KBC Ireland advanced less than €100m in new home loans last year but plans to re-emerge as a significant lender as it rolls out new branches in Cork, Limerick and Galway.
Losses at KBC Bank Ireland widened last year to €306m. Loan impairment costs, or write-downs, increased to €547m, from €510m in 2011.
The Irish loss is in contrast to profits at the bank's Belgian parent.
After years of losses, the Irish business is expected to at least break even next year and show a profit in 2015, the head of KBC Bank in Ireland, John Reynolds, said.
Arrears are expected to peak this year after the rate at which new mortgages were getting into trouble slowed "dramatically" over the course of last year, according to KBC.
Mr Reynolds said he accepted criticism from the Central Bank that lenders were slow to respond to the mortgage crisis, but added action was now being taken.
KBC has agreed 10,000 individual arrangements with troubled mortgage holders, he said.
Around 200 of the bank's 700 staff are now dedicated to working on troubled mortgages.
The bank aims to keep as many people as possible in their homes, by restructuring their debt, he said. Repossessions will rise, but mainly from the buy-to-let mortgage sector, he said.
Some 29pc of KBC's €3.2bn of buy-to-let mortgages are in trouble compared to 17pc of its €9.3bn of home loans.
The bank is not in favour of "debt forgiveness" but some debt will not be recoverable, he said. The bank aims to reclaim its traditional 10pc share of the home loan market as the economy stabilises, he said.
Meanwhile, deposits held by Irish banks covered by the state guarantee remained largely stable last month.
The Department of Finance said deposits were at €154.3bn, down 0.9pc or about €1.4bn.
Banks' borrowings from the ECB by the state-covered banks – excluding the now defunct IBRC – declined by €0.7bn, or 1pc, during January.
This was attributed to AIB and Permanent TSB raising €1.1bn in new funding from capital markets.
AIB raised its money by issuing new "covered bonds" for the second time in three months. Permanent TSB raised €600m in a private deal from a UK bank. The debt is secured on UK mortgages.
The dependence of banks on ECB funding is now at its lowest since September 2008 – the month the now infamous guarantee was introduced.