Royal Bank of Scotland today posted a pre-tax loss of £5.2 billion sterling, hit by a £4.6 billion charge for losses on the value of its own debt.
RBS chief executive Stephen Hester admitted 2012 had been a "chastening" year for the bank.
But it managed to report stronger underlying profits, potentially opening the way for the British government to start selling its 82% stake and for payment of a dividend.
RBS was rescued in a £45.5 billion bailout during the 2008 financial crisis and Britain is now looking at ways to sell off its holding as RBS starts to return to financial health. It owns Ulster Bank here.
"The light at the end of the tunnel is coming closer," RBS chief executive Stephen Hester said.
"Our job is to deliver a company that is doing its job well and that other investors will want to invest in." He said the clean-up of the bank should be much more evident into 2014.
RBS said it planned to sell part of its US business Citizens in the next two years and would likely float a batch of 315 UK branches it has struggled to offload.
Like rival Barclays, RBS has been shrinking its investment banking arm. The bank said it would further reduce the "scale and scope" of this business to focus on core domestic customers.
RBS said about £302m had been cut from staff bonuses, clawed back from past awards or to be cut from future payments to account for behaviour related to the rigging of interest rates, for which the bank was fined $612m. It paid a total of £607m in bonuses for 2012, down 23% from 2011.
RBS said it made an operating profit of £3.5 billion last year, up from £1.8 billion the year before and the highest since its bailout in 2008.
Mr Hester said RBS would probably sell about 25% of Citizens through a share sale in New York which would take place around two years from now. The bank said it also expected to float a batch of 315 branches in Britain that had been earmarked for a sale to Santander, which pulled out of the deal in October.
European competition authorities ordered RBS to sell the branches as a consequence of taking state aid. The bank said it expected to ask for an extension to an end of 2013 deadline to shed the branches.
RBS said it had set aside a further £450m to compensate customers mis-sold payment protection insurance, taking its total provision to £2.2 billion. Some £1.3 billion has already been paid out. The bank has also set aside £700m to compensate small businesses mis-sold complex interest rate hedging products.