PPI compensation bill hits Santander

A £538m provision to cover compensation for customers mis-sold payment protection insurance in the UK knocked a dent in the profits of Spanish bank Santander, which has been hoping to float the UK business on the London stock market.

The bill revealed by Santander on Wednesday means that all the major players in PPI – which was supposed to pay out if customers lost their jobs or fell ill but often failed to do so – have now admitted the financial cost of mis-selling the insurance during the past decade.

Bailed out Lloyds Banking Group kicked off the process after setting aside £3.2bn in May, while the Royal Bank of Scotland is providing £850m, Barclays £1bn and HSBC £270m.

Profits at Santander fell 21% to €3.5bn (£3bn), in part because of the provision.

Ana Botín, the head of the UK business and daughter of Santander chairman Emilio, complained about the impact of regulatory changes on the bank’s business. She stressed the UK arm was beating its pledges to lend to small businesses, as set out in the Project Merlin agreement with the government in February.

“We continue to be a consistent lender to homeowners, despite weak demand, and to small- and medium-sized enterprises (SMEs), to which our lending grew by 27% and where we continue to exceed our lending commitments made under the Merlin agreement,” she said.

The fall-off in mortgage lending was stark, after rapid expansion by Santander in the immediate aftermath of the 2008 banking crisis when other players pulled out of the home loan market. However, the Spanish bank is now no longer able to keep up with the pace at which home loans are being repaid. Net lending – which takes account of mortgages repaid – was negative by £400m in the first half, falling 11%.

However, for small businesses the stock of lending was up 27% and gross lending – which adds up loads repaid and new ones granted – reached £4bn, some £2.1bn of which was for SMEs. The Bank of England is due to publish an official six-month update on Project Merlin on 12 August, to show if the banking industry is meeting the pledge to lend £76bn to SMEs and £190bn to businesses generally.

While the bank’s parent company has said it wants to float the UK arm this year, the City now believes such a move is unlikely until 2012, when there will be a clearer view on the regulatory changes imposed by the government following the recommendations of the independent commission on banking (due on 12 September).

Botín is already concerned about the impact of requirements to hold more liquid instruments such as government bonds on overall profitability. Over the past 18 months, the bank has built up its hold of liquid assets by £30bn.