Mortgage price war set to put Santander profits under pressure

High street banking giant Santander will reveal how it has fared amid the mortgage price war raging in the UK when it kicks off half-year bank results on Tuesday.

The Spanish-owned lender has already revealed a hit from the intense competition in the market, which is putting the squeeze on British banks, with a 35% plunge in its first quarter profits.

First out of the stalls from the UK banking sector, Santander is expected to reveal the woes have continued throughout the first half of 2019, with mortgage rates under pressure across the board.

The trend has been great for borrowers, but has taken its toll on retail banking groups, who have already seen profit margins hammered by more than a decade of low interest rates.

It has also led to some smaller players quitting the market, with Tesco Bank putting its mortgage book up for sale in May amid the difficult trading conditions for lenders.

Santander is understood to be one of the bidders looking to snap up Tesco Bank’s mortgages as it becomes a market favouring the large scale.

But even with a hefty mortgage balance under its belt, Santander has been feeling the heat, reporting pre-tax profits of £270 million for the first three months of 2019, down from £414 million a year earlier.

Underlying pre-tax profits fell 13% to £352 million in the first quarter.

Its figures showed net interest income, a key measure for retail banks, dropped 6% in the first quarter largely as a result of the mortgage woes.

The wider Banco Santander group, based in Madrid, was also weighed down by the British performance, with net profits falling 10% to 1.84 billion euro (£1.7 billion) for the three months to March.

The figures showed a worsening of the mortgage lending conditions since 2018, with experts suggesting the price war has been amplified by ring-fencing regulations.

It is thought the rules, which require banks to separate their retail operations from investment banking businesses, have seen banks left with large amounts of funds trapped in their retail arms, which they are putting to use by lending, pushing rates down.

The impact on net interest margins and profits is set to be a running theme across many of the major UK banking players, which will follow suit with their figures over the next two weeks.

TSB, owned by Banco Sabadell, reports on Friday.

Santander’s interim figures also come after the group announced earlier this year that it is to axe 140 branches across the UK, putting more than 1,200 jobs at risk.

First quarter figures showed it booked £77 million in charges related to the overhaul.

The half-year figures will also be watched for any further cash set aside for the payment protection insurance (PPI) saga as the August deadline for claims looms large.