Santander to Shrink Its U.K. Business After Poor Results

Following poor first quarter earnings this year, Banco Santander announced it is planning to shrink its U.K. business.

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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, has expanded in the U.K. over the last decade through the acquisitions of domestic building societies Abbey National, Alliance & Leicester and Bradford & Bingley. By the end of the year it will have acquired 311 branches from Royal Bank of Scotland Group, a move that will not have a huge impact on market share but will bring it an additional 1.8 million customers.

Pateman also acknowledged, “I think there is space for more competition; the existing players, facing higher capital and liquidity requirements, will need to consider where they allocate capital and liquidity.” Asked about the high volume of customer complaints Santander receives, Pateman said changes were needed: “The service we provide to our customers, and the returns we give to our shareholders, are more important than market share. I see us a bank that is warm, that empathizes with its customers in all channels, and also one that provides digital, mobile and internet banking.”

Santander U.K., which is led by CEO Ana Botin, suffered a 40 percent fall in profits to £347 million ($555 million) in the first three months of 2012, as it made £179 million of provisions for bad loans. This was even worse than the figures for the Spain-based group as a whole, which saw profits decline 24 percent to €1.6 billion ($2.1 billion) compared to the first quarter of 2011. Return on equity of 8 percent for the period is below the group’s mid-teens target, although it was described as “resilient” in the present economic environment in an April 27 note by CreditSights London-based analysts John Raymond and Puja Poojara. Revenues for the group, however, which is led by CEO Alfredo Saenz and chairman Emilio Botin and is Spain’s largest bank by assets, grew steadily by 8 percent to €11.4 billion. Its core tier-1 ratio rose to 9.11 percent by the end of March, which was above the 9 percent level required by the European Banking Authority.

Santander still faces significant funding pressures this year, even though it borrowed a total of €40.3 billion from the European Central Bank’s long-term refinancing operations in December and February. Barclays’ London-based banking analysts Rohith Chandra-Rajan and Carlos Cobo Catena estimated on April 26 that the bank has to carry out €12 billion of deleveraging in order to refinance debt maturing this year. Funding conditions are unlikely to ease soon against a background of international concern about Spain’s economy and its sovereign debt. Yields on Spain’s 10-year bonds had risen to 5.88 percent by April 27 compared to less than 5 percent in early March following the second round of the ECB’s LTROs. Standard & Poors downgraded Spain by two notches on April 27 to BBB+.

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