Fierce competition and Brexit trigger impairment at Santander UK

By Jesús Aguado

MADRID (Reuters) - Tougher regulations, increased competition and uncertainty around Brexit have forced Santander <SAN.MC> to take a 1.5 billion euro (£1.33 billion) impairment on its British business.

The Spanish lender said late Tuesday the completion of a review of the goodwill ascribed to Santander UK, mostly a result of compulsory rules in Britain to separate retail banking from investment banking activities, had led to the one-off charge.

The euro zone's biggest bank by market value said the impairment would be booked in the third quarter and that it was also a result of economic uncertainty caused by Britain's looming departure from the European Union.

Santander said the impairment would hit reported quarterly profits, but not underlying profits and would not affect its core capital levels or medium term targets.

Its shares were down 0.7% on Wednesday, in line with a drop of 0.8% in Spain's blue-chip index Ibex-35 <.IBEX>.

"The goodwill revision looks a bit rushed to us as Brexit is still uncertain and it could even lead to a bigger adjustment in case of a disorderly outcome," broker investment firm Alantra said in a note to clients.

In its recently outlined strategy in April, Santander said it would focus on cost savings in Europe, where lenders are under pressure due to ultra low interest rates, while pursuing higher profitability in Latin America.

In Britain, Santander's third-largest market after Spain and Brazil, profit fell 41% in the second quarter due to continued pressure on mortgage margins, restructuring costs of 26 million euros and provisions of 80 million euros.

Of its main markets, Britain has the lowest underlying profitability target ratio, which was cut in July to 9-11% from the 10-12% set in April.

"The UK business is the weakest link in the Santander equity story and this unit has driven most of the downgrades to consensus forecasts in the last few years," Alantra said.

Banks operating in Britain have been separating deposit-taking operations from riskier investment banking activities, resulting in higher costs and a reduced capacity to generate profits there, the lender said.

As a result of the so-called ring-fencing process, Santander UK has been shrinking its balance sheet and transferring assets to Madrid-based Santander, which also has a London branch.

The ring-fencing has led to an increase of approximately 40 billion euros in assets in the parent company's London branch after a transfer of some assets from its British unit, the bank said.

As part of this process, Santander UK transferred around 200 employees to the parent's London branch in 2018, a spokeswoman said.

Additionally, Santander announced it would pay its first full cash dividend of 0.10 euro per share against 2019 earnings, effective Nov. 1.

Santander shareholders will now receive two annual dividend payments instead of four and the board ratified its intention to maintain a payout ratio over underlying attributable profit of 40-50%, it said.

(Reporting by Jesus Aguado, Editing by Andrei Khalip, Mark Potter and David Evans)