Profits made by the major banks have doubled during the past year but the groups still face significant challenges going forward, a report indicated today.
The big five banks - Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered - made combined pre-tax statutory profits of £22.2 billion in 2010, up from £11.3 billion in 2009, according to accountants KPMG.
The increase was driven by a dramatic drop in impairment charges across all five banks, with these falling by more than £20 billion during the 12 months.
There was also a marked increase in the margins on their existing mortgage book at some of the banks.
But despite the improvement, KPMG warned that income growth had been "lacklustre", adding that there was likely to be little new mortgage lending going forward due to the subdued state of the housing market.
At the same time, competition among the major banks for people remortgaging suggested that margins were likely to fall, rather than rise.
The group also warned that as the Government's austerity measures took hold, the number of people defaulting on their mortgage, which has so far remained low, could rise.
Banks could also be left with a "very significant" compensation bill if they lose the current judicial review on the sale of controversial payment protection insurance.
David Sayer, global head of retail banking at KPMG, said: "In the current economic environment profitability on mortgages looks likely to fall and it is difficult to see what will take its place.
"Looking ahead we expect to see a price war for deposits break out across Europe, as banks seek to repay liquidity to central banks.
"With the margins on savings fast disappearing, some UK deposit takers will come under real pressure."
He added that to counter these profitability pressures, banks were likely to look to implement a number of measures, such as introducing additional bank charges, targeting so-called mass affluent and high net worth individuals and trying to cut their costs.
Earnings from the groups' investment banking divisions returned to more normal levels during 2010, following the highs seen in 2009.
The group said that although earnings in this sector showed a "marked slowdown" during the second half of 2010, the current year had got off to a good start, and expectations were that 2011 would be either the same or better than 2010.
KPMG said regulation was set to continue as a "key theme" for banks for sometime yet, as the sector waits for the findings of the Independent Commission on Banking.