Banco Santander is set to shrink its U.K. business in the next three years after unveiling disappointing first quarter earnings on April 26. This comes at a time when several new retail banking players, such as Metro Bank and Virgin Money, are emerging with the aim of trying to win market share from the top five players including Santander, which is the U.K.’s second-biggest mortgage lender after Lloyds Banking Group.

Steve Pateman, London-based executive director and head of U.K. banking at Santander U.K., did not give precise details of the reorganization but said in an interview that the bank is still moving through a transitional phase: “I think we’ll become smaller over the next three years to become better. From having been a collection of three different building societies, we’re now building a full service bank, probably one with fewer than the 25 million customers we have now. We’ve yet to sketch out the exact shape of it — that will depend on what happens in the regulatory and economic environments in the next few years — but we see a clear trajectory for improvement.” Santander, which decided to postpone plans for an IPO last year because of market conditions,....