Santander UK profit slides as analysts forecast £1.8bn motor finance hit

Santander has revealed a sharp fall in its UK profit during the third quarter while delaying the publication of more detailed figures to digest a landmark motor finance court ruling in London.

The Spanish lender said profit at its UK arm came in at €346m (£288m) between July and September, down 18.5 per cent from a year earlier.

The drop comes after a 23 per cent year-on-year fall in the previous quarter as the bank grapples with intense competition for mortgages and falling interest rates.

Santander partly blamed the third-quarter decline on a one-off gain during the same period last year from selling a stake in Euroclear.

However, its UK revenue still fell nearly 10 per cent after the bank kept its mortgage rates higher than some rival lenders.

Although mortgage activity has improved in recent months, helped by the Bank of England’s rate cut in August, some lenders have pulled their cheapest deals amid uncertainty over the government’s upcoming Budget.

Santander also revealed a streamlining of its UK operations, reducing headcount by 468 to 21,812 this year. It said it had both made redundancies and not replaced some staff who exited.

The bank said it would not publish a more detailed set of UK earnings until measuring the impact of a key court ruling last week that could expose motor finance providers to billions in extra compensation payouts.

Analysts have raised their estimates of banks’ exposure to a regulatory probe into now-banned commission arrangements with brokers, after a test case in the courts last week ruled in favour of borrowers. The Court of Appeal said on Friday that a broker could not lawfully receive a commission from the lender without obtaining the customer’s fully informed consent to the payment.

The decision has made it more likely that the Financial Conduct Authority (FCA) will implement a redress scheme for lenders as part of its review into the so-called discretionary commission arrangements, which it announced in January.

“Our understanding is that the bank needs additional time to make a legal comment on this issue, alongside third-quarter results, or risk being locked out of funding markets,” Benjamin Toms, an analyst at RBC Capital Markets, said in a note.

Santander differs with analysts

RBC has modelled a worse-case scenario for Santander UK that would see it foot a £1.8bn bill, including compensation, interest and administration costs.

That compares to a previous upper estimate of £1.5bn. RBC’s base case for Santander would see the bank take a £1.1bn hit from the investigation.

“It is not possible at this time to reliably predict the financial impact, which is not expected to be material for the group’s financial position,” Santander said on Tuesday. “Nor is it expected to affect the achievement of the group’s financial targets for 2024.”

Separately, Santander’s chief financial officer José García Cantera told Bloomberg that the bank expected the FCA’s probe to hit profits by “significantly lower” than €600m (£499m). 

The bank said it disagreed with the judges’ conclusions and noted that defendants in the test case have said they plan to appeal the decision.

Santander added that the judgement set a “higher bar” for the disclosure and consent to any commission paid than had previously been the case.

The ruling has hammered the share price of Close Brothers, considered the most exposed lender in relative terms. It has also weighed on Lloyds Banking Group, which owns the country’s biggest motor finance provider Black Horse.

Santander reported an overall profit of €3.25bn (£2.7bn) for the third quarter, up 12 per cent year on year, helped by lower costs and loan loss provisions.