Santander cutting risk as it wins more business clients

The lender’s profits slumped 22 per cent in the first three months of the year to £282m, driven lower by the rising cost of deposits and higher expenses.

The bank shrunk its loan book by £2.3bn during the quarter as its net mortgage lending fell by £2.5bn. But it said that followed a deliberate decision to do less interest-only lending and cover more of its mortgages with customer deposits.

Santander also saw a surge in mortgage arrears, with ‘non-performing loans’ increasing to 1.83 per cent of assets from 1.51 per cent a year earlier following a lending spree between 2007 and 2009.

The Spanish-owned bank was an active player in the business banking market during the quarter.

Its corporate loans increased 11 per cent to £20.4bn, including a 15 per cent surge in lending to small and medium-sized enterprises.

But the bank said its growth will be organic rather than acquisitive, after it walked away last year from a deal to buy more than 300 branches from Royal Bank of Scotland.

Santander UK was formed from the takeover of Abbey, Alliance & Leicester and part of Bradford & Bingley.

Steve Pateman, head of UK banking, said while it may be “slower and harder” the “primary focus is on organic growth in corporate and in retail”.

He also dismissed speculation the bank will bid for Yorkshire and Clydesdale banks, owned by National Australia Bank.

He said: “The reality is that is no longer a UK-wide business. It’s a regional business.”

The bank’s lending spree saw its market share of mortgage lending climb to about 20 per cent, compared with its normal market share of 12 per cent. Mr Pateman said this was behind the surge in mortgage arrears – which it sees rising further this year before falling next year.

But Santander does not see write-offs increasing due to the higher arrears rate. Provisions in its retail banking arm were slightly lower at £99m.

Across its UK operations bad debt write-offs fell 27 per cent to £130m.

The bank welcomed Government moves to boost the flow of capital to businesses through the Funding for Lending scheme, which was this week beefed up to offer banks more funding if they lend more to SMEs.

However, Santander has shrunk its lending by significantly more than the £1bn it has so far borrowed from the FLS – due to its mortgage market retreat.