Santander profits drop as bank sets aside cash for PPI claims

Santander UK yesterday revealed that its half year profits had dropped after it set aside more cash to cover claims over the mis-selling of payment protection insurance (PPI).

In the six months ended June 30 2011, Santander UK’s profit after tax attributable to equity shareholders declined by 51 per cent to £413m. Ana Botin, Santander UK’s chief executive, said: “The outlook for earnings remains difficult, with pressure on revenues, driven by the lower interest rate environment and competition for deposits.

“In relation to credit provisions, the speed of economic recovery is critical, combined with rising interest rates in the future.”

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In the company’s business and financial review, Santander UK said that, in line with other UK banks, a further provision for customer remediation of £731m has also been made, primarily in relation to payment protection insurance.

It has been estimated that the mis-selling of debt repayment insurance policies could cost the UK banking industry £8bn in total.

The PPI insurance policies were typically taken out alongside a personal loan or mortgage to cover repayments if customers fell ill or lost jobs.

But the policies were sold to self-employed or unemployed people who would not have been able to claim or to consumers who didn’t realise they were taking out a policy.

Santander UK is paying out considerably less than other big UK banks. Lloyds has borne the brunt with a £3.2bn provision, while Barclays took a charge of around £1bn. HSBC made a £269m provision after the banks decided to scrap a legal fight on the issue.

More than three million people are in line for compensation after the banking industry abandoned its legal battle over the mis-selling of PPI.

The level of banks’ exposure became clearer after the British Bankers’ Association announced in May that it would not appeal against a High Court challenge it lost over new Financial Services Authority rules on PPI mis-selling being applied retrospectively.

Santander took over Bradford & Bingley’s savings accounts and branches, and the Government took control of its mortgages and loans, following the bank’s collapse in 2008 due to massive bad debts. Yesterday Ms Botin said: “Santander has delivered profit in the first six months of 2011, maintaining its strong track record of profitability and balance sheet strength. We are working towards completing the acquisition of 318 branches and more than 40 banking centres from Royal Bank of Scotland.

“This is a key step in fulfilling our ambition to be a full-service commercial bank as we complement our strong retail offering with an increased presence for SMEs (small and medium-sized enterprises).”