The UK's biggest banks saw profits rise by 45% in 2012, but the gains were wiped out by the cost of their past mistakes and changes to their ways of accounting for their debts, according to research by KPMG.

KPMG's Bank Performance Benchmarking Reportlooked at the performance of the big five banks - Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered.

It found their profits for 2012 totalled £31.5bn. However, a mix of regulatory fines, customer redress provisions and the accounting consequences of improved creditworthiness saw statutory profits fall 40% compared to the previous year at £11.7bn.

KPMG says this £20bn hit was made up of PPI costs of £7.4bn, up from £5.7bn in 2011, other fines and penalties from regulators and redress provisions of £4.7bn, plus a £12.8bn accounting hit for losses caused by the revaluation of 'own debt', reflecting the credit markets' more positive view on bank issuers and interest rate movements.

Bill Michael, EMA head of financial services at KPMG, said: '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. 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.'

KPMG's report says banks are undertaking multi-year transformation programmes with significant up-front costs to core infrastructure, systems and processes. However, it says banks will need to reduce their costs if they are to convince shareholders they can generate returns in excess of their considerably increased costs of capital, liquidity and operation.

Michael said: 'Overall, banks have made progress. They have strengthened their balance sheets and made strides to bolster their capital. However, the necessary changes to address conduct and behavioural failings will have a significant cost.'