Cost rises and economic woes see profits take a dive at Santander UK

Santander UK's first-quarter profits fell 40 per cent as it was hit by higher regulatory and funding costs as well as a weaker economic background.

The bank, headed by Ana Botin, yesterday cautioned that it did not expect to see any great improvement in its profits this year and perhaps into 2013.

Ms Botin said: "The macroeconomic outlook, together with increased funding costs and low interest rates, will continue to put pressure on earnings this year, partially offset by a broadening and deepening of our customer relationships and the maintenance of our cost discipline. Regulatory uncertainties continue to impact our ability to plan ahead."

Santander UK's pre-tax profit fell from £590m to £347m in the first three months of the year. Ms Botin called it a "solid" result and said the bank opened 400,000 new current and credit card accounts through the quarter.

Bad loan writedowns jumped 40 per cent to £179m, partly as a result of the bank building up its lending book to small and medium-sized businesses, but also because of the legacy of Alliance & Leicester's corporate lending book , which has come under more pressure as the economy stalls.

Santander UK said the costs of medium-term funding in the money markets had continued to rise even in the last three months. It claimed that at the same time, almost permanently low interest rates make it difficult to grow the profit margin between what it offers savers and charges lenders.

A planned £1bn London flotation of the bank has been put on hold.

Its parent company Santander, the largest Spanish bank, also reported a fall in profits: down 24 per cent at €1.6bn (£1.3bn). The bank has around €1bn left to write down against losses from Spain's property crash, and will set aside the provisions throughout this year.

Separately yesterday, HSBC confirmed that 2,217 of its people in the UK will lose their jobs in the coming months. About 450 of those cuts will fall in London. The cull is part of the wider 30,000 job cuts worldwide that the chief executive, Stuart Gulliver, announced last year to slash costs.