(Adds comments from conference call)
MILAN, Nov 7 (Reuters) - UniCredit, Italy's biggest bank, on Thursday opened the door to its first share buyback in more than a decade after reporting strong third-quarter profits, sending the bank's stock price up more than 5%.
The results and potential buy-back show how the restructuring by Chief Executive Jean Pierre Mustier is starting to pay off. He has been selling assets and cutting costs since his arrival at the bank in mid-2016.
As part of this plan to shed non-core assets, UniCredit on Wednesday sold its 8.4% stake in Mediobanca, which had made it the biggest shareholder in the Milanese merchant bank.
UniCredit's shares hit their highest level since April following the bank's 26% yearly rise in third-quarter net profit adjusted for one-off items, and confirmation of its full-year targets.
Despite gaining 30% this year, UniCredit trades at roughly half the value of its tangible assets. This reflects the challenges facing European banks, such as a fragmented market, outdated business models, the need for large technology investments and tough competition from non-banking players.
"Europe needs bigger banks but I cannot see any M&A transactions at this stage," Mustier told analysts, citing depressed bank valuations and the additional capital needs required for a merger.
Sources have said the French investment banker had studied a possible bid for Germany's Commerzbank but was forced to shelve it.
"Today what works very, very well is to buy back shares at discount to tangible book ... so guess what we would prefer to do and we will discuss that at the capital market day," he said.
UniCredit will be in London on Dec. 3 to present its strategy for the next three years.
Mustier said contacts with the European Central Bank showed the regulator was willing to authorise share buybacks if a lender had enough capital.
UniCredit strengthened its core capital to 12.6% of assets in July-September helped by the sale of its remaining stake in online bank Fineco.
DISTANCE FROM MEDIOBANCA FEUD
The Mediobanca sale distances UniCredit from an investor feud at the investment bank, where billionaire Leonardo Del Vecchio recently built a 7.5% stake and challenged the top management's strategy.
In UniCredit's third-quarter results, strong trading gains, higher fees and falling loan losses offset a shrinking interest income to drive the bank's net profit to 1.1 billion euros.
Analysts had looked on average for a profit of 1.01 billion euros on revenue of 4.57 billion euros, based on a consensus compiled by the bank.
After shedding 4 billion euros in impaired home mortgages, UniCredit said it had lowered the share of problem loans in its total lending to 5.7%, the best level among leading Italian banks, down from 15% when Mustier first arrived.
As it works to reduce its domestic exposure, UniCredit also said it had cut its holdings of Italian government bonds by 3.6 billion euros in the quarter.
($1 = 0.9024 euros)
(Reporting by Valentina Za, editing by Silvia Aloisi/Emelia Sithole-Matarise/Jane Merriman)