* RBS expects to start Libor settlement talks soon
* CEO hopes for news of settlement by next February
* Says timing on any settlement in hands of regulators
* Q3 operating profit 1.05 bln stg vs 2 mln yr ago
* CEO won't rule out sale of U.S. business Citizens
By Matt Scuffham and Steve Slater
LONDON, Nov 2 Royal Bank of Scotland faces fines for its part in a global interest rate rigging scandal and wants to reach a settlement as soon as possible.
U.S. and UK authorities are investigating the part-nationalised bank over how it set Libor and other interest rates and it is expected to be one of the next to settle after British rival Barclays was fined $450 million in June.
RBS expects to start talks on a settlement soon, which is likely to result in financial penalties, the bank said on Friday as it published third quarter results.
Chief Executive Stephen Hester said the timing of a settlement was in the hands of regulators. "We are up for settling with all and every one as soon as they are ready."
Hester said it was difficult to assess whether RBS would be hit with a bigger fine than Barclays, the only bank to settle so far. More than a dozen banks are under investigation by authorities in the United States, Europe and Asia.
Even if a fine was smaller than Barclays' penalty it would still be a "miserable day" for RBS, Hester said. "It is a deeply regrettable thing....this is the sort of thing the industry has to put behind it," he said.
Hester expected details of a settlement to emerge between now and the bank's full year results next February.
"I'd be disappointed if we were talking to you at our full year results in February without having had more news but it's not under my control."
RBS has dismissed a number of employees for misconduct after its own investigations into interest rate setting.
Libor and other past mistakes are threatening to overshadow Hester's attempts to turn the bank around, which he said would be complete in the next 15-18 months.
LEANER INVESTMENT BANK
The bank is under political pressure to shrink its investment bank further and to consider the future of its U.S. business, Citizens because it does not fit with RBS's narrowed focus on its home market.
However analysts, who estimate Citizens could fetch over 9 billion pounds, expect Hester to delay any sale until he has got the business into better shape. He said on Friday that Citizens was a core asset, but left the door open for a disposal.
"I've never ruled anything out and I'm not going to start ruling it out now," he said. But he said there was a "cogent and coherent strategy" for the bank "to not have all its eggs in one geographic basket."
Shares in RBS were down 2 percent to 281 pence at 1215 GMT, lagging a 0.1 percent rise across Europe's banks.
The bank set aside another 400 million pounds to compensate customers mis-sold loan insurance, bringing its total provision to 1.7 billion pounds.
Its third-quarter operating profit of 1.05 billion pounds ($1.69 billion), was up from 2 million pounds in the same period the previous year, as losses from bad debts dropped.
Bad debts were 1.18 billion in the third quarter, down 12 percent from the previous three months. Staff costs fell 5 percent. The bank has cut 9,900 staff in the past year, or 7 percent of its workforce, most notably at its investment bank.
That business saw a 2 percent dip in revenue from the previous quarter. But its operating profit jumped 18 percent to 295 million pounds due to lower costs.
Hester said RBS had already significantly shrunk its investment bank and would continue to take a "pragmatic" approach to the size and scope of the business.
Taxpayers are sitting on a loss of over 20 billion pounds after Britain pumped 45 billion pounds into the bank to keep it afloat during the 2008 financial crisis.
Compensation payouts for payment protection insurance, the investigations into interest rate rigging and possible breaches of sanctions on Iran still hang over the bank's recovery.
RBS last month exited a government insurance plan to cover its riskiest loans and sold a first tranche of shares in its insurance arm Direct Line.
But a 1.65 billion pound deal to sell 316 branches to Spain's Santander demanded by European regulators was scrapped after delays. RBS has restarted the sale.