Royal Bank of Scotland's chief executive Stephen Hester said his turnaround plan was "ahead of schedule" despite full-year losses coming in significantly higher than expected.
The part-nationalised bank cut full-year losses from £3.6bn in 2009 to £1.1bn last year following a strong performance from the retail banking arm, a fall in bad loan provisions and after off loading assets. Analysts had, however, expected losses of closer to £700m and shares in the banking group dropped over 3 per cent at one stage yesterday.
The miss was caused by the cost of RBS's participation in the Government's asset-protection scheme, bad debt charges in its Irish operation and a weaker than expected performance in investment banking.
Without the cost of asset protection, the losses would have been just £9m, the bank said. Analysts were also pleased the group swung into a profit of £12m in the last quarter, from a loss of £765m a year earlier.
Richard Curr, an analyst at Prime View, said: "Although the £1.13bn loss is still worse than some analysts had expected, there was a move into profit during the fourth quarter which is no doubt an encouraging sign, and all the time the 'toxic' assets are becoming less toxic as the economy improves."
But he added that the bank was struggling with the annual bill for subscribing to the asset protection scheme, and "until an investor such as the Qatar state steps up to the plate to buy the Government stake, RBS as a listed entity will always be effectively boxing with one hand tied behind its back". Qatar's prime minister Sheikh Hamad bin Jassim bin Jabr al-Thani said this week that the country was open to buying stakes in RBS and fellow bailed-out bank Lloyds Banking Group.
RBS is two years into a five-year plan to overhaul its business and "restore the group to good health". Mr Hester said: "Two years on from the global financial crisis, RBS's recovery is ahead of schedule," before adding: "We are continuing with the task of stripping away the risks that weakened RBS and nearly brought the bank down."
Income at the group rose a tenth in 2010 to £32.6bn, while the funds set aside for bad loans fell a third to £9.3bn. However, the losses mounted at RBS' Ulster Bank to hit £761m. The group expects further losses this year with no turnaround before 2014.
There were also further problems at RBS Insurance, which slumped to its fourth successive quarterly loss as the adverse weather claims bit. Mr Gordon added: "Speculation of any early sale appears highly premature."
Ian Gordon, an analyst at Exane BNP Paribas, released a report into RBS last week called "Take the money and run" which said the stock's outperformance so far this year was unsustainable. After reading the full-year numbers yesterday, Mr Gordon said: "Our advice to investors is to keep on running."
He said: "It would be churlish not to recognise the solid underlying progress being made by the new RBS management team, but the losses continue to mount and market expectations for 2011/12 still appear too frothy."
The chairman Philip Hampton said 2010 had been a "step change in our overall financial performance," before adding: "We are still a good way from where we want to be in terms of our performance but 2010 represents another big stride towards that goal."
RBS by numbers
£1.13bn RBS's loss during 2010
£950m The value of the bonuses payable to RBS investment bankers
£2.04m Chief executive Stephen Hester's share of the bonus pot
83% The proportion of RBS owned by taxpayers
45.7p RBS's closing share price last night, compared to an average price paid by taxpayers of 50.2pReuse content