Tougher rules hit bank’s figures

The group, which bought Bradford & Bingley’s branch network during the financial crisis, reported pre-tax profits of £572m against £588m a year earlier, blaming new rules requiring it to hold more cash, as well as more expensive wholesale funding markets.

Santander, which has snapped up a raft of UK players including Alliance & Leicester and Abbey in recent years to gain a significant presence on the high street, said UK profits would have been 20 per cent higher year-on-year if the extra regulatory costs were stripped out.

The UK’s fifth-biggest lender, which is set to be spun off by its parent company later this year, added its first quarter profits were £45m more than its fourth quarter profits.

“Santander UK has delivered a solid first quarter performance, with all business areas performing well and further progress made in improving customer service,” said new Santander UK chief executive Ana Botin.

“Santander UK has established solid foundations and we are already proving a strong challenger for the incumbent banks.”

The bank is expanding further by buying 318 branches from Royal Bank of Scotland, as well as 40 small business banking centres.

The Independent Commission on Banking, set up in the wake of the financial crisis, estimates Santander will have around 13 per cent of UK current accounts and 13 per cent of savings accounts after buying the RBS branches. Along with Lloyds, it will be the joint-biggest mortgage lender with 19 per cent of the market. It will also have about 10 per cent of small and medium-sized (SME) business lending.

However, Santander’s figures also reveal the challenges of the sector, with negative net mortgage lending of £600m in the first three months of 2011 as borrower repayments offset new loans and the lower margins it makes on lower loan-to-value products.

The group is expanding aggressively in the SME sector, growing its market share from three per cent a year ago to 3.7 per cent.

Santander has 25 regional business banking centres including sites in Leeds, Sheffield and Hull, and commercial lending to SMEs was 29 per cent higher at £9.1bn.

However, its net commercial deposits were about £100m lower in the first quarter, which Santander blamed on a net reduction in the size of the UK market and “extremely negative pricing and margins in the market”. Its growing corporate book also resulted in an unspecified increase in charges.

Across the group, trading provisions fell by 50.4 per cent on a year ago to £118m, due to a fall in charges on mortgages and unsecured loans, as the record low interest environment helps customers keep up with payments. The proportion of the group’s loan book three or more months in arrears dropped to 1.35 per cent from 1.43 per cent a year earlier. However, it was up on the 1.29 per cent impairment rate in the fourth quarter of 2010.

By the end of March it had 1,001 homes in possession, compared with 873 a year earlier. But Santander said repossessed homes still represent only 0.06 per cent of its mortgage book.

“A strong focus on collections strategy, low interest rates and the relative stability of the UK economy continued to support the improving mortgage arrears position and the low volume of properties in possession,” said Santander.

Its parent company reported a five per cent fall in first quarter profits to 2.1 billion euros.