LONDON/PARIS Royal Bank of Scotland (RBS.L) is expected to report its first quarterly profit in 18 months on Friday, the fruit of efforts to focus on bread and butter lending and shed the high risk assets that led to its public bailout in 2008.
The outlook for European banks as a whole remains shaky, with France's biggest bank BNP Paribas (BNPP.PA) expected to post a slump in earnings in its own results on Friday.
RBS is seen showing a pretax profit of 800 million pounds ($1.2 billion) but unlike another bailed out bank, Lloyds, its share price is still far below what it was when the last UK government pumped 45 billion pounds into the bank in 2008.
Analysts say the recovery from a 1.4 billion pound loss in the first quarter a year ago will show the bank benefitting from reduced losses on bad loans and a decline in the cost of compensating customers for mis-sold loan insurance.
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. But he still has major hurdles to overcome.
Britain's financial regulator said in March 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 must also ask European regulators to extend an end-2013 deadline it set for the bank to sell 315 branches as a condition of receiving state aid. A deal to sell the branches to Santander (SAN.MC) collapsed and RBS is now targeting a stock market flotation in 2014.
Fellow UK lender Lloyds (LLOY.L), also the subject of a public rescue, on Tuesday reported a jump in first-quarter profit, sending shares to a near two-year high and close to the price at which the state could break even if it sold its stake.
But the euro zone's troubles and poor growth across Europe continues to weigh on the financial sector. BNP (BNPP.PA) has been hit by the stagnation of the French economy and renewed concerns over the government debt with which most banks are still loaded after new shocks from Cyprus and Italy.
French banks are mulling staff cuts and branch closures at their retail networks as fee income dries up.
Analysts on average forecast BNP's net income to fall to 1.53 billion euros ($2.02 billion), compared with 2.87 billion a year earlier, according to Thomson Reuters I/B/E/S data.
BNP may give more details on its drive to cut costs and grow in non-euro markets to help rebuild investor confidence. Its shares are down 0.7 percent year-to-date, worse than a 5.1 percent gain for the STOXX Europe 600 banks index .SX7P but better than rival Societe Generale's (SOGN.PA) 2.6 percent drop.
The bank's shareholder structure is also in focus after sovereign shareholders Belgium and Luxembourg said they were open to selling equity stakes held in the bank.
(Reporting by Matt Scuffham and Lionel Laurent; editing by Patrick Graham)