Part state-owned British bank Lloyds pushed back key targets of its turnaround plan and warned a tough economic outlook would hit revenues this year after it plunged to a 3.5 billion pound ($5.5 billion) loss in 2011.
Lloyds, 40% owned by the government after a state bailout during the 2008 financial crisis, said on Friday it no longer expected to meet goals to boost income and achieve a return on equity of over 12.5% by 2014, although it added its "medium-term" recovery plan remained on track.
Banks across Europe have been posting billions of dollars in losses as the euro zone sovereign debt crisis has eroded the value of their government bond holdings and hit their bond trading businesses, and as they strive to meet tough new rules aimed at preventing a repeat of the 2007-9 banking crisis.
Rival Royal Bank of Scotland, 82% owed by the British government after a similar bailout in 2008, on Thursday reported a 2011 loss of about 2 billion pounds.
"We expect the external environment to remain challenging in 2012, with a subdued economy, continued high levels of regulatory scrutiny and political uncertainty relating to the banking sector, and the continued potential for downside effects from financial market volatility and instability in the euro zone," Lloyds Chief Executive Antonio Horta-Osorio said.
Britain hopes to sell back its RBS and Lloyds stakes to the private sector, but the timing remains uncertain due to the banks' ongoing problems, with some analysts speculating the government may have to sell some of its shares at a loss.
Lloyds, Britain's biggest mortgage lender, forecast revenues would fall further this year, after dropping 10% in 2011 to 21.2 billion pounds.
Its banking net interest margin would drop to near 1.93% after falling 14 basis points to 2.07% in 2011 due to high funding costs, it added.
The bearish outlook sent Lloyds shares down by 1.5% to 36.02 pence in mid-morning trade, making the stock one of the worst performers on Britain's benchmark FTSE 100 index.
The British taxpayer effectively acquired its Lloyds stake at an average price of around 63 pence, which means that Britain is currently sitting on a 10 billion pound loss after pumping in 20 billion pounds to save the business during 2008 crisis.
"Following on from RBS, Lloyds is another work in progress, making some headway but still with much to do," said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers.
375 MILLION POUNDS FOR BONUSES
Lloyds, which made a profit of 281 million pounds in 2010, took a 3.2-billion-pound hit in 2011 to compensate customers for the mis-selling of payment protection insurance, which typically covers loan repayments if customers fall ill or lose their jobs.
Banks have been forced to pay out billions of pounds in compensation after a regulatory investigation ruled the policies were often sold to people who would not have been able to claim.
Lloyds' annual results presentation was the first since CEO Horta-Osorio took nearly two months off work with a fatigue-related illness at the end of 2011, which raised doubts over whether or not he could cope with the job.
Horta-Osorio returned to work in January and has since streamlined the bank's management structure to ease his workload..
Last year, Horta-Osorio set out a restructuring plan that would see Lloyds axe 15,000 jobs and halve its international presence.
He said on Friday the bank was making progress, and annual cost savings from the overhaul should hit 1.7 billion pounds, 200 million more than expected
Losses on bad debts fell 26% year-on-year to 8.1 billion pounds in 2011, which included 3.2 billion pounds of losses on Irish loans.
Horta-Osorio said impairments should fall by about another quarter this year, signalling a fall of almost 2 billion pounds, which was also better than analysts had expected.
Lloyds said it would pay out 375 million pounds in bonuses for 2011, down 30%. The average bonus was 3,900 pounds for each staff member, down 24%.
While pay is less of an issue at Lloyds, as it does not have a large investment banking operation, all banks are under pressure to cut pay after a public backlash over bonuses.
Lloyds added it was making good progress in its plans to sell some 630 retail bank branches to British conglomerate The Co-Operative Group, although it has kept open the option of floating off the branches if fails to agree on a sale.