By Pietro Lombardi and Patricia Kowsmann 

Spanish banking giant Banco Santander SA will book a roughly EUR1.5 billion ($1.7 billion) charge over its U.K. business that has been hit by Brexit and changes in banking regulation.

The impairment charge comes during a challenging period for Europe's banks as ultralow interest rates make lending less profitable. Political turmoil surrounding the U.K.'s exit from the European Union is adding to the uncertainty, particularly for lenders like Santander with large U.K. operations. Santander reported a 18% drop in second-quarter net profit over restructuring costs at home and a squeeze on U.K. mortgage margins.

The lender said the charge was mostly due to a challenging regulatory environment, mentioning the negative impact of "ringfencing" rules, under which U.K. lenders must separate retail banking from riskier investment-banking operations. By separating the businesses, many costs have been duplicated.

The rules, which were imposed on banks following the financial crisis, have also increased competition on mortgage lending in the U.K. because banks with both retail and investment banking operations had to stop using retail deposits to spur their business for corporate clients. As a result, several banks have diverted the liquidity into mortgage lending. Santander, which also has big operations in Brazil, is focused on retail banking.

"While ringfencing reforms and Brexit have impacted profitability in the U.K., it remains a critically important market, in which the group is investing significantly to service our customers and to continue to compete," the bank's executive chairman, Ana Botín, said.

The British economy contracted in the second quarter as uncertainty over the country's planned departure from the European Union on Oct. 31 hurt business confidence. Since then, uncertainty over the U.K.'s relationship with the EU has deepened further.

Santander said the impairment charge will be reported in its third-quarter results. The bank said its core capital ratio won't be affected.

Shares of Santander followed the broader banking sector and were down 2.4% at about noon Wednesday. The impairment charge was announced after the market closed Tuesday.

The lender will pay the first of two annual dividend payments starting in November. Shareholders will get EUR0.10 a share in cash.

Write to Pietro Lombardi at Pietro.Lombardi@dowjones.com and Patricia Kowsmann at patricia.kowsmann@wsj.com

 

(END) Dow Jones Newswires

September 25, 2019 07:18 ET (11:18 GMT)

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