ROYAL Bank of Scotland chairman Sir Philip Hampton has said 2012 was a "chastening year" and admitted his "frustration" that fresh scandals and failings have continued to eclipse the bank's path to recovery.

Sir Philip's recent disclosure that he expected RBS to be ready for privatisation within a year, prompting a slap-down from the Government, was echoed at yesterday's annual meeting by chief executive Stephen Hester, who said returning the bank to normality would be "substantially complete as we go through the next year".

Mr Hester said the bank had slashed £900 billion from its balance sheet and now had an excess of customer deposits, adding: "One of our biggest business problems now is how to find sensible lending opportunities to use these deposits for. Our capital ratios are transformed but we probably have another 18 months or so to get them in the final shape that we and our regulators want."

The chairman said RBS was "doing more than our share" of lending to support the economy, making one-third of SME loans by value in a sector where its UK market share was only 24%. But he said SME loan applications were down 19% last year, 43% of SME overdrafts worth £4bn was undrawn, and £35bn of undrawn facilities remained available to bigger companies.

Sir Philip told shareholders that the bank had "worked with regulators to put right past mistakes, particularly the Libor and mis-selling problems" and had also faced "the consequences of a big IT failure" in 2012. Answering shareholder Malcolm Hill, Sir Philip said it had been "disappointing how many skeletons have come out of the cupboard" since 2009, adding: "I think that we are through the worst, there isn't anything major on the horizon – but I might have made that statement two years ago."

To a shareholder complaint about executive pay levels, and a "cosy" relationship with non-executives, Sir Philip said: "Very few of our top people have had a pay increase in recent years, we have almost frozen basic pay ... I absolutely refute the notion there is any cosiness, we have extremely rigorous and long discussions about what non-executives and executives get paid and what levels bonuses are, and I think over time a correction is taking place."

The chairman said the bank had "led the sector in most aspects of pay and reward", and "changed the incentive structure for 22,000 members of staff and now reward service over sales".

The bank was also spending an extra £450m on IT on top of its £2bn annual spend. On the use of exotic corporate tax havens, the chairman told shareholder Chris Hegarty that RBS was "not a particularly prolific user compared with other banks", and was the first bank to sign up to HMRC's new code of practice.

The three-hour meeting was dominated at times by shareholders in dispute with the bank over the loss of their businesses or homes, with property developer Mr Hill noting that the bank had been publicly accused of "state-sponsored kleptomania in obtaining property at knockdown prices", and Scottish restaurateur Nigel Matheson complaining that his profitable business had been "destroyed" by the bank, prompting nine years of litigation due to end in mediation next week.

US campaigner Paul Corbit Brown urged RBS to end its financing of companies involved in mountain top removal mining in Appalachia.

Sir Philip told retired RBS manager Graham Aitken that his proposal of issuing special loyalty shares in a privatisation was unlikely to be accepted by major shareholder UKFI, which runs the taxpayer's 82% stake.

He told shareholder David Robinson that dividends would be resumed "sooner rather than later", but only once the first quarter's bottom line profit had been properly sustained.

On the auction of its 318 branches, Sir Philip said the bank was "working towards an IPO, [and] it is also possible that a trade sale might take place and a significant new challenger bank may be created".