Santander UK profits tumble 19% amid intense mortgage competition and pending court decision

Santander has reported a significant drop in its UK profit for the third quarter, while also delaying the release of more detailed figures to assess the impact of a landmark motor finance court ruling in London.

The Spanish bank announced that its UK arm's profit was €346m (£288m) between July and September, marking an 18.5 per cent decrease from the same period last year, as reported by City AM.

This decline follows a 23 per cent year-on-year fall in the previous quarter as the bank contends with fierce mortgage competition and declining interest rates. Santander partially attributed the third-quarter slump to a one-off gain during the same period last year from selling a stake in Euroclear.

However, the bank's UK revenue still dropped nearly 10 per cent after it maintained higher mortgage rates than some competitors. Despite recent improvements in mortgage activity, aided by the Bank of England's rate cut in August, some lenders have withdrawn their cheapest deals due to uncertainty surrounding the government's forthcoming Budget.

Santander also disclosed a streamlining of its UK operations, reducing its workforce by 468 to 21,812 this year through redundancies and not replacing some departing staff. The bank stated it would not release a more detailed set of UK earnings until it has evaluated the implications of a key court ruling last week that could leave motor finance providers facing billions in additional compensation payouts.

Analysts have increased their estimates of banks' exposure to a regulatory investigation into now-prohibited commission arrangements with brokers, following a court ruling last week that sided with borrowers. The Court of Appeal declared on Friday that a broker could not lawfully receive a commission from the lender without securing the customer's fully informed consent to the payment.

This decision has heightened the likelihood of the Financial Conduct Authority (FCA) introducing a compensation scheme for lenders as part of its review into the so-called discretionary commission arrangements, 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," stated Benjamin Toms, an analyst at RBC Capital Markets, in a note.

RBC has projected a worst-case scenario for Santander UK that would result in a £1.8bn bill, encompassing compensation, interest and administration costs. This is compared to a previous upper estimate of £1.5bn.

RBC's base case for Santander would see the bank incur a £1.1bn cost 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 commented on Tuesday. "Nor is it expected to affect the achievement of the group's financial targets for 2024."

In a separate development, Santander's Chief Financial Officer, Jose Garcia Cantera, indicated to Bloomberg that the bank is bracing for a hit to profits as a result of the FCA's investigation, forecasting an impact "significantly lower" than €600m (£499m).

The banking giant expressed disagreement with the judges' findings in the test case, pointing out that defendants are preparing to contest the decision through an appeal.

Santander also stressed that the recent judicial ruling has established a "higher bar" regarding the disclosure and consent surrounding commission payments than what was previously customary.

Close Brothers' stock value took a significant beating due to the decision, with the company being tagged as the most vulnerable lender on a relative basis. The judgment likewise exerted downwards pressure on the shares of Lloyds Banking Group, which operates Black Horse, the leading motor finance firm in the UK.