BMPS, the world's oldest bank still operating today, unveiled the overhaul as it posted a net loss of 1.15 billion euros ($1.3 billion) in the third quarter.
Losses linked to loans led to the result, which compared to a net profit of 255.8 million euros in the same period a year earlier, the bank said.
But under new chief executive Marco Morelli, the bank now aims to cut costs by closing about a quarter of its 2,000 branches and slashing personnel costs by nine percent over three years.
It targets net profit above 1.1 billion euros in 2019 under the vast three-year overhaul, it said.
Italy's third-biggest lender will also seek improvements of its loans and risk reduction.
The bank was found to be Europe's weakest major bank in tests undertaken by the European Banking Authority and its finances have raised concerns for the broader Italian banking sector.
It announced a rescue plan in late July that entailed offloading gross non-performing loans worth 27.6 billion euros into a separate entity, while seeking investors to inject new capital of up to 5.0 billion euros into the bank.
The bank, which last year posted its first net profit in five years, will also rein in administrative costs and kickstart its commercial business by speeding up the digitization of services for customers, it announced.
Bad loan pile
The bank was found to be Europe's weakest major bank in tests undertaken by the European Banking Authority at the end of July and its finances have raised concerns for the broader Italian banking sector.
The BMPS overhaul "is the kind of bitter pill the Italian banking sector as a whole better get used to taking if it wants to avoid being the biggest threat to the eurozone's stability," said Spreadex analyst Connor Campbell.
The bank had announced a rescue plan in late July that entailed offloading non-performing loans worth 27.6 billion euros into a separate entity, while seeking investors to inject new capital of up to 5.0 billion euros into the bank.
It aims to carry out the capital increase by the end of this year, it said Tuesday.
The operation will be launched "in the seven to eight first days of December if the market conditions are met", Morelli, who took over the helm last month, told reporters.
Bad loans at BMPS rose to 45.6 billion euros at the end of September.
Italy's troubled lenders overall hold 360 billion euros of bad loans - about a third of the eurozone's total.
Its CET1 fully loaded capital ratio - the benchmark followed by regulators for the amount of funds a bank has available to absorb losses - slid to 11.5 percent in September, from 12.1 percent in June.
Shares in the bank have collapsed by more than 70 percent since the start of the year, but had firmed in recent days on the Milan stock exchange, to close more than 28 percent higher on Monday, at their highest level since early July.
Volatility returned after Tuesday's announcements, when the shares surged more than 20 percent after opening of trade, before then plunging up to 23 percent.