Royal Bank of Scotland posted a £3.6 billion loss today but said it will still pay about £1.6 billion in bonuses to its staff as it walks a "tightrope" between public outrage and business demands.
The 2009 shortfall at the part-nationalised lender was better than expected and shares surged around 7% as a result.
The figure compares with a record £24.3 billion deficit the year before - the largest in UK corporate history - as the bank was sucked into the maelstrom of the financial crisis.
RBS, which is now 84% taxpayer-owned after a series of bail-outs, has attracted huge controversy about the level of planned bonuses at its investment arm.
UK Financial Investments (UKFI), the body set up to manage the Government's stakes in banks, has given its blessing to the payments, understood to be around £1.3 billion for the investment banking division and about £300 million elsewhere in the business.
Chief executive Stephen Hester said the level of the bank's rewards pot was set by the board and was not "imposed upon us from outside", although he added that there had been a need to balance external pressures with the need to retain key workers.
"I do believe because of the nature of the tightrope that we are walking we will continue to lose staff," he said.
And he has said he believes the top-performing staff who left the company in last year's exodus could have added £1 billion to profits.
Mr Hester said the intense levels of scrutiny over the issue of remuneration were "crosses we have to bear".
The RBS boss, who waived his own bonus for 2009, said he had done so to try to take the heat out of the bonus issue.
Rewards will be paid in shares rather than cash and this could be subject to clawback at a later date. The only cash bonuses will be paid to those earning under £39,000, who will get a maximum of £2,000 in cash.
RBS said it expects to make a £208 million contribution to the Treasury bonus tax.
Staff costs represented 27% of income at its investment arm, Global Banking & Markets (GBM), and Mr Hester said this would have been around 80% for the previous year because of the sharp drop in income.
A spokesman for the Treasury said RBS is "leading the world in pay restraint among banks".
"The Government supports Stephen Hester and the staff at RBS in their work to rebuild the bank, and deliver more lending to UK businesses and households," he said.
"Because of the Government's role as an active shareholder, they will pay no cash bonuses, defer their bonuses over up to five years, and pay the lowest remuneration ratio of any investment bank. We also welcome Stephen Hester's decision to waive his bonus."
He also stressed the need to get the bank back on its feet to return the Government's investment.
RBS is the second big UK bank to report 2009 results, after Barclays announced record profits of £11.6 billion.
Mr Hester said the better-than-expected loss was driven by an improved performance from the investment banking division in the last three months of the year, while there was also some upturn in the retail and commercial arms of the business as net interest margins increased.
The group's core business - the activities that will stay part of the organisation after the restructuring plans - saw profits rise from £4.4 billion in 2008 to £8.3 billion last year.
This was mainly due to GBM swinging to a profit of £5.7 billion, from a £1.8 billion loss in 2008.
The UK retail division, which includes the NatWest brand, saw operating profits of £229 million in the year, £494 million lower than in 2008, as the deteriorating economy saw loan impairments rise by £660 million.
RBS said there were signs that conditions started to stabilise in the second half of the year.
The insurance division, which includes the brands Direct Line, Churchill and Privilege, suffered a steep profits fall to £58 million, from £584 million in 2008.
It said this was because of the rising costs of bodily injury claims and said "significant price increases" were put in place towards the end of the year to mitigate this.
Net claims were 20% higher than in 2008, driven by a £448 million increase in injury claims as well as by adverse weather experienced in the fourth quarter.
Bad debt and other impairment charges across the group increased to £13.9 billion from £7.7 billion the previous year.
The bank said there were signs that its level of soured loans could have reached its peak, with the fourth quarter looking less dire for corporate clients.
But it warned that the financial circumstances of many consumers and businesses remain fragile and that current economic uncertainty "could expose some customers to further difficulty".
The bank said it is in discussion with the Government about altering its lending commitments to "reflect the economic circumstances" over the next year.
As part of its bail-out terms, the firm agreed to make an extra £25 billion available to customers in loans - £9 billion for mortgages and £16 billion for business lending.
Chairman Philip Hampton said the group believed it was "fulfilling both the letter and the spirit" of its commitment, but said that while it had achieved more than the required mortgage lending level, loans to businesses had undershot the target.
The firm said it was on course to surpass its commitment to lend to householders as competitors have withdrawn from the market, allowing it to increase its share. Net mortgage lending over the year was £11.8 billion.
But corporate lending has been tougher to increase as fewer foreign players exited the market and "demand has been weak in the teeth of recession".
Mr Hester said he was "cautiously positive" on the year ahead but the firm is still expected to be dragged into loss for 2010, before returning to profit the following year.