Santander’s profit before tax was down 36 per cent year-on-year in the first six months of the year, primarily due to income pressure from existing customers and regulatory changes.
In its half year results, published today (July 23), the banking group reported a profit before tax of £575m — down 36 per cent from the £903m measured for the first half of 2018.
Santander reported its net interest income had dropped 8 per cent compared with the previous year and the group put the reduction down to "pressure from the mortgage back book" and "£2.1bn of standard variable rate attrition".
Mortgages on the back book are medium to long term mortgage customers who often provide the bank with higher margins than front book customers who have gained new deals with the lender.
SVR attrition accounts for the number of consumers who remortgage to get a better deal once their initial fixed-rate deal has finished.
Santander's non-interest income was down 11 per cent and the group stated this was down to a loss of £63m due to ring-fencing in its corporate and investment banking arm.
From January 1, the Bank of England enforced regulation which saw global banks, such as Santander, required to ring-fence their retail arm from their investment arm.
Quarter on quarter (from end of March to end of June) the bank saw its non-interest income increase £36m.
The bank increased its mortgage lending by £1.4bn from the end of 2018 to June 2019 and the group stated it would “continue to strengthen” its mortgage franchise and aimed to “maintain the market share”.
Its banking net interest margin dropped 11 basis points to 1.69 per cent in the first six months of the year, also due to mortgage back book pressure and SVR attrition according to the group, but new mortgage margins improved slightly during the year.
The group also took a hit from payment protection insurance claims, paying £248m in redress and related costs in the period.
Santander reported its outlook for 2019 was predicated on the UK’s orderly exit from the EU, noting it continued to prepare for all potential outcomes including a no-deal leave in October.
In the results, the group stated it was focused on building strong customer relationships, improving returns for the corporate business, and ensuring profitable growth in its retail banking arm.
Nathan Bostock, chief executive at Santander, said: "The results for the first half of the year reflect the start of a multi-year investment in our strategic transformation programme, a number of external factors and our prudent approach to risk.
"Our business remains strong, with the further enhancement of our mortgage franchise and increases in our retail and corporate deposits, both important customer loyalty drivers."
Mr Bostock added that the group’s profitability had been impacted by a fall in income due to the competitive UK mortgage market as well as uncertain political times.
He said: "We are confident that our strategy, combining prudence with decisive actions, will deliver significant benefits over the medium-term and leave us strongly positioned for the future."