Santander UK profits rise, but bank sees more borrowers under stress

Santander UK has notched up a rise in annual profits after being boosted by higher interest rates, but flagged rising numbers of borrowers falling behind with repayments.

The Spanish-owned bank said it is seeing a “modest” increase in customer arrears across mortgages, credit cards, unsecured personal loans and overdrafts in recent quarters.

Its mortgage borrowers faced paying an extra £250 a month on average in repayments last year due to higher rates, though Santander said only 1% of its customers who remortgaged last year are struggling with repayments.

But the high street lender is predicting cuts to interest rates this year, falling from 5.25% to 4.5% by the year-end as inflation eases back, which it said will “ease cost-of-living pressures for our customers”.

It expects the first rate cut to come in May.

However, falling rates will also take its toll on the group’s profitability, with the group warning that its net interest margin – a key performance measure for retail lenders – is set to fall over the year ahead.

The group reported a 13% rise in annual pre-tax profits to £2.1 billion for 2023, up from £1.9 billion in 2022.

It revealed a 36% drop in money set aside for loan losses, to £206 million, down from £321 million in 2022, thanks to an improved outlook for the wider UK economy.

Chief executive Mike Regnier said: “During 2023 our focus has been on supporting our customers through the higher cost of living and increased interest rates.

“As we look ahead to 2024, we expect interest rates and inflation to fall.”

In the final three months of last year, pre-tax profits dropped 25% quarter on quarter to £418 million, though the result was 3% higher year on year.

Credit impairments in the fourth quarter dropped to £2 million, from £99 in the previous three months.

Its mortgage book suffered amid a slowing housing market over the year, with an £11.9 billion drop in mortgage lending in 2023.

But the group has upgraded its economic forecast for the UK and is pencilling in growth of 0.4%, rising to 1.3% next year, with a rosier picture for the housing market.

It is predicting house price falls to ease back to 1% in 2024, from a 2.2% decline in 2023.

House prices will return to growth in 2025, with a 2.5% increase, according to Santander.

Mr Regnier told the PA news agency: “Now that we see a world of falling interest rates and falling inflation, our expectation is that the housing market should be pretty stable this year in terms of house prices.”

The group said it would continue to keep a tight rein on costs amid the shift to online banking.

Mr Regnier said its 450-strong branch network remains “under review”, but said there were no immediate plans to close further branches.

He said: “This is something that every bank keeps under review.

“If demand for face-to-face services continues to drop, we need to provide that service cost effectively.”

The UK arm contributed to higher earnings at the wider Spanish-based Banco Santander group, which posted a record 11.1 billion euro (£9.5 billion) profit for 2023 on the back of higher interest rates.

Its net profit was 15% higher than in 2022.