SHARES in Royal Bank of Scotland closed up nearly five per cent last night after the state-backed lender reported its first quarterly profit since September 2015.

The Edinburgh-based bank beat analysts’ expectations with a £259 million profit for the quarter ended March 31.

Chief executive Ross McEwan repeated the bank’s hope that it will make its first annual profit in more than a decade next year, provided it reaches a settlement with US regulators over mis-selling residential mortgage-backed securities (RMBS), and satisfies state-aid obligations with the European Commission (EC) over its Williams & Glyn network, this year.

But he warned the costs of settling the RMBS claim with the Department of Justice (DoJ) may turn out to be higher than currently forecast.

Meanwhile, the bank said it was on track to deliver cost savings of £750m this year, having cut costs by £278m in the opening quarter. It made no announcement on further branch closures, having revealed last month that it will axe 158 branches in the coming months. But it signalled further closures are inevitable across the sector because of the growing use of digital banking.

Mr McEwan said: “Subject to dealing with RMBS and Williams & Glyn this year, we anticipate being profitable in 2018, and are on course to deliver our targets for 2020.”

He added: “This bank has a very strong core with great potential, and we believe that by going further on the cost reduction and faster on digital transformation, we will deliver a simpler, safer and even more customer-focused bank with [a] compelling investment case.”

Pressed on how confident the bank is over its guidance on returning to profit in 2018, he said: “We are as confident as we can be given those two situations that we have commented on.”

Mr McEwan said the bank had no further update to make on the RMBS case yesterday. The bank set aside a further provision of £3.1 billion in January as talks continue with officials at the DoJ over the claims, which could ultimately cost as much as £9bn.

Chief financial officer Ewen Stevenson admitted the costs could be higher than the bank has so far provided for. He said: “I would continue to caution that we could see further material potential settlement costs for RMBS this year, above and beyond existing provisions.”

Asked whether there is a chance the US case could run into next year, Mr McEwan said: “We are still confident it will happen this year. There may be more money to pay out. We don’t know that until we have gone into discussions with the Department of Justice, but we have warned that there could be substantially more to say.”

On Williams & Glyn, Mr McEwan reported that progress was being made over its alternative plan for the branches submitted by the Treasury to Brussels.

Royal Bank was ordered to offload the 300-strong branch network as a condition of its £45bn by the UK Government in 2008 and 2009, but failed to launch it as a standalone bank and find a buyer for the branches. It announced last month a £750m package of measures to stimulate competition in the small business banking market as an alternative to selling the branches. The EC is currently consulting on the proposals.

Meanwhile, Mr McEwan said the bank was still prepared to go to court to defend itself in a case brought by investors who took part in its 2008 cash call. The bank has now settled with around 90 per cent of the 27,000 claimants and believes it has a strong case if the action from the outstanding shareholders reaches court. The case is due to be heard next month.

As to when the bank expects to begin paying dividends, Mr Stevenson said this will not be until it resolves the RMBS and Williams & Glyn issues, passes a stress test, and returns to profitability. He declined to forecast when that will be.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said Royal Bank had defied expectations in the first quarter but said it was still “too early to pop the Champagne corks”. He said the US DoJ is “likely to play the role of party pooper at some point, by landing RBS with a massive fine.”

Mr Khalaf added: “The ongoing saga of the Williams & Glyn separation is still rumbling on too, and whatever the conclusion, it could end up costing RBS more money.”

Shares closed up 12p, or 4.74 per cent, at 265.4p.