Profits suffer at Santander UK following rise in savings rates

Eurozone woes have squeezed Santander’s UK profits this year as it pays the price for having to dangle more attractive deposit rates to tempt nervy savers, the bank said today.

Santander, which employs 25,000 staff in the UK, acted to counter savings outflows in May and June last year amid jitters over the nationalisation of Spain’s Bankia and a bailout for the nation’s struggling banking system.

“During last year, speculation over Spanish sovereign ratings and our own ratings meant we had to be very competitive on deposit spreads,” said Santander’s head of UK banking, Steve Pateman.

The bank has since cut savings rates, which should feed into recovering profits later this year, but pre-tax profits were down 20 per cent to £549 million for the first half of 2013.

Santander’s net interest income, the difference between what it generates in loans and what it pays out in deposits, was down 5 per cent to £1.39 billion in the first half.

The bank’s UK arm is focusing on small business lending as it pulls away from the mortgage market. Loans to small and medium-sized companies rose 12 per cent to £10.9 billion, while gross mortgage lending dropped to £7.9 billion from  £8.7 billion a year earlier.

The company has also cut its loans as a proportion of its deposits to 125 per cent. “It is about running a safe and sustainable organisation,” Pateman said. Total customer loans fell from £201.6 billion to £191 billion in the first half and the bank expects a further reduction in lending across 2013 as a whole.

Meanwhile, Santander welcomed another 130,000 current account switchers in the first six months as it continued to push its 1-2-3 account, which pays interest on cash balances and cashback on direct debit bills.

Profits at its Spanish parent increased by 29 per cent to €2.25 billion (£1.95 billion) as it largely moved free of the write-downs on property assets taken during the past two years, although weaker earnings from Latin America and its home market weighed on the results.