Bad debts at part-nationalised Royal Bank of Scotland could soar to almost £12 billion this year, the bank said today.
RBS, which is 70-per-cent-owned by the taxpayer, posted loans losses of £2.9 billion for the first quarter of 2009 but directors said full-year bad debts could be "at least" four times as high.
The warning came as chief executive Stephen Hester sought to dampen expectations of a swift recovery, saying he had seen no "green shoots" on sour loans and that this year and next would be "very tough".
The downbeat comments - a day after fellow struggler Lloyds Banking Group said bad debts could jump more than 50 per cent - underlines the growing impact of recession on banks even though the danger of collapse has passed.
RBS posted a pre-tax loss of £44 million as record income driven by its buoyant investment banking business was offset by the group's surge in bad debts and the squeeze of record low interest rates on margins.
After tax, dividend payouts to the Government, and payments to partners on the sale of its Bank of China stake, losses widened much further to £857 million.
Under this measure, RBS posted a UK record £24.1 billion loss last year after writing off more than £16 billion on its disastrous deal for Dutch bank ABN Amro.
Markets had been braced for much worse and shares in RBS soared 14 per cent, but Mr Hester warned against over-exuberance - saying the bank's path back to health "will take years not months".
"I think it is very important that people do not get carried away in the short term with over-optimism," he said.
The chief executive, who is undertaking a mammoth restructuring of the bank to shrink the RBS and reduce its risks, also declined to predict when the bank would return to profit.
"It's not really in our hands, it's in the hands of the economy and what it does to our loan books," he said.
The uncertainty of last year's banking crisis had given way to a "severe but recognisable" recession, Mr Hester said.
The figures showed investment banking impairments reached £1.37 billion, while commercial and retail banking loan losses more than doubled to £1.46 billion.
A further £2.1 billion hit from credit market losses sent total impairment to almost £5 billion.
The £2.9 billion in bad debt charges compared with just £656 million a year earlier in the tougher economic climate for both businesses and consumers. Impairment charges as a percentage of its loans rose to 1.33 per cent in the first quarter.
RBS is insuring more than £300 billion of toxic debts in a taxpayer-backed insurance scheme but is liable for the first £19.5 billion of any loss.
The bank said it expected up to 85 per cent of the impairments and credit market losses announced today to count towards its first loss - meaning the bank will already have burnt through about £4 billion of its buffer.
Last month RBS announced up to 9,000 job cuts - half of which will fall in the UK - bringing the total axed in December to more than 15,000.
Mr Hester, who completed the clear-out of senior directors from former chief executive Sir Fred Goodwin's regime this week, said more cuts were on the way, but declined to give further details.
"We would expect the overwhelming majority of what we need to do to be carried out over this year and next, but sadly we're not finished yet," he said.
Richard Hunter, head of equities at Hargreaves Lansdown, said: "RBS is a radically different organisation from just a year ago. A 70 per cent-plus gain in the share price over the last three months underlines investors' new found trust in management and the bank's future.
"Nonetheless, management itself is stressing the magnitude of the task ahead, with the bank's future being closely tied to that of the UK economy."