Santander sails on despite concerns over Spanish debt

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Banco Santander yesterday shrugged off concerns about Spain's economy to post an expectations-beating 6 per cent rise in first-quarter profits, driven by Latin America and Britain.

UK profits surged by 15 per cent to £426m, and the bank, which has 13.4 per cent of Britain's existing mortgage stock, again outperformed, accounting for one in five home loans in Britain in the first three months of 2010.

The bank has so far avoided any backlash in sentiment from concerns over its home country's sovereign debt, with UK deposits of £3bn – up 240 per cent on the same period in 2009 – from retail, corporate and private banking clients. At the group level, overall deposits grew 13 per cent while lending fell back by 0.3 per cent.

Santander was particularly cautious over lending in its home market: in Spain total loans were down 5 per cent on the year, although the company said the fall in Spain was caused by the lack of demand for credit. The contribution that Spain makes to the group profits of €2.21bn (£1.9bn) fell by 8 per cent.

Addressing the issue of Spain's sovereign debt – downgraded by the ratings agencies amid fears that it could be one of the dominos to fall in the wake of the Greek debt crisis – chief executive Alfredo Saenz urged the Spanish government to get a grip on the country's ballooning deficit as quickly as possible. He described the downgrade as "bad news" but said it was "not unexpected".

Santander, the eurozone's biggest bank, has an exposure of just €200m to Greek sovereign debt, but €3bn to Portuguese and, unsurprisingly, €24bn to government bonds issued by Spain.

Because of its location the company does pay a premium of between 10 and 30 basis points when seeking funding compared to what banks rated AA plus by the credit ratings agencies typically pay. However, a Santander spokesman yesterday pointed out that the company's deposits are increasing meaning that it is becoming progressively less reliant on wholesale funding to fuel its lending.

Santander is widely seen as being the favourite to win control of Williams & Glyn's, which is being spun off by Royal Bank of Scotland. The company, which faces competition from rivals such as National Australia Bank and Virgin, is keen on increasing its share of the business banking market, and the RBS operation is far stronger in this than the other banking businesses set to come on to the UK market in the next few years. They include around 600 Lloyds branches and Northern Rock.

Santander already owns Abbey, Alliance & Leicester and the deposit book of Bradford & Bingley. One option open to it is a partial flotation of the British business should it win the auction, a tactic the company has used before with some success.

Santander said yesterday of its British operation: "We continue to support the UK economy, increasing lending to small and medium-sized businesses by 18 per cent and by writing one in five mortgages to UK households (based on our gross lending market share of 20 per cent). Net mortgage lending was £1.5bn."

The bank said it opened 276,000 new current accounts and 340,000 Individual Savings Accounts during the cross-tax year campaign while it increased investment sales by 5 per cent.

The stock of properties in possession represented 0.07 per cent of the bank's overall portfolio against the Council of Mortgage Lenders average of 0.14 per cent in the fourth quarter of 2009. The number of home loans showing arrears of over three months stood at 1.41 per cent, compared to the CML average of 2.3 per cent.

"Given the high-quality prime residential nature of our portfolio and reduced exposure to unsecured lending, we believe we are in a robust position given the economic environment," the Santander said.

The average loan to value (LTV) on new business completions stood at 63 per cent. Provisions came in at £204m, against £189m the previous year, but unchanged from the previous quarter.

"In terms of the UK economy, we expect interest rates to remain low for the rest of this year. House purchase volumes are higher than a year ago, but remain low relative to the past decade. Given our expectation that it will remain tough, we predict that unemployment will rise in 2010 to 8.4 per cent. GDP will see modest growth of 1.1 per cent in 2010."