* Q1 net 1.2 bln stg vs company poll consensus of 200 mln
* No plans to settle on 2008 rights issue
* Will pay to retain staff affected by bonus cap
* Taxpayers still sitting on 14 billion pound loss
* Shares up 12 percent (Adds CEO comments on 2008 rights issue lawsuits, rewritesfirst paragraph, writes through)
By Matt Scuffham and Steve Slater
LONDON, May 2 (Reuters) - Royal Bank of Scotland (RBS) trebled its profit in the first quarter, beatinganalysts' expectations and handing a boost to new ChiefExecutive Ross McEwan as he looks to turn around thegovernment-controlled bank's fortunes.
The bank reported a net profit of 1.2 billion pounds ($2billion), up from 400 million the year before, benefiting fromimproved cost controls and a reduction in losses from bad loans.
The performance marked only the sixth occasion RBS hasreported a quarterly profit since Britain pumped 45 billionpounds into the bank during the 2008 financial crisis, leavingit with an 81 percent shareholding, and contrasted with an 8.7billion pound full-year loss in 2013.
Analysts had forecast a profit of 200 million pounds,according to a poll of eight analysts provided by the bank.
"Today's results show ... RBS will be a bank that does agreat job for customers while delivering good returns for ourshareholders," said McEwan, who took over from predecessorStephen Hester last October.
However, McEwan added that RBS still has "a lot of work todo and plenty of issues from the past to reckon with".
Its shares, which had fallen earlier this year to an eight-month low, jumped more than 12 percent to their highest sincelate February. But taxpayers are still sitting on a loss of 14billion pounds on their holding, while banking and politicalsources say a return to full private ownership may take up tofive years.
The results, which come a day after fellow bailed-out bankLloyds also reported improved earnings, reflect theimpact of RBS's decision last November to create an internal"bad bank", designed to fence off its riskiest assets andleaving the rest of the bank in a better position to lend.
The results also include no new charges for past misconduct, such as the mis-sale of loan insurance in Britain and possiblemis-selling of U.S. mortgages.
RBS had said in January it would take a 3 billion poundscharge in its 2013 results to cover the cost of these misdeeds,resulting in its top executives not receiving any bonuses forthe past year.
STRONG DEFENCES
McEwan said on Friday the bank did not intend to settleearly with investors who claim they were misled over its 12billion pound rights issue of new shares six years ago and aresuing it for billions of pounds.
"We understand their issues, but we believe we have strongdefences to the claims and that is why we intend to defend thesevigorously. That's the reason why these things will be set outin court rather than in an early settlement, we have a gooddefence on this," he said.
Hundreds of investors, including some of the bank's biggestinstitutional investors, claim they were misled by RBS over itsmassive 2008 rights issue, raising the prospect of ahigh-profile court battle next year. RBS said on Friday afurther claim was filed in the High Court in London on April 28.
RBS is also among several major banks assisting regulatorsaround the world investigating allegations of collusion andprice-rigging in the global currency market. It said the timingand amounts of further settlements were uncertain.
The bank said an improvement in economic confidence inBritain had continued and it expected a modest increase over therest of the year in its net interest margin, a key measure forbanks which reflects the difference in the rates at which itlends and pays out to depositors.
EARNINGS POWER
"We believe the bank remains the best way to play the UK(economy) over the next two years. The first-quarter resultsconfirm the underlying earnings power of the franchise," saidanalyst Chirantan Barua at brokerage Sanford Bernstein.
RBS said its Irish division Ulster Bank returned to profitfor the first time in five years, swinging to an operatingprofit of 17 million pounds from a 1 billion pound loss in thefourth quarter as losses on bad loans tumbled.
McEwan said he wants to achieve economies of scale inIreland and would be happy to work with other parties to achievethat. He said the bank would update on its plans in the summer.
RBS also said income from its investment bank is expected tobe lower in the remainder of the year, in line with widerindustry trends. RBS has shrunk its investment bank dramaticallyto satisfy lawmakers who want it to focus on lending to Britishhouseholds and businesses.
The bank's actions remain under scrutiny by lawmakers andthe government last week blocked its plans to pay bonuses worthdouble an employee's fixed salary, saying this could not bejustified while RBS remained a majority publicly-owned bank.
McEwan said the intervention will mainly affect people inits investment bank, its U.S. retail business Citizens and inits restructuring arm.
"I want to make sure we're in a position to pay those peopleso we can retain them for the value of this business," he said.
RBS said its core Tier 1 capital ratio - a key measure of abank's financial strength - increased to 9.4 percent from 8.6percent at the end of 2013 and it is on track to achieve itstarget of 11 percent by the end of 2015, and 12 percent or aboveby the end of 2016.
"All trends for this bank are going in the right direction,notably capital and impairments," said analyst Joseph Dickersonat brokerage Jefferies. "Further, RBS is generating decentunderlying returns."
($1 = 0.5919 British Pounds) (Editing by David Holmes)
Lloyds (LLOY)