One-off charges for bad lending and dropping purchase of RBS branches as growth prospects slow
Santander UK is continuing to retrench from the British mortgage market after a drop in profits in the third quarter, though the bank fared better than its Spanish parent.
Bad lending by Abbey National and Alliance & Leicester, potential payouts for future mis-selling scandals and the cost of abandoning the purchase of 316 Royal Bank of Scotland branches helped push down third quarter profits to £372m from £511m.
The Spanish parent, Banco Santander, suffered a 90% fall in third quarter profits after making provisions against property loans which turned sour. Group net income was €100m (£80m), compared with €1.8bn a year ago, because the bank is being forced by the Madrid government to make writedowns on the property loans. Banco Santander has taken €5bn of provisions in the first nine months of the year, 90% of that required.
Over the nine-month period, the UK arm – which also owns part of Bradford & Bingley – reported a 4% increase in profits to £1.1bn, but took three one-off charges: £335m in bad debt on shipping loans by A&L and commercial property mortgages by Abbey; £232m provision for “conduct remediation”, though none of this was due to payment protection insurance, and £52m for abandoning the purchase of RBS branches. These £620m of charges almost negated a £705m gain on buying back debt.
The decision not to buy the RBS branches will slow the bank’s prospects of growth in the UK. Tightened criteria has reduced lending and so far this year more home loans have been repaid than new ones granted. Gross lending was £11.5bn – a market share of nearly 11% – but net lending was negative by £6.1bn.
“Further managed reductions in the mortgage stock and lower market share are expected in the fourth quarter, although we continue to take opportunities to lend at favourable margins and with a good risk profile,” the bank said.
With flotation of the UK arm on hold indefinitely, Gary Greenwood, analyst at Shore Capital, said: “Our key observation is that Santander UK had a relatively good credit crisis versus its domestic UK banking peers, but that its operating performance has come under more pressure of late due to a falling net interest margin and rising impairments.” He noted that the bank had reported a sharp increase in deposits.
The bank, which is rated higher by Moody’s than the Spanish government, makes about 13% of profits in the UK with Latin American generating about 50%. The domestic market contributes about 16% of profits.
The UK arm is on review for a potential downgrade by Moody’s but the bank said it was “well placed to do deal with the impact of potential downgrades” which can increase its borrowing costs or stop customers placing deposits with the bank. The UK arm has a core tier one ratio – a key measure of financial strength – of 12.8%, higher than its parent company’s 10.4%.
The provision for “conduct remediation” is in part to do with interest rate swap mis-selling to SMEs, contributing to the £20m redress costs incurred by card insurer CCP and potential bills caused by interest rate only mortgages and other issues being looked at regulators.
The group chief executive, Alfredo Saenz, supported the idea of a bailout for Spain. “A situation in which the treasury funding is being helped by contingency credit lines offered by any international body will produce a fall in the sovereign debt risk premium and, as a consequence, a fall in banks’ risk premium,” he said.
The parent company noted its stockmarket value was €57bn – making it the largest bank in the eurozone – but lower than its €84bn assets.
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