Royal Bank of Scotland faced anger over bonuses as it revealed a £576 million handout to staff despite slumping into the red by £8.2 billion and admitting losses had now reached £46 billion over the past six years.
Chief executive Ross McEwan pledged to rebuild trust in the group with a mammoth overhaul that will slash costs by £5 billion within three years and see it shrink from seven divisions to three.
He warned of further job losses, with back-office staff expected to be hit in particular, but said the moves were necessary to nurse the group back to health and create a "smaller, simpler and smarter" bank.
" We cannot spend money as though we are in profit when we have lost £46 billion in six years," he said.
Shares tumbled by 8%, wiping around £1.7 billion off its stock market value after the full scale of its losses were revealed.
But the taxpayer-backed lender still shared out more than half a billion pounds in bonuses, including a £237 million windfall for its investment bankers, paying out £23,010 on average for each employee in the markets division.
Mr McEwan defended the bonus pot, which was 15% lower than in 2012, saying: "We need to keep people engaged in the job they do all day every day - from the high street to those in our markets business in the United States.
"We need to pay these people fairly in the marketplace to do the job."
RBS, which is just over 80%-owned by the Government, has already sought to deflect flak over bonuses by scrapping 2013 payouts for its eight-strong executive committee in the wake of recent hefty provisions, while Mr McEwan has already said he would not take a bonus for 2013 or 2014.
But it failed to calm fury over banker pay, given the mammoth losses and as it remains under investigation over allegations of unscrupulous treatment of small firms.
The group is facing a series of investigations after a shocking report from Government adviser Lawrence Tomlinson accused RBS of driving firms to collapse to profit from their property assets.
Trade union Unite said the bank's bonus revelation was an "astonishing betrayal".
Unite national officer Rob MacGregor said: "This is a state-sponsored grab by greedy senior bankers."
Business Secretary Vince Cable said: "If RBS is to become the sensible, boring bank envisaged by the chief executive, the bonus culture will have to go."
RBS said it was still in discussions with UK Financial Investments - the body that manages Government stakes in banks - over whether to ask shareholders for permission to pay bonuses of up to double an employee's salary for 2014 onwards, the maximum allowed under new EU rules to cap payouts.
It is also said to be planning to follow the lead of rivals such as Barclays and HSBC by introducing monthly allowance payments to sidestep the rules further and boost potential bonuses.
Mr McEwan said no decisions had been made, adding only that the group must be "competitive in the marketplace".
Chris Leslie, shadow chief secretary to the Treasury, repeated calls for Chancellor George Osborne to veto any request by RBS to pay bonuses worth more than 100% of salary.
He said: "Taxpayers will be incredulous that such large bonuses continue to be paid out at a time when huge losses are being made.
"At a time when ordinary families are facing a cost-of-living crisis and bank lending to business is down, it cannot be justified."
The bank's results confirmed there was no hope of an imminent return to the private sector as it showed losses widening significantly from £5.3 billion in 2012 after taking a £3.8 billion provision for a string of scandal-related charges and a £4.8 billion hit for the creation of an internal "bad bank".
Mr McEwan said RBS was "not yet strong enough" to be privatised.
He said: " The journey to recovery and renewal is harder than was first anticipated back in 2008. There is no point avoiding this inconvenient truth."
The bank's losses lay bare the scale of the turnaround job that lies ahead and come in stark contrast to the fortunes of fellow bailed-out player Lloyds Banking Group, which is preparing for a further sale of Government-owned shares after it returned to bottom line profit for the first time in three years in 2013.
RBS has not paid a dividend since 2007 and has failed to turn a profit since its £45.5 billion bail-out at the height of the financial crisis.
Mr McEwan admitted the group was the "least trusted bank in the least trusted sector of the economy", but said his overhaul was designed to turn its reputation around.
It will axe teaser rates that lure in new customers and offer the same deals to both new and existing customers, while also rolling out a team of business banking representatives in branches on the high street under plans to improve its banking service.
The group's structure will be simplified into just three units: personal and business banking; commercial and private banking; and corporate and institutional banking.
Its vastly-reduced investment banking markets business, where it has been slashing jobs, will be merged into the corporate and institutional banking arm.
Mr McEwan said the days of seeking to become the biggest bank in the world were "well and truly over".
This will involve " difficult choices on jobs in the years ahead", although he said it was too early to comment on numbers.
Recent reports have suggested its 120,000-strong workforce could be reduced by around a quarter, although much of this is thought likely to come from plans to sell off businesses and exit from many of its riskier investment bank activities, as well as much of its overseas operation.
The planned flotation of its US retail bank Citizens will remove some 18,500 jobs, while further reductions will come from its initial public offering of the Williams & Glyn's branch network, which employs around 4,500 staff.
RBS signalled its troubled Ulster Bank arm in Ireland and Northern Ireland will be retained, but will be overhauled and closer aligned with the core bank.
Last night the group also announced it will sell its remaining stake in Direct Line Insurance.
The bank floated the owner of Churchill and Direct Line in October 2012, initially placing a 30% chunk of the group and since selling down its stake further.
RBS must offload the entire company by the end of this year as part of conditions of its state bailout .
Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said the bank's results "make for grim reading as RBS continues to wrestle with the legacy of its troubled past".
The bank's losses come after further charges for scandals and litigation, including £900 million in 2013 for payment protection insurance (PPI) mis-selling, bringing its total so far to £3.1 billion.
It also set aside another £550 million last year for mis-selling of interest rate swaps to small businesses, making a total of £1.25 billion.
But the group said that, excluding the £4.8 billion costs of creating an internal "bad bank" to hive off troubled assets, it made an operating profit of £2.5 billion last year, 15% lower than in 2012.
The Treasury welcomed the new strategy unveiled by RBS.
A spokesman said: "The Chancellor said last year that he wanted RBS to be a bank that is focused on lending to British businesses and families.
"The plan, announced by Ross McEwan and the board today, delivers that vision and is further evidence of RBS's new management getting to grips with the problems of the past and taking the bank in its new direction."
Mr McEwan denied heavy involvement by the Treasury in his strategy overhaul, insisting: "This is our plan - we own it."
RBS remained on the sid-lines over Scottish independence, despite Standard Life's announcement that it was considering moving some of its operations out of the country as part of contingency plans being lined up.
Mr McEwan said the bank was looking at plans in the event of a vote in favour of Scottish independence, but said: "Let the Scottish people decide on this."
In a presentation to staff, customers, business and consumer groups, Mr McEwan said: " We haven't made money for six or seven years, and that sticks, that we pay bonuses and we don't make money.
"But I don't want our people looking across the road and saying 'I'd get a lot more pay over there, for doing the same thing'."
He admitted there had been a "dislocation".
"We need to bring it back and it is being brought back."
He said the launch of the bank's strategy update marked an important day for the group.
"What we need to do in my era is to turn this into a trusted bank again. That's going to take time, but we need to start as quickly as we possibly can.
"I want to be the best bank, not the biggest, I have no desire to be the biggest. As we become the best, we may become the biggest, over time."