A report by audit firm KPMG said the biggest UK banks actually saw core profits increase by 45% in 2012, but these gains were erased by factors such as the PPI and LIBOR scandals which saw the banks having to set aside redress.

KPMG said Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered had combined core profits of £31.5bn last year.

However, this was eliminated by the “cost of past mistakes and increased creditworthiness of their own debt”, the report said, causing a 40% fall in statutory profits on the previous year.

Payment Protection Insurance (PPI) claims cost the banks £7.4bn in total, up from £5.7bn in 2011.

Fines from regulators and redress provisions totalled £4.7bn, and there was a £12.8bn accounting hit for losses caused by the revaluation of “own debt'”.

“Banks had a better performance year in 2012 but their improved core profits were eaten up by fines and other exceptional items, leaving them down on 2011,” said Bill Michael of KPMG.

“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.”