MILAN (Reuters) - UniCredit on Tuesday posted better than expected 2024 earnings and said it aimed to keep profit stable this year despite declining rates, promising to increase shareholder rewards in 2025-2027.

After years of record profits and investor payouts fuelled by the ECB's rate hiking cycle, European lenders are looking for new profit drivers, and some have turned to mergers and acquisitions.

Under CEO Andrea Orcel's leadership, UniCredit has embarked on an aggressive expansion strategy, building a 28% stake in Germany's Commerzbank and launching an all-share bid for smaller domestic peer Banco BPM.

Earlier this month, the bank announced it had taken a 4.1% stake in Generali. Italy's biggest insurer, an investment which also gives it influence in other takeover and boardroom battles unfolding in Italian finance.

UniCredit will return 9 billion euros ($9.3 billion) to shareholders in share buybacks and dividends from its 2024 profits, which still benefited from a rising net interest margin, a measure of profit from the gap between lending and deposit rates.

JPMorgan analysts said the capital distribution surpassed expectations, as did the guidance for an even higher distribution in 2025.

Other analysts noted UniCredit's 2027 profit target of 10 billion euros was also above market estimates.

"Management outlook reads well," KBW analysts said in a note. "UniCredit's share price has outperformed the SX7E [European banking index] by 6% over the last month, but with these results we think the market will not be disappointed."

UniCredit shares fell 2.7% in early trading, underperforming European banking stocks.

The fall followed a report on Tuesday in the Corriere della Sera newspaper, citing banking sources, that Delfin, the holding of the Del Vecchio family, is exploring the possibility of selling its 2.7% stake in UniCredit.

Delfin was not immediately available to comment.

Since Orcel's arrival in 2021, UniCredit has boosted shareholder returns, driving a near six-fold increase in its share price, which gives it a strong hand in merger deals paid for in shares.

Orcel is also sitting on billions of euros of cash in excess of targeted capital reserves. While some of that can be used for M&A, Orcel also plans to return part of it to shareholders by 2027.

UniCredit said it would pursue external growth options only "if they meet strict strategic and financial parameters".

UniCredit forecast net interest income, which rose more than expected in the fourth quarter, would post "a moderate decline" in 2025, due to lower euro zone interest rates but also efforts to shrink its Russian business.

UniCredit faces European Central Bank demands to speed up its exit from the country.

A "mid-single digit" increase in fees projected for 2025 would not be enough to offset the drag from lower rates, with net revenues seen above 23 billion euros ($24 billion) versus 24.2 billion last year, it said.

Profit in the October-December period totalled 1.97 billion euros ($2.03 billion), above a 1.63 billion euro company-gathered consensus forecast, despite higher than expected provisions for loan losses.

That compared with 2.8 billion euros a year ago, when the boost from tax credits linked to past losses was more than twice as big.

($1 = 0.9706 euros)