Santander UK profit drops and mortgage lending shrinks amid price war

Santander UK has revealed a 29% drop in profits, as mortgage lending shrank and the bank said it passed on higher interest rates to savers.

The UK arm of the Spanish banking giant reported a pre-tax profit of £391 million for the first three months of the year, down 29% from the £547 million posted this time last year.

Its net interest income, meaning the difference between the interest it generates from loans and pays out to savers, was down 11% year on year.

Santander said this was primarily due to it costing more to hold customer cash after it raised savings rates.

It also reported a £2.5 billion decline in mortgage lending since the end of last year.

The bank said it decided to prioritise profitability and to “optimise balance sheet returns”, which resulted in lower mortgage lending and a slight drop in customer deposits.

Competition among lenders to offer better mortgage deals ramped up for UK lenders during 2023, with many homeowners shopping around to find a cheaper loan.

Lenders such as Santander have also stressed that they have strict affordability tests for mortgages so that they are only lending to borrowers who can sustain higher interest rates.

High street rivals Lloyds, Barclays and NatWest all reported a drop in earnings compared with last year when interest rates peaked.

Meanwhile, Santander provided a cheerier outlook for parts of the UK economy.

New forecasts show that average UK house prices could rise 3% this year, and continue inching higher over the next five years.

It is also expecting the rate of unemployment to peak at 4.4% in 2025, lower than previous projections.

However, in a scenario where inflation remains stubbornly high and interest rates rise further, house prices could tumble in the next two years and unemployment could spike, according to the bank’s forecast.

This is because it would mean cost-of-living pressures prevail, therefore weakening consumer demand.

Mike Regnier, Santander UK’s chief executive, said: “The recent fall in the rate of inflation will be welcomed by our customers who continue to face cost-of-living pressures.

“Our prudent approach to risk and targeted support has meant that in a challenging environment, levels of arrears have remained low.”

Meanwhile, the wider Madrid-based Banco Santander group reported a profit of 2.9 billion euros (£2.5 billion), 11% higher than the previous year.

Executive chair Ana Botin said it had been a “very strong start to the year” for the banking group.