Lloyds Banking Group lost £3.5bn last year, but the taxpayer-owned bank said it was in a "much stronger position" than it was 12 months ago.
Its chief executive, Antonio Horta-Osorio, cautioned that 2012 would be very challenging "with a subdued economy, continued, high-regulatory scrutiny and political uncertainty relating to the banking sector".
Mr Horta-Osorio, who took eight weeks' sick leave with extreme exhaustion at the end of last year, once again said the bank would not hit some of the targets he had set for 2014 because of the slowing economic backdrop.
"This is not a profits warning," he declared. "And we have identified an extra £200m of cost savings which will take the total savings to £1.7bn by 2014."
Lloyds said it did not expect the extra savings to come from more job cuts on top of the 15,000 it announced in the autumn. It said 3,700 of those involved had left the bank already.
But David Fleming, of the trade union Unite, said: "28,000 totally innocent Lloyds Banking Group employees have lost their jobs due to the poor management of this finance institution. It is vital that Lloyds stops attempting to make scapegoats out of its workforce to make short-term cost savings. Instead they must recognise the ongoing commitment of those who day in, day out, deliver world-class customer services on their behalf, not simply rewarding the city bankers."
Lloyds' annual loss compares with a £281m profit made in 2010, and comes after it took a £3.2bn hit on mis-selling payment protection insurance. That was the highest cost for any UK bank and was a decision taken by Mr Horta-Osorio after he took over from Eric Daniels as chief executive last year.
The bank's total income fell by 17 per cent to £20.8bn. Bad debt provisions declined 26 per cent to £8.1bn, with Ireland – much of it inherited from HBOS, which it rescued during the financial crisis – accounting for £3.2bn of that. Lloyds said it had paid back £97bn of cheap facilities from governments and central banks last year, reducing the total to £24bn. It has repaid all the money it took under the Bank of England's special liquidity scheme.
Its total bonus pool fell by 30 per cent to £375m, and Lloyds said that senior executives' bonuses would be 50 per cent lower than in 2010. Mr Horta-Osorio has already said he will not take a bonus this year after being off sick, while Lloyds is also looking to claw back £1.5m of earlier executive bonuses – including £580,000 from the former chief executive Eric Daniels – because of its PPI mis-selling.
Bonus pools at RBS and Barclays were £785m and £2.2bn respectively.
Mr Horta-Osorio said that disposal of just over 600 branches as ordered by the European Commission under its state aid rules was "progressing well." The Co-op Bank is the exclusive bidder with an offer of about £1bn, and he expects the deal to complete this year.
Richard Hunter, the head of equities at Hargreaves Lansdown stockbrokers, said the bank's outlook comments "provide little reassurance, with the company predicting a similarly tough year ahead as they continue to concentrate on tidying up the balance sheet".
Shares in Lloyds closed down 0.845p at 35.73p yesterday.
George Osborne's target of raising £2.5bn through the UK bank levy could be under pressure after Lloyds yesterday became the third of the big banks to say it paid less than the City expected.
Lloyds' share of the levy was £189m, Barclays paid £325m, Royal Bank of Scotland £300m and HSBC has been suggesting it will have paid £380m when it reports on Monday.
That is a total of £1.2bn or just under half the Chancellor's target. He has already tweaked the levy up from 0.075 to 0.088 per cent in the autumn because the banks had reduced the size of their balance sheets faster than expected.