Santander UK Group Holdings PLC (LON:BNC) said costs related to meeting ring-fencing rules and margin pressures led to a 7.5% drop in pre-tax profit for the third quarter.
The UK arm of Spanish parent Banco Santander said profit before tax for the three months to September came to £467mln, down from £505mln a year ago.
The bank has spent a total of £240mln to date to comply with the ring-fencing legislation, which requires lenders to separate retail operations from the rest of the business to protect customers from the impact of potential future financial shocks.
The net interest margin (NIM) – a key measure of profitability – fell to 1.78% from 1.89% the prior year amid low-interest rates and tough competition in mortgages.
Total operating income dropped 6.1% to £1.15bn from £1.22bn last year as net interest income fell 5.1% to £907mln and non-interest income decreased 9.7% to £242mln.
Mortgage book grows but margins squeezed
Customer loans, which include mortgages, motor finance, business banking and other unsecured lending, rose to £171.3mln at the end of the quarter from £169mln at the end of 2017.
The mortgage lending balance grew to £157.2bn from £154.9bn at the end of 2017 but margins were squeezed as it offered low rates to lure in customers.
Total customer deposits declined to £146.9mln from £149.3mln over the same period, reflecting a £3.4bn drop in savings balances and a £700mln drip in other retail products.
READ: Santander UK reports 15% drop in first-half profits as tough mortgage market hits margins
Risk-weighted assets rose to £45bn from £44bn in line with customer loan growth.
"In a highly competitive market, we continued to support customers and have grown net mortgage lending while maintaining our rigorous underwriting approach. In our corporate business, we have further reduced commercial real estate exposure while focusing on lending to other trading business customers,” said chief executive Nathan Bostock.
"Our results reflect competitive income pressures and higher regulatory project costs, as well as the impact of ring-fence transfers. Our efficiency initiatives have reduced cost growth in each quarter this year."
In the retail arm, the bank had 4mln customers, up from 3.9mln in December, but said it was unlikely to meet its 2018 target of 4.7mln.
Santander UK ended the quarter with a common equity tier 1 capital ratio of 13.1%, compared to 12.2% at the end of December.
Santander cautious on outlook
For the 2018 financial year, the bank expects net mortgage lending to be slightly below market growth of about 3% as it takes a “prudent approach” to risk ahead of Brexit. The banking NIM is expected to drop and costs will be higher due to regulatory, risk and control projects.
The group said it was cautious about the outlook, given the uncertainties facing the global economy, including Brexit and trade tensions between the US and China.
It added that it expects the weaker buyer demand and subdued house price growth seen in the UK housing market to date to continue.