UniCredit SpA , Italy's No. 1 bank, returned to a cash dividend on Wednesday as it battles to win round politically-connected shareholders who have been fighting a revamp plan by the lender's boss.

Shares in the euro zone's third-largest lender by market value jumped to a seven-week high in early trade in response to the higher than expected payout on yearly earnings, which also topped average analyst expectations.

The results came just two days after Chief Executive Alessandro Profumo, 53, threatened to resign in the face of resistance from cash-hungry shareholder foundations over his plan to streamline domestic operations.

UniCredit paid its dividend in shares last year but is now proposing 0.03 a share in cash, above forecasts, for a total of nearly 600 million euros ($819.8 million). Bank of Italy Governor Mario Draghi had urged banks last week to direct profits to strengthening capital instead of handing out cash to shareholders.

Profumo told an analyst conference in London he expected UniCredit's Bank Austria unit to need a further 1 billion euros of capital to meet tougher new rules for the money banks put aside against risk.

Profumo, architect of UniCredit 's rise from domestic lender to major European player thanks to the acquisition of Germany's HVB in 2005, said he was confident of reaching agreement with shareholders over a reorganisation that analysts say could save up to 800 million euros a year.

"This plan is strategic for me and for my team, because we are talking about a cultural change for the bank that aims to bring it closer to our customers and improve the quality of services," he was quoted as saying by Il Sole 24 Ore.

RESIGNATION CARD

The plan would eliminate boards at UniCredit units, limiting the local influence of politically-connected shareholder foundations that overall hold about 12 percent of the bank.

The foundations, which had borne much of the costs of 10 billion euros in capital-strengthening steps last year, would also like to install a general manager, potentially weakening Profumo, who has played the resignation card in other confrontations at the banks.

UniCredit made a net profit of 1.70 billion euros in the year, down 58 percent from the year before but above an average forecast of 1.57 billion according to Thomson Reuters I/B/E/S.

"These are good quality set of numbers, characterised by better net interest income and net interest margin, a low cost/income ratio, and slightly better than expected loan losses," said analyst Andrew Lim at Matrix Corporate Capital.

Its shares were up 5.3 percent at 1051 GMT, making it one of the best-performing stocks in the European banks' index, which was up 1.6 percent.

UniCredit , the Italian lender most exposed to the credit crunch through its role as No.1 bank in eastern Europe, showed a slight quarterly drop in bad debt provisions against expectations of some year-end kitchen-sinking.

PEAK IN PROVISIONS

But charges remained high at around three times pre-Lehman levels, potentially hampering the bank's full recovery while interest rates remain stubbornly low.

Bank Austria said bad debt provisions have probably peaked in emerging Europe. Provisions picked up in Turkey, Russia and the Balkans, especially Croatia, after dropping in third quarter. In debt-ridden Kazakhstan charges for impaired loans fell but still accounted for 7 percent of group bad debt charges.

Profumo told analysts he saw signs of economic improvement in Poland, Russia, Turkey and in the Czeck Republic but any further expansion in the region would be selective: "Winning market share is easy, making money is different," he said.

European banks have shown mixed 2009 results as they emerge from the financial crisis. France's Credit Agricole swung to a net profit but was hit by losses in Greece, while Deutsche Postbank saw an unexpected quarterly loss as it doubled loan loss provisions.

UniCredit also said it sold a 2.84 percent stake in Italy's largest insurer Generali SpA, booking a net loss of 67 million euros. The bank is a key player in discussions to name a new chairman at Generali in coming weeks.

Italy's antitrust authority ordered it to sell the stake after the purchase of Rome-based bank Capitalia in 2005. Traders said shedding the stake would help it strengthen capital ratios