* Q1 underlying net profit up 30 pct to 378 million euros
* Loan impairments seen slightly lower in 2014 vs 2013
* To give advice on flotation in Oct/Nov
* Flotation likely no earlier than Q2 2015 (Recasts with financial targets, adds CFO comments on potential flotation)
By Philip Blenkinsop
BRUSSELS, May 16 Dutch state-owned bank ABN AMRO hit its key financial targets in the first quarter, giving a boost to its plans for a stock market return six years after it was bailed out in the financial crisis.
A flotation would mark a turning point in the fortunes of the bank and of the domestic economy, as well as removing the bank from the hands of a government with no interest in owning a major bank in the long term.
Announcing first-quarter results on Friday, the lender said
its cost-to-income ratio had improved to 58 percent in the first quarter from 65 percent in 2013, showing the impact of cost cuts, while its return on equity rose to 10.9 percent from 5.5 percent before one-offs in 2013, in line with its 2017 targets on both counts.
The two measures were identified by Chief Financial Officer Kees van Dijkhuizen as important in determining whether the bank was fit for a stock market return.
Van Dijkhuizen said that to justify a positive message to the government on a flotation, ABN AMRO would have to make serious progress toward the goals it had set for 2017, which were for a cost-to-income ratio of between 56 and 60 percent and a return on equity of 9 to 12 percent.
ABN AMRO will offer its advice to the Dutch government about the listing in October or November. The government would then determine by the end of the year whether to proceed with a flotation in 2015.
Van Dijkhuizen also said the result of the European Central Bank's "health check" on bank finances, designed to ensure lenders are secure enough to withstand another financial meltdown, would be important in clearing the way for a float.
"The asset quality review will have a strong influence," he told a conference call, adding a flotation would probably have to wait until the second quarter, after the release of the bank's 2014 results.
However, Chief Executive Gerrit Zalm, a former Dutch finance minister, said a good first quarter was not necessarily a guide for the whole year.
"We caution not to extrapolate the Q1 results to the end of the year, as Q1 is traditionally the best quarter of the year and also because the bank tax is due in the final quarter," he said in a statement.
ABN AMRO also reported a 30 percent rise in first-quarter underlying net profit and said loan impairments would take some time to fall to normal levels, although they should be slightly lower this year.
Underlying net profit rose to 378 million euros ($518.5 million), as higher margins on deposits led to increased interest income and expenses barely rose.
Loan impairments remained elevated, reflecting the weak state of the domestic economy. At 361 million euros, they were 39 percent above year earlier levels, although an improvement of 35 percent from the final quarter of 2014.
ABN AMRO said the Dutch economy was showing promising signs, from rising house prices and transactions to improved sentiment among small businesses (SMEs) and rising job vacancies.
"However, a large proportion of SMEs are still facing financial difficulties, as are a significant number of households," Zalm said in the earnings statement. "It will take time for loan impairments to return to more normal levels as these lag economic developments."
Full-year loan impairments are expected to be slightly below last year's 1.67 billion euros, excluding special items.
ABN AMRO, which has been slowly restructuring in the run-up to its planned sale, has said that 2013 marked the bottom of the economic cycle. The Dutch economy lagged others in the euro zone in emerging from recession and signs of recovery are mixed.
The housing market is expected to stabilise this year after prices fell about a fifth from their peak levels in 2008.
Fourth-quarter GDP growth was stronger than expected thanks to a pick-up in investment, but the economy contracted by 1.4 percent in the first three months of this year, against growth of 0.2 percent in the euro zone.
The sharp contraction was at least part the result of a mild winter squeezing sales of natural gas.
Unemployment also shows no sign of decline.
The government said last August it planned to sell ABN AMRO in a year's time at the earliest, but was unlikely to recoup its costs. It put the value of the bank at about 15 billion euros, well below what the Netherlands poured in to rescue and support it. ($1 = 0.7291 Euros) (Editing by Miral Fahmy and David Holmes)