Surge in loan-loss reserves poison Santander profits

Funds set aside to deal with an expected jump in loan defaults caused by borrowers’ being squeezed by a historic inflation surge has whacked Spanish bank Santander’s profits.

The lender, which has a big presence in the UK, banked over €500m (£420m) in loan-loss reserves over the three months to June, up 25 per cent compared to the previous quarter, it announced today.

That charge hit the lender’s bottom line, with pre-tax profits eroding over 10 per cent compared to the last quarter to €3.7bn (£3.1bn).

However, over the first six months of this year, profits jumped 3.8 per cent, partially reflecting the worsening global economic situation since Russia invaded Ukraine in February.

Santander’s European and British customers are being spiked by the biggest inflation surge in recent memory.

In the UK, living costs are up 9.4 per cent, the quickest acceleration since 1982, while in the eurozone, inflation has soared to the highest level since the creation of the euro in 1999.

Inflationary pressures are squeezing consumers’ finances, raising the risk of Santander’s existing and future loans souring.

Ana Botín, executive chair of Santander, said: “The economic context will likely be difficult for governments, central banks, businesses and individuals.”

“Banks continue to be part of the solution and we look to all institutions and authorities to work together as we continue to support our customers and the economies we serve,” she added.

Europe’s top lenders have also ramped up loan-loss provisions to brace for a rise in defaults.

This time last year, banks released provisions built up over the course of the pandemic, boosting profits.

Higher interest rates also raised Sanatnder’s net interest income nearly eight per cent. Elevated borrowing costs tend to support banks by allowing them to charge more for loans.

The Bank of England has lifted rates five times in a row to a 13-year high of 1.25 per cent.