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Banco Santander's U.K. Unit to Take Impairment Charge in Q3

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After conducting a review of goodwill attributed to its U.K. business, Banco Santander, S.A. (SAN - Free Report) recently announced that Santander UK will take an impairment charge of nearly 1.5 billion euros. The impairment will be recognized in the Group’s third-quarter 2019 results.

Although, the impairment may have a negative impact on the company’s profits in the quarter, the Group’s CET1 ratio will not be affected as goodwill is excluded while calculating the same. Moreover, the company’s tangible book value per share will also remain unaffected.

This write-down is a result of the weaker economic outlook amid a challenging regulatory environment and the impact that the uncertainty related to Brexit has had on the U.K. economic growth.

In fact, the impairment also reflects the unintended negative impact that “ring-fencing” has had on U.K. banks.

Ring-fencing is the largest structural reform that has been imposed on U.K. banks. Per the regulation, banks with more than £25 billion in deposits need to separate their essential banking services from investment banking operations, effective Jan 1, 2019. This is to prevent a replay of the 2008 financial crisis when banks’ poor investment decisions put pressure on ordinary depositors, leading to big taxpayer-funded bailouts.

While the rule was designed to protect banks, it has had several negative impacts. The ring-fencing regulation has created a wide range of strategic and operational issues for legal and commercial functions within U.K. banks. It has led to an increase in costs even for retail banking experts like Banco Santander. Moreover, ring-fencing has intensified competition as it has encouraged banks like HSBC Holdings plc (HSBC - Free Report) to deploy more funds in the U.K. mortgage market.

Notably, Banco Santander entered the U.K. market in 2004 with the acquisition of Abbey National. It purchased Bradford & Bingley and Alliance & Leicester in 2008 and 2009, respectively. Following these acquisitions, the company named this unit Santander UK in 2010.

However, Santander UK, the Spanish lender’s fourth-largest unit, has been struggling to generate profits amid rising expenses and increasing competition within the mortgage market because of ring-fencing.

Nevertheless, Ana Botin, the company’s chairman said, “While ring-fencing 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.”

While HSBC completed ring-fencing in July 2018, Barclays (BCS - Free Report) completed it in April the same year.

Notably, like Lloyds Banking Group plc (LYG - Free Report) , Barclays and most U.K. lenders, Banco Santander also had to compensate customers for mis-sold payment protection insurance (PPI) policies between late 1990 and early 2000.

So far this year, Banco Santander’s shares have lost 11.8%, against the industry’s growth of 2.3%.

Currently, the stock carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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