* Chairman says sale of shares could start in mid-2014
* CEO Hester says no explicit talks with government on sale
* 2014 bank share sales a realistic aim-sources
* Expects taxpayer to make profit on RBS shares in long run
* RBS reports first quarterly profit for 18 months
By Matt Scuffham and Steve Slater
LONDON, May 3 State-backed Royal Bank of Scotland on Friday pushed for the British government to start selling its 82 percent stake as early as next year even though it could mean a loss for taxpayers.
Chairman Philip Hampton said the aim was to have a business in strong enough shape to start preparing a prospectus with the government for a sale from the middle of 2014.
"It could be earlier, that's a matter for the government," Hampton said in an interview on the bank's website.
Britain pumped 45.5 billion pounds ($71 billion) into RBS during the 2008 financial crisis, leaving the government with a controlling stake.
The bank has been through a big restructuring - shedding underperforming assets and cutting jobs. It reported its first quarterly profit in 18 months on Friday. But taxpayers are still sitting on a paper loss of 19 billion pounds, based on RBS's current share price.
The government is keen to start selling its holding but is under pressure to get a good deal for taxpayers ahead of a general election in 2015.
RBS is pushing for a sale so it can run its business without state interference. Hampton has said the bank needed freedom to execute its recovery plan without political meddling.
But rival Lloyds Banking Group, 39 percent state-owned after a bailout in the crisis, could prove a more attractive business to sell. Lloyds reported a big jump in first quarter profit on Tuesday, pushing its shares close to a price where the government could break even if it sold out.
Sources with knowledge of government plans told Reuters a sale of shares in RBS or Lloyds in 2014 was realistic. A decision would depend ultimately on the share performance of the two banks in the interim and whether the government would sell at a loss, the sources said.
Other factors affecting the decision included the outcome of talks on capital requirements between the banks and Britain's financial regulator and a review into banking standards by a parliamentary panel.
The Treasury and UK Financial Investments (UKFI), which manages the government's stakes, declined to comment.
SELL AT A LOSS
RBS Chief Executive Stephen Hester said the government might have to take a loss initially when it starts selling, given the depressed state of bank shares and tougher regulation of the industry. But he expected the UK taxpayer to make a profit in the long run.
"There may well be a cogent case for starting at a lower price but I believe the average (sale) price can, and should, be above the government purchase price," Hester told reporters.
RBS shares were down 5.7 percent to 290 pence at 1200 GMT, well below the 407 pence mark which the government regards as its buy-in level.
Under Hester, RBS has shed around 900 billion pounds in assets and is focusing on lending to British households and small businesses. He said the bank was starting to see a pick-up in loan demand, echoing comments from Lloyds, which said its core loan book had returned to growth quicker than expected.
The long-term prospects for RBS and Lloyds are closely linked to Britain's economy as their domestic focus means profitability will be constrained until UK growth picks up.
RBS made a pretax profit of 826 million pounds ($1.3 billion) in the first quarter, compared with a loss of 1.5 billion pounds in the same period last year.
The investment bank's income fell short of expectations and it said it expected a "muted" year as it cuts back on risk and shrinks the business to focus on fixed income products.
The bank still has to sell 315 UK branches to meet demands from European regulators. RBS said it was working towards listing them on the stock market but was also open to other options and was having talks with potential investors. It expects to rebrand this business as Williams & Glyn's.