LONDON (Reuters) - State-backed Royal Bank of Scotland reported its first quarterly profit in 18 months on Friday and said it expected to complete its restructuring during 2014, potentially enabling the government to start selling shares.
RBS, which is 82 percent-owned by the taxpayer, made a pretax profit of 826 million pounds ($1.3 billion), compared with a loss of 1.5 billion pounds in the same period last year. Analysts had forecast a profit of 800 million pounds.
Chief Executive Stephen Hester has overseen the shedding of around 900 billion pounds in assets and is focusing on lending to British households and small businesses.
"We expect to substantially complete the bank's restructuring phase during 2014. We are seeing the start of a pick-up in loan demand and have a strong surplus of funds ready and available to support economic recovery," he said.
However, Hester still has major hurdles to overcome. Britain's financial regulator said in March that UK banks must raise 25 billion pounds of extra capital by the end of the year to absorb any future losses on loans.
Although the regulator has not yet given specific guidance to individual banks, analysts expect the biggest shortfall to be at RBS.
RBS said its capital position had improved during the period and its core tier one ratio - a bank's main benchmark of health - had risen by 50 basis points to 10.8 percent. It expects to have a core capital ratio of 9 percent at the end of 2013 on the basis of full implementation of tougher Basel III capital rules.
Britain's regulator wants major lenders to achieve a core tier one ratio of at least 7 percent.
($1 = 0.6447 British pounds)
(Reporting by Matt Scuffham; Editing by Steve Slater)