(Bloomberg) -- Banco Santander SA’s frustrations with its British business are piling up, with job cuts and an expensive car finance review last week just the latest headaches for executives as they make other countries more of a priority.
Spain’s most valuable bank became a UK household name with its 2004 acquisition of building society Abbey National, in a deal Santander’s then-chairman Emilio Botin said would “reinforce our pan-European franchise” and give the bank “a more balanced stream of earnings.”
Two decades on, both the bank and its feelings toward the UK have shifted. Santander branches are still a familiar sight in British towns and it remains one of the biggest mortgage lenders, yet its Latin American markets offer greater returns. Santander has trimmed the relative size of the British business: risk-weighted assets in the UK have been falling from around 14.7% of the group’s total in 2018 to around 12.7%. in the first half of this year.
The bank has previously considered divesting assets in the UK and may consider doing so again if it felt it may fetch a good price for any of them, according to two people familiar with the matter. There are no active deliberations at the moment and chances of any deal in the future are low, they said, asking not to be named discussing non-public information.
The bank delayed its full UK results last Monday so it could assess the cost of an industrywide regulatory probe into mis-sold car finance. Chief Financial Officer Jose Garcia Cantera said it would come in “significantly lower” than €600 million ($649 million), though analysts have touted a total bill of €1 billion.
Even at the lower end, this represents a big charge for Santander UK, where earnings fell 21.5% to €975 million in the three quarters through September.
While the cost of deposits rose in the first nine months of the year, the loan book shrank 4% compared to a year ago to €238 billion.
Santander has also kicked off a round of job cuts at its UK headquarters in Milton Keynes, and expects to lose almost 1,500 staff in the country this year.
These issues add to the negative sentiment around the British arm, where Santander has moved out around £2 billion to the parent company over the last 18 months. Over three years, the percentage of profits paid as dividends to the group has been higher than in other core markets such as Brazil and Mexico.
“At the moment they are in a holding pattern, not allocating capital to the division, seeing more upside in other regions,” said Benjamin Toms, an analyst at RBC. “They probably need to take some of inorganic action at some point. The bank’s exposure to UK motor finance commissions could also be an unhelpful headwind.”
UK boss Mike Regnier alluded to some of the challenges at a parliamentary hearing in March, where he warned that “even in a really good year, the level of returns that we are able to make in the UK are not as high as the shareholders of our parent would expect.”
Regnier blamed the low returns on fierce competition for UK savers and borrowers, higher tax rates on banks, and the growing burden on finance firms to reimburse fraud victims, something that is “quite unusually globally.” The bank’s fraud losses were £54 million in the first half of the year.
‘Great Opportunities’
To be sure, Chief Executive Officer Hector Grisi has made upbeat public comments about the prospects of the British market. “One of the countries where we have great opportunities” is the UK, Grisi said at a press conference on Tuesday, citing growth in credit cards. In that line of business, he said “we have had good results that are still very incipient, but very good. And in that sense, we will continue like this.”
A spokesperson for the bank said in response to Bloomberg questions that it was “focused on growing Santander’s global businesses across a diversified group of core markets, of which the UK is one.”
The bank is investing in technology in the UK business, and “we always manage capital allocation and RWA evolution to maximize profitability both within the markets and across the group,” they added in an emailed statement.
“The payment of dividends from the UK or other markets to the group reflects efficient management of excess capital and is not an indication of the group’s commitment to any market.”
Regulatory Burden
New regulatory pressures could make the UK market even less attractive for Santander. The car finance cost remains uncertain, with a court ruling last month potentially raising the bill for lenders but subject to appeal. The Financial Conduct Authority is due to set out its next steps in May 2025, with a compensation program among its options.
A new consumer duty introduced last year, obliging financial firms to ensure “good outcomes” for their customers, adds to the burdens.
The bank’s return on tangible equity in the UK was 11.1% in the first nine months of the year, below the group’s overall 16.2% rate and trailing growth areas such as Brazil.
Hugo Cruz, an analyst at KBW, said that he expected the UK to account for a low teens percentage of Santander’s medium-term profits, down from its peak of 19% in 2021. The bank has set a goal of 15% return on tangible equity for it European business in its current strategic plan, which ends in 2025.
Santander is one of several international lenders adjusting its UK operations — and while some are looking to scale back, others are growing. Retail-focused TSB, which is part of Spain’s Banco de Sabadell SA, may come to market if BBVA is successful in the contentious takeover of its domestic rival. London-based Barclays Plc, meanwhile, is seeking to increase its reliance on UK customers, acquiring much of Tesco Plc’s banking business earlier this year.
(Updates to add more detail of UK earnings in sixth paragraph.)
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