Royal Bank of Scotland's high bad debt charges in Ireland and a drop in investment banking income overshadowed its return to profit in the final months of 2010.
Stephen Hester, chief executive of the majority nationalised bank, said on Thursday that his turnaround plan was ahead of target.
But he also said political pressures, such as calls by politicians to curb bonuses, could hold back recovery efforts as the bank was used as a "political football".
"It's a tough thing for us, it can feel pretty beleaguered working at RBS with external and internal pressures, that's one of the handicaps we work with," Hester told reporters.
RBS, rescued with 45 bln pounds of taxpayers' cash during the financial crisis, posted a loss of 1.1 bln pounds for 2010, largely driven by losses at its Ulster Bank arm.
Last year, it made a loss of 3.6 bln pounds.
It scraped back into a slight profit in the final months of 2010 but impairment losses during the fourth quarter rose to 930 mln pounds from 782 mln in the previous quarter.
Investors were also disappointed by a drop in profits at RBS' lucrative investment banking arm.
"You can't expect miracles overnight. There are still a number of doubtful areas going forward but eventually the company will get back to basics," said Cavendish Asset Management fund manager Paul Mumford, who holds 3.25 mln RBS shares.
RBS shares fell 4.3% to 45.32 pence by 1614 GMT, underperforming a weaker European bank index and leaving the taxpayer sitting on a paper loss of over 3 bln pounds.
The government owns an 83% stake in RBS, bought at an average price of around 50 pence.
IRISH WOES
Britain plans to sell its stakes in RBS and Lloyds, but Hester said that was unlikely to start before the Independent Commission on Banking (ICB) – set up to examine a potential break-up of the UK's top lenders — publishes its final report in September.
"The ability of the government to sell shares to redeploy to other more productive areas will be a symbol of recovery and help RBS," Hester said.
Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani this week said Qatar was open to buying stakes in both RBS and Lloyds.
As a result of its government bailout, RBS was ordered by European regulators to dispose of a range of assets by 2013, including its insurance division, which it aims to sell or list on the stock market during the second half of 2012.
The "core" RBS business — what will be the new RBS once its restructuring is completed — made an operating profit of 7.4 bln pounds, delivering a return on equity of 13%.
But the "non-core" business, or assets that are being sold and run down, made a loss of 5.5 bln pounds.
The bank incurred other one-off charges, including a 1.1 bln pound charge for using the government's asset insurance scheme.
RBS said it reduced non-core assets by 63 bln pounds to 138 bln during the year, ahead of target.
Revenues at Global Banking and Markets, the investment bank arm, dropped 28% on the year to 7.9 bln pounds, hit by a slowdown in capital markets activity in the second half. Staff costs at GBM fell to 2.7 bln pounds from 2.9 bln, after it pledged to keep bonuses under 950 mln pounds.
Average pay for its 18,700 GBM staff was down 11% to 144,012 pounds, although pay rose to 34% of revenue from 26% in 2009. Hester said he would take up his 2 mln pound bonus.
Losses on Irish bad loans almost doubled to 3.9 bln pounds last year, including loans in the non-core unit, and the bank warned losses there would remain high in the first half of this year. Exane BNP Paribas analyst Ian Gordon said he did not expect Ulster Bank to return to profit before 2014.
