Santander's UK has reported a 29% decrease in profits for the first three months of the year.

The UK of the Spanish banking giant made profits of £391million - a drop from last year's £547 million reported during the same period. The bank's net interest income fell 11% year-on-year. This is revenue the bank received on interest it charges lenders minus the interest it paid out to savers.

Santander said this was primarily due to it costing more to hold customer cash after it raised savings rates. It also reported a £2.5billion decline in mortgage lending since the end of last year. The bank said it decided to prioritise profitability and to “optimise balance sheet returns”, which resulted in lower mortgage lending and a slight drop in customer deposits.

Last year also saw increased competition among lenders seeking to provide better mortgage deals for UK-based property owners. Many homeowners have been shopping around in search of a cheaper loan alternative.

Banks like Santander affirmed their commitment to stringent affordability tests for mortgages, ensuring they only lend to borrowers capable of sustaining higher interest rates. Their high street competitors, Lloyds, Barclays, and NatWest, all reported a decrease in earnings compared to the previous year when there was a peak in interest rates.

However, despite these challenges, Santander maintains a positive outlook for parts of the UK economy. New forecasts suggest that average UK house prices could see a 3% rise this year, with the potential for continued gradual increases over the next five years. The unemployment rate is also expected to peak at a lower-than-anticipated 4.4% in 2025.

However, there's a another economic scenario which could unfold if inflation doesn't ease and interest rates climb further; under these conditions, house prices might fall in the coming two years, and unemployment rates could soar. This is tied to ongoing cost-of-living pressures which would dampen consumer spending.

Santander UK's chief executive Mike Regnier said: "The recent fall in the rate of inflation will be welcomed by our customers who continue to face cost-of-living pressures. Our prudent approach to risk and targeted support has meant that in a challenging environment, levels of arrears have remained low."

In other news, the broader Banco Santander group, based in Madrid, reported an 11% increase in profits from last year, reaching 2.9 billion euros (£2.5billion). Ana Botin, the Executive Chair, described it as a "very strong start to the year" for the banking conglomerate.