KBC Bank Ireland has posted an annual loss for 2012 of €306m, up from €269m in 2011.

The bank said the loss, while disappointing, was not unexpected due to the challenging credit environment in Ireland.

The bank, which is owned by Belgian lender KBC, said its loan impairment costs last year rose from €510m to €547m.

But it noted that the pace of increase in both commercial and residential mortgage arrears continued to slow last year.

KBC said that 2012 was a year of ''continued unacceptably high credit costs'' for the bank as those mortgage arrears in its residential loan book continued to increase.

It said that collateral values in its commercial banking book were impacted by continued funding illiquidity and asset deleveraging in the Irish market.

But it said that most of its customers continue to repay their loans in full. It added that it is working day by day to increase the number of customers availing of the restructuring initiatives offered by the bank.

During the year the bank increased its workforce from 521 to 650 as it continued its retail expansion. It also reported an increased level of deposits to €2.1 billion and said it attracted an extra 22,000 new retail customers during the year.

However, the bank's overall loan portfolio fell to €16 billion from €16.7 billion in 2011 due to muted economic activity and limited new business demand, as well as increased loan repayments.

John Reynolds, chief executive of KBC Bank Ireland, said that the results for 2012 represented an ''unsatisfactory business performance.''

''We had signalled that we expected conditions to remain challenging in 2012 and this proved the case. However, we anticipate increasing economic stability will lead to more sustainable conditions in 2013 with the bank hoping for reduced credit cost in the year ahead,'' he added.

He also said the bank will open new branches in Cork, Limerick and Galway this year.

Mr Reynolds also said that the bank want to keep its 10% share of the country's mortgage market while significantly increasing its broader retail presence.

''KBC Group is a strong and profitable entity and is committed to developing its business in Ireland. We recognise the opportunity in Ireland's recovery and are positioning to play our part in that recovery, despite the challenges that remain as Ireland seeks to develop a more sustainable banking sector,'' he added.