Santander Prepares for Rising Defaults as BoE Raises Interest Rate

Santander UK has warned that macroeconomic challenges in the United Kingdom could impact credit quality.

In its 2022 results announced on Thursday (Feb. 2), Santander UK revealed that it put aside 321 million pounds last year to cover potential defaults, compared with 233 million pounds in 2021.

As Mike Regnier, CEO at Santander UK, commented in the earnings statement, following a market slowdown toward the end of 2022 and an “uncertain economic outlook for 2023,” going forward, the bank will focus on a “prudent approach to risk.”

In its group-wide earnings statement, also published on Thursday, Santander said that during the fourth quarter, it booked higher loan-loss provisions in Brazil, Poland, Spain and the U.S. too.

The bank said its concerns over potential defaults in the U.K. are fueled by the erosion of real disposable income as a result of inflation and the looming prospect of a recession.

Santander’s warning comes as mortgage payments in the U.K. have hit their highest level in years. As PYMNTS has reported, U.K. mortgage repayments as a share of people’s income are at the highest they have been since 2008.

The latest data published by Nationwide Building Society Friday revealed that in the final quarter of 2022, first-time buyers in the country were spending on average 39% of their take-home pay on mortgage repayments.

To add salt to the wounds of those suffering from a sharp increase in mortgage costs, property values have been declining in many parts of the U.K.

In Thursday’s earnings statement, Santander said it expects the downward trend to continue, with house prices “falling back to 2021 levels in the year ahead,” as higher interest rates suppress demand.

On the same day, the Bank of England (BoE) instigated its tenth consecutive rate hike, raising the U.K.’s interest rate by half a percentage point to 4%.

However, the good news for mortgage holders in the country is that the central bank signaled that with inflation on its way down, interest rates may be approaching their peak.

“We’ve seen the first signs that inflation may have turned the corner… and we think it will continue to fall this year,” Andrew Bailey, governor the of the BoE, told reporters.

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