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'Caution' at Santander UK as first quarter profits fall 1%

Santander UK (LSE: 44RS.L - news) has said there is a "degree of caution" in its outlook for the UK economy as rising inflation begins to hit consumer spending power.

The lender voiced fears of an easing in credit growth to households and businesses alike while revealing a 1% dip in first quarter profits.

It reported earnings of £525m in the three months to March - damaged by a further provision of £32m to cover costs associated with the payment protection insurance scandal and another one-off regulatory charge of £25m.

The bank said it left UK profits 8% lower when the sum was translated into euros for parent firm Banco Santander (Amsterdam: 817651.AS - news) - accounting for the plunge in sterling's value since the Brexit vote.

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While it announced growth of almost £1bn in net business lending, Santander UK said it had seen slower "loyal retailer customer" growth after changes to its 1/2/3 credit card offer.

Net (LSE: 0LN0.L - news) mortgage lending fell by £400m after it withdrew some of its most competitive rates at the end of 2016.

There are concerns that uncertainty related to the Brexit vote could start to harm business investment this year as price rises - linked to higher import costs because of the weaker pound - start to bite.

There is also evidence that consumers are starting to rein-in their spending, money often derived from savings and credit, that has largely driven economic growth since the end of the financial crisis.

The most recent retail sales figures pointed to a plunge while - just this week - Carpetright (Other OTC: CGHXF - news) and Costa's owner have also voiced fears for growth ahead.

The bank said: "Higher inflation, largely from the lower value of sterling, could reduce households' real earnings growth.

"This and a potentially more challenging macro environment going forward, adds a degree of caution to our outlook.

"Even (Taiwan OTC: 6436.TWO - news) so, we expect solid UK economic growth in 2017."

Santander is the first of the banks with a major high street presence to report on its progress this week.

Lloyds, RBS (LSE: RBS.L - news) and Barclays (LSE: BARC.L - news) are due to update their shareholders in the next few days.