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Santander posted a drop of more than 20 per cent in UK profit as it clawed back market share in the country’s highly competitive mortgage sector.
Even as the Spanish bank reported a record quarterly profit on Wednesday, the UK stood out as a weak spot as the cost of courting new British borrowers took its toll.
Demand for UK mortgages rose in the first quarter of the year after a slowdown last year, as most lenders cut their mortgage rates amid expectations that the Bank of England will cut borrowing costs this year.
Santander’s UK net profit dropped 23 per cent from a year ago to €325mn in the second quarter, but it boosted its share of new mortgage issuance to 10.5 per cent as it sought to match rivals’ interest rates.
The Spanish group’s share of new mortgages dropped from 11 per cent to as low as 4 to 5 per cent last year when it prioritised profit margins over keeping up with competitors’ offerings.
“Right now we see a slight pick-up in demand [and] obviously pressure to compete for that increased demand,” said José García Cantera, Santander’s chief financial officer. “But it looks like the worst in the mortgage market in the UK is behind us. We should gradually see an improvement both in volumes and in profitability.”
Mortgage rates have fallen in recent weeks after increasing slightly in February, as markets anticipate the BoE will cut its benchmark interest rate in August or September from a 16-year high of 5.25 per cent.
Santander’s record global profit of €3.2bn, which marked a 20 per cent increase from a year ago and was just ahead of analysts’ expectations, was driven largely by its operations in Spain and Brazil.
Because European Central Bank interest rates remain only 0.25 percentage points below their record 4 per cent high, Santander and other lenders continue to garner healthy net interest income — broadly the difference between lending and deposit rates.
Net profit in Spain was €984mn in the quarter, up 48 per cent from a year ago and accounting for almost one-third of the global total.
In Brazil, the bank has benefited from falling interest rates because the country requires banks to cut deposit rates for savers as soon as central bank policy changes.
“We have a negative sensitivity to rates in Brazil, which means that when rates go down margins go up,” said García Cantera. Brazil contributed net profit of €580mn, up 64 per cent from a year ago.
In Argentina, Santander took a €687mn hit due to an “adjustment” for hyperinflation. That involved the bank using a theoretical exchange rate, based on modelling of how the Argentine peso would behave if it moved in line with inflation, as opposed to the official exchange rate.
Santander shares were up 3.2 per cent by midday on Wednesday.
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