HSBC's pre-tax profit was six percent lower than in 2011, while earnings per share were 20 percent lower at 74 cents.
2012 dividends stood at 45 cents per ordinary share, up 10 percent on 2011, with a fourth interim dividend of 18 cents.
Shares in the U.K. bank dropped 2.7 percent after the earnings were released on Monday. The European banking sector was pressured downwards by the news, with the Dow Jones STOXX Banks index trading 1.32 percent lower.
Stuart Gulliver, CEO of HSBC, said the bank had faced a challenging operating environment in 2012 with low economic growth and changing regulations.
"Although reported pre-tax profit fell... underlying profit, which includes the impact of fines and penalties and U.K. customer redress provisions totaling $4.3 billion, grew by 18 percent."
HSBC paid a record $1.9 billion in fines and penalties to U.S. and U.K. authorities in 2012, plus $1.4 billion customer compensation in the U.K.
(Read More: Recent Libor Settlements Are Just Tip of the Iceberg)
Gulliver highlighted HSBC's "record year" for commercial banking, where revenue grew by eight percent to $15.9 billion. He added that revenues for HSBC overall had increased and the bank had performed well in most "faster-growing" markets.
Bob Parker, senior advisor at Credit Suisse, said HSBC investors would be disappointed by the return on equity, which fell to 8.4 percent from 10.9 percent in 2011. He said the fall-off put the bank's cost-cutting measures into question.
"Where does HSBC go from here in terms of its cost-cutting program? This is very much an area of focus for investors at the minute," he told CNBC Europe's "Squawk Box."
In the release, Gulliver said HSBC had announced the disposal or closure of 47 businesses and non-core investments since 2011. He said the decline in shareholder returns was "driven by adverse fair value movements on own debt, a higher tax charge and a much stronger equity base".