RBS to report profit uplift amid UK share sale hope LONDON (Reuters) - Royal Bank of Scotland (RBS.L) reports third quarter results on Friday amid heightened speculation that Britain could begin selling shares in the part-nationalized bank before the next election in 2015. But compensation pay-outs for mis-sold loan insurance, plus investigations into interest rate rigging and possible breaches of sanctions on Iran still hang over the bank's recovery. Chairman Philip Hampton said last month that RBS is preparing for the British government to start the process of disposing of its 81 percent stake in the next two years although that would likely require it to sell at a loss. Hampton's optimism was fueled by RBS's exit from the government's Asset Protection Scheme (APS), which had been set up to insure its riskiest loans. Its departure from the APS cleared a significant obstacle on the path to recovery although the bank still has several hurdles to overcome. Taxpayers are currently 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. Investec analyst Ian Gordon expects RBS to report a third quarter operating profit of 700 million pounds ($1.1 billion), up from 650 million pounds in the second quarter. The bank is expected to increase the 1.3 billion pound provision it has set aside to compensate customers wrongly sold loan insurance and Gordon forecasts a statutory loss of 1 billion pounds for the period. RBS has endured mixed fortunes in recent weeks. It successfully sold a first tranche of shares in its insurance arm Direct Line (DLGD.L), but days later a 1.65 billion pound deal to sell 316 branches to Spain's Santander (SAN.MC) collapsed. Both disposals were mandated by European regulators as a price of the bank receiving state aid. RBS may now have to ask for an extension to the current 2013 deadline for completing the sale of the branches. RBS will also face questions over the future of its U.S. business Citizens and whether it plans to further shrink the size of its investment bank. The head of the body which manages the government's 81 percent stake in the bank said last month that the bank needed to consider both of those issues. The future of Citizens has been under scrutiny as it does not fit with RBS's narrowed focus on its home market, although Chief Executive Stephen Hester was expected to try to delay any sale until a turnaround of the business was more advanced. Analysts have estimated it could fetch over 9 billion pounds. RBS is under investigation by U.S. and UK authorities over the Libor interest rate rigging scandal and possible breaches of U.S. economic sanctions against Iran. Those issues are threatening to overshadow the turnaround driven by Hester, who said last month there was "about 15 months of heavy lifting still to do" under the bank's recovery plan. $1 = 0.6196 British pounds Reporting by Matt Scuffham; Editing by Rosalind Russell