Royal Bank of Scotland has revealed it is to float up to 25% of its US subsidiary Citizens on the stock market and further trim its investment bank in response to pressure from the Government and regulators.

The news came as the Edinburgh bank unveiled a £5.2 billion pre-tax loss for last year.

RBS, which is 82% taxpayer-owned, said it hoped some Government shares would be sold in 2014 and revealed it is seeking private equity backing for a portfolio of branches it plans to float after the collapse of a previous deal to sell it to Santander.

Chairman Sir Philip Hampton said: “Step by step RBS is being fixed.”

He said the bank wants to give the Government the option to sell its stake as soon as possible.

He said: “It would be good if we could make that ‘as soon as possible’ 2014.”

This would allow a sale to take place before the next General Election.

Investors sent RBS’s shares down 22.9p or 6.6% to 323.9p, well adrift of the £5 break-even price on the Government’s stake.

RBS’s managers expect 2013 to be the final year of “heavy lifting” in restructuring the bank.

RBS’s loss is the fifth consecutive recorded by the bank and was caused in part by another £450 million charge in the last three months of 2012 to cover mis-selling of Payment Protection Insurance, taking its provision to £2.2bn.

There was also an artificial £4.65bn “own credit” loss due to the changing value of its own debt.

Meanwhile, publicly-quoted insurer Direct Line, which is still 65.3%-owned by RBS, reported better-than-expected full-year operating profits of £461.2m, up 9.3%.

Chief executive Stephen Hester said RBS’s loss was chastening but noted the “decent profit” made by its core business as the bank posted a near-90% jump in operating profit to £3.5bn.

Despite the loss, RBS paid out £679m in bonuses, including £287m of to its investment bankers.

Sir Philip said: “That is the market reality. We have to pay close to the going rate.”

RBS is to seek to float between 20% and 25% of its US arm Citizens in two years’ time, it said.

This is part of a package of measures including an extra £250m of writedowns on its loans and a further shrinking of its investment bank that Mr Hester said is a “response to the pressure from Government and regulators”.

The Bank of England and Financial Services Authority want banks to increase their capital cushions.

Meanwhile, the Chancellor George Osborne claimed credit for the decision by RBS to “accelerate” its focus on UK retail and corporate banking.

But the City is concerned this will hit RBS’s profits.

Nic Clarke, analyst at Charles Stanley, said: “Management are putting a positive spin on these changes but whether these moves are in shareholders’ best interest is debateable.”

Espirito Santo analyst Shailesh Raikundlia said the restructuring “is likely to further dilute the future returns potential at RBS”.

Citizens accounted for 22% of RBS’s operating profit.

Asked if RBS investors, including the taxpayer, could miss out on a rebound in bank valuations by such a prompt stake sale, Mr Hester emphasised that RBS would still retain a majority holding in Citizens.

Finance director Bruce van Saun said that RBS had unsuccessfully sought another trade buyer after Santander pulled out of its planned £1.5bn purchase of 316 RBS branches.

RBS is now planning a stock market flotation of the business, which it is being forced to sell by European competition regulators as a condition of its 2008 state bailout, under the Williams & Glyn’s brand.

“This is going to be quite involved, be quite expensive and take some time,” Mr van Saun said. However it might accept a private equity firm investing in the business ahead of flotation.

RBS will seek an extension to the 2014 deadline for selling the portfolio, dubbed Rainbow, which includes six NatWest branches in Scotland.

Mr Hester said RBS had considered but rejected seeking to merge the business with the Verde portfolio fellow part-nationalised institution Lloyds Banking Group plans to sell to Co-operative Bank.

RBS is also planning to negotiate with the Government and European regulators over buying back the right the Treasury has to higher dividends than other investors when payments restart.

RBS hopes to restart dividend payments in 2014.

This would ease the way to a flotation and the bank anticipates a public share offer.

“My guess is that they (the Government) will want British taxpayers to be able to participate in the availability of shares,” Sir Philip said.

However he indicated that RBS would resist a mooted share giveaway to every taxpayer.

“Would we have to have the AGM at Wembley Stadium with a simultaneous transmission across Europe?” he quipped.