesasanpaolo.com

-By Sabrina Cohen, Dow Jones Newswires, +39 02 5821 9906; sabrina.cohen@dowjones.com

(Milena Vercellino in Turin contributed to this article.)