An increase in profits at the big five UK banks was wiped out by more than £11bn of fines and compensation payments in 2012.
Despite an improved core business performance, fines from regulators and the costs of the mis-selling of payment protection insurance contributed to a 40% cumulative drop in profits from 2011 to £11.7bn, according to accountants KMPG.
Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered posted results in a year where bleak headlines included the Libor scandal, the mis-selling furore, and slack control of money laundering.
KPMG's bank performance benchmarking report concluded that banks had improved in their core performance due to better credit performance, or fewer bad loans, and stronger results from investment banking divisions, helped by more positive sentiment over the eurozone's future.
Alongside the punitive costs banks incurred, profits were also written down because of a £12.8bn revaluation of the banks' debt. Bill Michael of KPMG said: "Banks had a better performance year in 2012 but their improved core profits were eaten up by fines and other exceptional items. In terms of their reputations, 2012 was a dire year. This is why it is so important for them to address cultural and ethical perceptions and issues. Restoring customer trust is critical."
KPMG warned that banks would need to significantly reduce costs to convince shareholders they could continue to generate strong returns, including cutting staff and wage bills.
The warning comes amid reports that Lloyds, bailed out by the taxpayer during the credit crunch, paid more than 20 of its staff more than £1m last year. Details of its high earners will be revealed in its annual report this week, but the bank said it could not comment on speculation.
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