Santander has postponed the release of its full UK results due to a court ruling on car loans, alongside reporting a significant decline in the division’s profits. This indicates a potential challenge in one of the Spanish bank’s key markets. The bank revealed that its UK profit for the three months ending in September decreased by 18.5% compared to the previous year, amounting to €346 million. This follows a 23% decrease in the previous quarter, amid a highly competitive lending environment.
As part of efforts to improve efficiency, the bank has reduced its UK workforce by 468 positions to 21,812, through a combination of redundancies and not replacing departing or retiring employees. On the eve of its global results announcement, Santander stated it would not disclose detailed UK numbers as it seeks to assess the potential financial impact of a British court decision. This ruling deemed that certain commissions paid by banks to car dealerships were unlawful.
This development occurs as UK financial regulators investigate possible historical mis-selling in car finance, increasing the possibility of a costly redress scheme analogous to the payment protection insurance scandal. The regulator is examining the use of discretionary commission agreements in car loans, a practice banned in 2021. Lenders, including Santander, may face significant compensation payments, with analysts suggesting the sector could incur up to £16 billion in redress costs.
Although Santander does not anticipate a material impact on the group overall, it delayed its UK results due to potentially significant national implications. Benjamin Toms, an analyst at Royal Bank of Canada, estimates a potential €1 billion charge for Santander. Lloyds Banking Group, owner of the largest car finance provider in the UK, has already set aside £450 million in anticipation of possible compensation costs.
According to Citibank analyst Marta Sanchez Romero, despite the UK profit decline, Santander’s British operations performed better than expected by the market. However, she noted that the car loan risk and delayed results could overshadow this performance.
The regulatory threat arises amid intense competition in the UK lending market, particularly for mortgage customers. Santander’s decrease in UK profit corresponded with a nearly 10% fall in national revenue, as the bank resisted pressure to cut interest rates as significantly as some competitors. Despite a rise in UK house prices and mortgage activity due to falling interest rates bolstering buyer confidence, Santander and other lenders have recently withdrawn some of their lower-cost mortgage offers. This is in response to strong economic data and concerns over government borrowing plans, which have exerted upward pressure on swap rates, critical to mortgage pricing.
The profit decline partially resulted from a specific gain of £46 million reported in the third quarter of 2023 from selling a stake in Euroclear. Additionally, both net interest income and net fee income fell compared to the previous year.
Apart from the UK, Mexico was the only major market where Santander’s profit decreased, showing a 2% decline to €394 million. Profit saw modest growth in the US and Brazil, with Spain, the bank’s home market, experiencing a 50% profit surge. Overall, Santander achieved a quarterly profit of €3.25 billion, up 12% from the previous year.
Ana Botín, Santander’s executive chair, stated that the bank is experiencing growth in both net interest income and net fee income, maintaining robust credit quality, and continuing its transformative efforts to generate positive operational leverage.