Santander to take $1.7 billion charge on troubled UK unit

Bloomberg

Banco Santander SA will take a 1.5 billion-euro ($1.7 billion) charge over its UK business, which has struggled to boost profit amid stricter regulations and a competitive mortgage market.
The impairment will be included in third-quarter results, the Spanish lender said. It won’t affect the bank’s cash flow or tier 1 capital ratio, a key measure of financial strength. Santander also announced a dividend payment of 10 euro cents a share in cash, unchanged from its second-half payout last year.
Santander UK, the lender’s fourth-largest unit, is facing increased competition in its key mortgage market and “ring-fencing” rules that force banks to separate their retail and investment banking operations. Weakness across the bank’s European businesses is increasing the Spanish lender’s dependence on the strong but potentially volatile Latin American market, where it has large businesses in Mexico and Brazil.
Profit at the UK business fell 13 percent in the second quarter from a year earlier on reduced income from lending and fees.
Ring-fencing, designed to protect retail deposits from risky investment banking, has had unintended side effects.
The regulation has sealed away capital in units where mortgages are one of the few avenues for growth, encouraging giants such as HSBC Holdings Plc to wade into a market it had long neglected.
Santander fell as much as 2.5 percent in Madrid trading and was down 1.6 percent at 3.57 euros. The stock has fallen 10.2 percent this year compared with a 3.4 percent decline for the STOXX Europe 600 banking index. The benchmark was 16 percent lower on Wednesday.
“With no CET1 impact, the charge reflects structurally lower profitability in the UK post ring-fencing. Future writedowns shouldn’t be ruled out, we believe, given Brexit risks and intense competition,” said Jonathan Tyce, Bloomberg Intelligence’s banking analyst.
Like most UK lenders, Santander was hit by costs to pay refunds to customers who were mis-sold payment-protection insurance.
It reported a second-quarter charge of 108 million euros, in part from costs related to the shuttering of 140 UK branches.