25/10/2012 08:45 BST

Santander Makes The Most Of SME Lending, But Mortgages, Aborted Takeovers And PPI Cost It Dear

Santander's Spanish parent company saw profits plunge by 94% in the third quarter, with the UK arm also suffering amid pressure on profit margins.

Spanish parent company Banco Santander said net profits slumped to £81 million from £1.5 billion a year earlier, after taking a hit on property losses in Spain.

The UK business arm, which recently pulled out of a deal to buy more than 300 branches from Royal Bank of Scotland, also revealed a sharp fall in the three months to 30 September.

And the aborted takeover and money put aside to deal with potential mis-selling of payment protection insurance will cost £52m.

In Santander's market statement on its nine-month results, it stressed it pulled out of the deal after realising it would not be completed within the timeframe agreed, having already been extended from an original aim to transfer the branches in 2011.

Ana Botin, chief executive of Santander UK, said: "The continued uncertainty regarding timing was not in the best interests of customers or staff. Our overriding obligation is to our existing and prospective customers and we have acted to protect their best interests."

Gloomy figures continued with Santander's mortgages, with the report showing a negative net mortgage lending of £3.3bn in the third quarter as it moves away from more riskier loans, such as high loan-to-value and interest only home mortgages.

But the former owner of Abbey and Alliance & Leicester made much of its lending to small businesses - which rose 20% to £10.2bn in the first nine months of 2012.

"We have consistently supported small businesses in the UK and over the last three years our lending to SMEs has grown by an average of more than 20% per year," said Botin.

"We completed the first growth capital loans through our Breakthrough programme, which offers funding, support and expert advice to the UK's fast-growth entrepreneurial smaller companies as we strive to become the SME 'Bank of Choice'."

Mike McCudden at Interactive Investor told Huffington Post UK that while the SME lending was "worth commending", the rest of its report made for bleak reading.

"Coming hot on the heels of the Barclays report into Santander, and the risk the bank may need a significant tranche of new capital, today's results really do make for bleak reading. The associated costs of abandoning the purchase of RBS branches is another unwelcome liability," he said.

Simon Hayward, managing partner of leadership development specialist Cirrus, added that Santander's claim that the decision to walk away from the deal was a values-based decision and was indicative of its aim to place values back at the heart of its organisation.

“Santander's Botín is the latest big bank leader to speak out about the need to focus on longer-term objectives which benefit customers, employees, shareholders and other stakeholders rather than short-term objectives focused on immediate profit," Hayward continued.

“Before the dawn of the banking crisis, it was rare to hear a big bank leader speak so openly about values, or to describe the importance of placing customers and employees at the heart of organisations. Following the economic crisis, however, many leaders now view restoring trust as a key priority.

“There are also very real, commercial benefits to developing values-based leadership. After all, if we’d had more values-based leaders around before the financial crisis, many of those high-profile corporate scandals would never have happened in the first place."

Toby Clark, Mintel's director of research for EMEA, said Santander was wise to stress the important of "traditional" banking values such as growth in deposits and current account balances.

"That focus on the bread-and-butter elements of retail banking should play well with consumers. Although conventional wisdom is that people don't trust banks, the real picture is more complex. Mintel's research shows that people tend to trust the people they have day-to-day dealings with.

"Two thirds trust the staff at their local branch, for example. It's only further up the scale that trust has collapsed. Just 15% trust senior executives in the banking industry, and 14% trust the way in which the sector as a whole operates."

Clark added Santander's emphasis on the growth in lending to small businesses and to first-time-buyers acts as a reminder that banks aren't all about casino banking, annual bonuses and rate-fixing.

But not everyone's convinced that banks are genuinely starting to lend to SMEs - and one of the biggest bones of contention is the definition of what makes an SME, according to Tomer Guriel, chief executive of Ezbob.

"There is a big difference between people's interpretations of the phrase SME and what I'm seeing is that the smaller you are, the less likely you'll get access to funding - most sole traders are getting no access whatsoever," he told Huff Post UK.

"Those SMEs with 250 staff members or more are still borrowing, but the smaller ones are being pushed into using personal financing, such as using their savings or taking out a credit card. They're being rejected because they don't have a good credit history, and then take out credit on a personal level to fund their business - it's a vicious circle."

Guriel said the government must work harder to understand which SMEs are being helped by the Funding For Lending scheme and called for more clarification on what classified as an SME, adding "The lending scheme should be lending beyond just the larger SMEs."

Paul Aitken, chief executive of Borro, told Huff Post UK he had seen an increase in small firms being forced into using alternative financing methods.

“Without access to shareholder cash or the cash reserves that some of the larger companies can afford to tap into, small businesses are struggling to keep their heads above water. With tight credit conditions also playing a part, many small businesses have no confidence in the banks and have already turned to alternative forms of financing.

"Around 60% of Borro’s customers are small business owners who are looking for a more accessible route to obtaining the finance they require.”