PART-NATIONALISED Royal Bank of Scotland today said its recovery was ahead of schedule as it slashed annual losses by more than half in 2010.

RBS, which is 83% owned by the taxpayer, posted losses of £1.1 billion in 2010 against a £3.6 billion loss in 2009.

The bank’s improvement came as it clawed its way out of the red in the final three months of the year, with £12 million in profits, thanks to sharply lower losses on loans turned sour.

Stephen Hester, chief executive of RBS, said: "Two years on from the global financial crisis, RBS’s recovery is ahead of schedule."

He added the group was aiming to make further headway this year during its five-year turnaround programme.

"We have much work still to do and there are significant obstacles still to overcome," he said.

On an underlying basis, it clawed its way out of the red with operating profits of £1.9 billion, compared with losses of £6.1 billion in 2009.

Mr Hester confirmed he would be taking his £2.04 million deferred shares bonus for 2010, which was announced at the time of the Project Merlin deal struck with the Government on lending and banker handouts.

Its investment bankers within Global Banking and Markets (GBM) will share a bonus pool of less than £950 million, lower than the £1.3 billion in 2009.

RBS revealed today the so-called compensation ratio for investment bankers - given as a percentage of revenues - rose last year to 34% from 26%.

But it said this rose as it took on more staff and saw revenues in GBM fall after a unusually strong year in 2009.

Pay per head dropped in the division and Mr Hester said while the group had a duty to the taxpayer to keep staff costs down, it was a "handicap" for the firm.

"It can feel pretty beleaguered working at RBS with internal and external pressures - it’s one of the handicaps we work with," he said.

The bank also agreed with the Government to lend "at least as much" to small businesses in 2011 as in 2010, with further lending set aside if demand increases.

It is on track for gross lending of £30 billion to small businesses in the current year to the end of February.

The bank was helped by a 33% drop overall in bad debt losses in 2010 as the UK economy recovered.

But its Ulster Bank subsidiary suffered a £1.2 billion charge in the fourth quarter as it was hit by the economic crisis in Ireland.

Mr Hester said the recovery efforts boosted hopes that the taxpayer will be able to sell off its stake.

He said: "The opportunity to sell part of the UK Government’s shareholding becomes increasingly visible and appealing - a ’win- win’ for the taxpayer and for RBS.

"That moment will be an emblem of our progress and, in some respects, of progress in the wider UK."

RBS said the group would have made bottom line profits, had it not been for the fees paid to use the Government’s asset protection scheme (APS), which sees it pay annual charges for insuring against losses on billions of pounds of risky assets.

There had been hopes RBS would exit the scheme early, but Mr Hester said today it was unlikely to withdraw earlier than planned, at the end of 2012.

The group hopes to sell its ailing RBS Insurance arm in 2012.

The division, which includes major insurance brands such as Direct Line and Churchill, made losses of £295 million as it was knocked by soaring injury claims and a £100 million additional weather-related impact.

RBS shares fell 2% today.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said while the group’s recovery remains on track "the overall picture reflects a loss".

"In all, RBS is clearly making progress from its former woes, but remains a group in the grip of transition."

"Even though the strategy has been laid out and is being slowly followed, less patient investors will look for more immediate prospects elsewhere in the sector."