Industry set for a tough year, says Santander

SANTANDER warned 2012 will be another tough year for the banking industry, after 2011 post-tax profits dived 42 per cent.

The Spanish-owned bank posted profits of £993m after it set aside £538m to deal with claims for mis-sold payment protection insurance (PPI).

Trading profits were also down six per cent, which Santander blamed on the need to hold more capital, the record low interest environment, higher regulatory costs and more expensive funding.

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However the bank, which has postponed a flotation of its UK arm while markets remain turbulent, said it has made progress in attracting more small and medium-sized businesses (SMEs). Lending to SMEs totalled £4.3m during the year, up 25 per cent on a year earlier.

Santander UK chief executive Ana Botín said: “2012 is likely to be a tough year for the UK banking industry. Economic prospects have deteriorated markedly, even in recent months, whilst increased regulatory burdens and funding costs will impact the results further.”

The group has expanded aggressively in the UK in recent years through the acquisition of Bradford & Bingley’s branches and savings book, Alliance & Leicester and Abbey National. It is in the process of buying 318 branches from Royal Bank of Scotland which should ramp up its exposure to SMEs.

It plans to invest £490m over the next three years, including in IT systems to help it improve customer service and expand.

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Ms Botín said: “A key priority of our strategy will be to build further on our balance sheet strength and stability. We will continue to invest in the commercial transformation of the UK business. Our strategy remains for Santander UK to be a full service, diversified, customer-centred commercial banking franchise and to emerge as the best bank in the country for our customers and our people.”

The bank’s parent company, Banco Santander, saw its profits plunge 98 per cent to £39.4m in the final quarter of 2011, as it took a 1.8bn euro (£1.5bn) charge to cover losses on its Spanish property portfolio.

Santander said the weaker outlook for the global economy in recent months prompted its bleak assessment of the year ahead.

“GDP growth forecasts have been cut; unemployment is set to rise further; and interest rates are expected to stay low for longer,” it said. “These factors will impact profitability and management will seek to mitigate these challenges as well as tackle costs in the forthcoming quarters.”

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The bank warned the ultra-low interest rate environment and higher funding costs will have an even greater impact this year and next.

However, Santander said bad debts remain low, helped by the low interest environment and “relative stability” of the UK economy.

Its percentage of mortgages three or more months in arrears stood at 1.46 per cent in the fourth quarter of the year, versus an industry average of 2.05 per cent. However, this percentage had grown from 1.41 per cent a year earlier.

The bank said it increased lending to Yorkshire SMEs by 24 per cent during the year, extending £279m of loans to the region’s companies over the year.

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Santander is expanding its business banking service into Bradford, Doncaster and Wakefield in coming months, on top of existing corporate business centres in Leeds, Hull and Sheffield.

The bank said costs rose in 2011 after it recruited 1,100 more staff to deal with customers, returned its call centres to the UK, installed 300 new cash deposit machines and overhauled its customer service systems.

It now employs about 26,300 staff in the UK, up 11 per cent on a year earlier.