Santander profits rise by 11%

High street banking giant Santander reported an 11% hike in UK annual profits today, but revealed the pressure of intense competition for mortgages and savings business.

The group, which has snapped up a raft of UK players such as Alliance & Leicester and Abbey in recent years, said net mortgage lending - new loans less redemptions - fell 27% in 2010, while savings deposits plunged by more than a third.

It grew pre-tax trading profits in the UK to £2.3 billion, but it warned that banking margins were being hit as it faces increasing costs to attract savings and meet new regulatory requirements.

Despite the challenges, its UK arm helped offset an even tougher market for the wider Spanish group, which saw bad debt charges drag annual profits down by 8.5% to 8.18 billion euros (£6.96 billion).

The Spanish parent company confirmed plans to spin off its burgeoning UK arm by floating it on the stock exchange in the second half of this year.

It has grown in the UK through a series of acquisitions, most recently agreeing to buy the 318 branches being offloaded by Royal Bank of Scotland to appease regulatory concerns on state aid.

Today's figures mark the first from the UK banking sector, with Santander's British rivals due to start reporting later this month.

Newly-appointed UK chief executive Ana Botin, whose predecessor Antonio Horta Osorio quit to join rival Lloyds Banking Group, said profits growth was healthy despite a "challenging operating environment" in the UK.

Trading income rose around 4% last year, limited by increased regulatory costs and capital requirements.

The group said UK banking margins would be knocked further in 2011.

Its UK arm saw deposits halve in the second half of 2010 to £5 billion, leaving annual deposit inflows down 35% to £9.6 billion over the year.

More expensive funding costs since the credit crunch have seen banks and building societies clamber to secure deposits to finance lending, which has driven aggressive competition to attract savers.

Santander also saw a sharp drop in net mortgage lending, slumping to £5.5 billion in 2010 against £7.6 billion in 2009,

The decline became more marked towards the end of the year as mortgage lending dropped 61% year on year in the second half .

The general UK mortgage market has been under pressure, with recent figures from the Bank of England showing new mortgage lending last year fell to the lowest level since records began in 1987.

Santander said it grew lending to small businesses by 26% last year.

It confirmed it was still in unilateral talks with the Government to agree business lending targets for 2011.

The company pulled out of collective industry talks last month on bonuses and lending - so-called Project Merlin - designed to support the economy.