Italy's fourth-largest lender, laid low by mismanagement and a large bad loan pile, has long been Rome's biggest banking headache and is now 68 percent owned by the state.

Political uncertainty in Italy after an inconclusive election last month has heightened concerns over the bank's turnaround process. Monte dei Paschi must meet restructuring goals agreed with EU competition authorities to clear the rescue.

Answering a question by a shareholder at the annual general meeting, the bank said one of the targets was a net profit margin, or revenues minus operating costs, of at least 1.2 billion euros in 2018. Additional cost cuts would be needed if the bank failed to meet that, unless its return on equity was on track with the plan.

Shares in the bank have lost 40 percent of their value since they resumed trade on the Milan bourse in late October after a 10-month suspension.

In an effort to reassure investors, Chief Executive Marco Morelli and new Chief Financial Officer Andrea Rovellini flew to London last week to discuss the bank's recovery progress.

"A rise in gross lending, excluding defaulted loans, is the first sign the bank is getting back on its feet," Morelli told shareholders on Thursday.

He also said funding from clients was increasing despite the fact the bank was now offering lower interest rates.

"Direct funding is up. The trend observed in 2017 is continuing, with lower costs and at a slower pace."

Monte dei Paschi added 11 billion euros in client deposits in 2017, following a 15 billion euro decline in direct funding the year before.

The CEO said the bank expected to wrap up by the end of May a securitisation deal which will allow it to offload 24 billion euros in bad debts with help from a state-sponsored, privately funded banking support fund.

Morelli called for shareholders to provide "strong and unconditional" support to the bank's executives, to help them deliver on a plan that contains "a long, complex, difficult path with several unknowns."

Monte dei Paschi must find a buyer to allow the state to liquidate its stake and key for its future will be the composition of Italy's new government.

Political parties have failed so far to break a deadlock that resulted from the March 4 vote. The anti-establishment 5-Star emerged as the largest single party, while a conservative coalition led by the far-right League has the most seats in parliament but not enough for an absolute majority.

Both the 5-Star and the League have opposed the previous centre-left's government efforts to shore up the country's banks. ($1 = 0.8106 euros)

(Writing by Valentina Za; Editing by Susan Fenton)

By Stefano Bernabei