Bad debt charges fell by 33% to £529m in the UK retail division of Royal Bank of Scotland at the end of 2012.
This figure was down from impairments of £788m at the end of 2011 and was driven by a huge reduction in impairment levels on UK mortgages, which fell to £92m from £182m the year before.
RBS said this was driven by reducing risky lending, a smaller unsecured loan book, lower default rates and higher recoveries, which also drove dramatic falls in bad debt charges on personal loans and cards.
Personal loan impairments fell to £307m for the year ended December 2012, down from £437m the previous year, while card impairments fell to £130m from £169m during the same period.
Despite these improvements, operating profits for the bank’s UK retail division fell to £1.8bn for 2012 after impairments, down from £2.02bn the previous year.
But RBS said the decline in income was partially offset by lower costs and improvements in impairments.
Meanwhile, the bank reported a pre-tax loss of £5.1bn for 2012 after taking a £4.6bn accounting charge for changes in the value of its own debt and setting aside significant sums for customer redress.
RBS set a further £450m aside in the final quarter of 2012 to cover claims for mis-sold Payment Protection Insurance (PPI) claims, taking its PPI provisions to £2.2bn.
A further £650m was set aside to cover mis-selling claims on interest rate hedging products sold to small businesses.
This is on top of the £50m set aside in the second quarter of 2012 to cover mis-selling claims on structured collar products, and a £381m fine paid to UK and US regulators relating to its role in the rigging of the interest rate Libor.
“RBS is coming through an immense and wretched restructuring,” said RBS chief executive Stephen Hester.
“Our target is for 2013 to be the last big year of restructuring. There will be important work still to do, but an increasingly sound base from which to work.”