Santander UK: Bank notches a rise in annual profits after being boosted by higher interest rates

But the high street lender is predicting cuts to interest rates this year, falling from 5.25 per cent to 4.5 per cent by the year-end as inflation eases back, which it said will “ease cost-of-living pressures for our customers”.

However, falling rates will also take its toll on the group’s profitability, with the group warning that its net interest margin – a key performance measure for retail lenders – is set to fall over the year ahead.

The group reported a 13 per cent rise in annual pre-tax profits to £2.1bn for 2023, up from £1.9bn in 2022.

It revealed a 36 per cent drop in money set aside for loan losses, to £206m, down from £321m in 2022, thanks to an improved outlook for the wider UK economy.

In the final three months of last year, pre-tax profits dropped 25 per cent quarter on quarter to £418m, although the result was 3 per cent higher year on year.

Its mortgage book suffered amid a slowing housing market over the year, with an £11.9bn drop in mortgage lending in 2023.

But the group has upgraded its economic forecast for the UK and is pencilling in growth of 0.4 per cent, rising to 1.3 per cent next year, with a rosier picture for the housing market.

It is predicting house price falls to ease back to 1 per cent in 2024, from a 2.2 per cent decline in 2023.

House prices will return to growth in 2025, with a 2.5 per cent increase, according to Santander.

Mike Regnier, Chief Executive Officer, commented: “During 2023 our focus has been on supporting our customers through the higher cost of living and increased interest rates.

"We have proactively contacted 2.5 million customers to offer help and also supported homeowners through the Government’s Mortgage Charter.

“Despite the difficult backdrop, our prudent approach to risk and the hard work of everyone at Santander UK has delivered a strong set of results for 2023.

"Their dedication to putting customers first has helped us deliver competitive rates for savers, introduce corporate clients to new international markets, protect millions of customers from fraud, refurbish branches and open new Work Cafés.

"I was very proud to move into our new sustainable head office in Milton Keynes, offering state-of-the-art working facilities and a hub for the local community.

“As we look ahead to 2024, we expect interest rates and inflation to fall. We will continue to execute on strategic initiatives focused on building customer loyalty, creating value and simplifying our business.

He added: "By working together with Banco Santander Group, we will harness the best of our local and global capabilities to develop new and innovative products and services for our customers and deliver the benefits of our scale.”