According to a KPMG report, the combined profits of Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered was £31.5bn in 2011.
However, this profit was eliminated by the "cost of past mistakes and increased creditworthiness of their own debt", the accounting giant said.
This meant the major banks actually saw their statutory profits slump 40% on the previous year, to £11.7bn.
"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.
He added, "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."
The banks, KPMG said, were hit by PPI costs of £7.4bn (up from £5.7bn in 2011), plus other fines and penalties from regulators and "redress provisions" of £4.7bn, and 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".
"Overall, banks have made progress," said added Michael. "They have strengthened their balance sheets and made strides to bolster their capital.
"They are becoming better able to carry out their essential function of providing support to businesses and promoting economic growth. However, the necessary changes to address conduct and behavioural failings will have a significant cost."