January 31, 2013 1:15 pm

Santander UK margins squeezed

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The performance of Santander UK suffered again in the fourth quarter of the year, as profit margins were squeezed by the low interest rate environment and a mistimed expectation that rates would have started to rise by now.

The squeeze, exacerbated by a misjudged interest-rate hedge that will continue to depress margins through the first half of 2013, dragged down the bank’s net interest margin by 24 per cent in the year to the end of December.

Income was boosted by a “capital management exercise”, which generated £705m of one-off gains when Santander UK bought back its own debt in the market at a discount to par value.

Profit before provisions for the year fell 2 per cent compared with 2011 and 20 per cent in the fourth quarter – although annual pre-tax profit was stable at £1.2bn, as charges for product mis-selling and other liabilities halved. In particular there was no additional provision beyond the £751m PPI charge taken in 2011, which analysts said could suggest that the worst was over for other UK banks, too.

Barclays is the first of the UK’s “big four” lenders to report its fourth-quarter results on February 12.

Analysts also praised the cost controls at Santander UK. Overheads were down 1 per cent.

The bank remains one of the best capitalised among British peers, with a core tier one capital ratio of 12.1 per cent, after paying a £450m dividend to its Spanish parent. Incoming Basel III capital rules are expected to shave about 1 percentage point off that number.

Although Santander would like to float its UK business, executives have dropped the idea for the time being, amid poor bank valuations. Santander UK also needs more clarity from policymakers on what it must carve out under the planned Vickers ringfencing reforms, as well a chance to revive profitability.

That, executives say, is likely to push the hoped-for initial public offering into late 2014, or more likely 2015 at the earliest.

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