New banking rules hit Santander's profits forecasts

The group – an increasing force in UK banking after snapping up a raft of players including Abbey and Alliance & Leicester – saw pre-tax trading profits rise 20 per cent to 619m in the three months to September 30 as better margins boosted performance. But the wider Santander group was hit by new rules in Spain forcing banks to bring forward charges for loan losses in their accounts, which it said would now see 2010 profits fall short of expectations.

Earlier this week Chief Executive of Santander UK Antonio Horta-Osorio warned regulators to "tackle the excesses of the financial system without damaging the system and the competitive advantage of the UK".

The move also left third quarter figures down sharply as Santander booked a 472m euro (413m) bad debt provision.

The UK arm saw a plunge in UK retail deposits in the third quarter, at 700m against 4bn a year earlier. The credit crunch has seen banks and building societies clamber to secure deposits to finance lending, which has driven intense competition between players.

Santander also saw a sharp drop in net mortgage lending in the third quarter compared with a year earlier – at 1.8bn against 3.1bn, although Santander said it had maintained its share of a dwindling market.

The general UK mortgage market has been under pressure with recent figures from the British Bankers' Association showing mortgage lending diving to its lowest level for almost a decade during September.

Santander said it was being helped in the UK by better margins as its loan to deposit ratio improves, while it has also been able to access funding in commercial markets at better prices as credit flows ease up.

Results were also helped as bad debts in the UK division slumped by a third year-on-year to 144m in the quarter, while it has been able to slash costs as it drives synergies from the integration of recent acquisitions.

Santander already has around 25 million customers and 1,300 branches after acquiring Abbey, A&L and parts of Bradford & Bingley. The European Commission has also approved its takeover of the retail and commercial banking assets of part-nationalised Royal Bank of Scotland which will instantly boost its UK branch base by around 300.

Santander gave a sombre outlook for the UK economy, with house prices continuing to slow and unemployment rising.