Banco Santander's Costly Reorganization: Can Splitting the UK Consumer Finance Arm Salvage Value?
16min read The fallout from Banco Santander’s UK motor finance scandal continues to reverberate, prompting the bank to consider a dramatic restructuring. Reports indicate the Spanish banking giant is exploring a plan to separate its scandal-hit consumer finance division—responsible for car loans—from its UK retail banking operations. While the move aims to isolate liabilities and improve the UK unit’s sale prospects, its success hinges on regulatory approvals, legal outcomes, and market confidence.
The Scandal and Its Financial Fallout
At the heart of the crisis is a practice known as discretionary commission arrangements (DCAs), where car dealers could adjust interest rates on loans to secure higher commissions. A 2024 Court of Appeal ruling deemed these practices unlawful, triggering a wave of compensation claims. Analysts now estimate potential payouts to borrowers could total £1.9 billion for Santander alone, with industry-wide liabilities potentially reaching £30 billion if a Supreme Court ruling later this year sides with consumers.
To mitigate these risks, Santander UK has already set aside £295 million for compensation, a provision that contributed to a sharp drop in its pre-tax profits in 2024. Meanwhile, the scandal has cast a shadow over the bank’s broader UK operations, making it a drag on Santander’s global performance.
Structural Reorganization and Regulatory Hurdles
The proposed split would carve out the consumer finance division—which includes Santander’s Redhill-based motor finance unit—from Santander UK Plc. This restructuring, still awaiting regulatory approval, is designed to shield the core UK banking business from the scandal’s lingering liabilities.
However, execution faces significant obstacles:
1. Regulatory Delays: The UK’s Financial Conduct Authority (FCA) has extended its review of DCAs until December 2025, delaying final compensation decisions.
2. Legal Uncertainty: A Supreme Court ruling expected later this year could amplify liabilities, potentially forcing Santander to increase provisions further.
3. Market Appetite: Buyers have been hesitant to acquire the UK unit due to the unresolved financial risks.
To prepare for potential divestment, Santander has implemented aggressive cost-cutting measures. In 2024, it slashed 1,400 jobs and plans to close 95 branches by June 2025, reducing its UK branch count by a fifth. These moves aim to streamline operations and emphasize digital growth, which has seen transaction volumes rise by 63% since 2019.
Investment Implications
Investors must weigh two critical questions:
1. Can the Split Isolate Risks? Separating the consumer finance division could theoretically make the UK retail bank a more palatable acquisition target. However, buyers may still demand steep discounts until liabilities crystallize.
2. Will the Supreme Court Ruling Be a Catalyst? A ruling in favor of consumers would likely force Santander to set aside additional funds, further pressuring its balance sheet. Conversely, a ruling in the bank’s favor could unlock value by reducing uncertainty.
Santander’s stock has already reacted to these pressures, underperforming the FTSE 100 by 12% over the past year. Meanwhile, credit rating agencies like Moody’s have warned of potential downgrades if liabilities escalate.
Conclusion: A Risky Gamble with High Stakes
The proposed split represents a bold attempt to salvage value from a toxic division. However, success requires navigating a labyrinth of regulatory approvals, legal judgments, and market skepticism. Key data points reinforce the challenge:
- Compensation Costs: Analysts estimate £1.9 billion for Santander, but this could balloon if the Supreme Court rules against the bank.
- Profit Pressures: The UK is now one of only two regions (alongside South America) where Santander reported earnings declines in 2024.
- Structural Adjustments: Job cuts and branch closures aim to cut costs, but the bank’s UK workforce remains at 18,000, suggesting deeper restructuring may be needed.
For investors, the split is a double-edged sword. If executed successfully, it could position Santander UK as a more attractive asset for sale, lifting the parent company’s valuation. However, without clarity on compensation liabilities, the stock remains vulnerable. The Supreme Court’s ruling in 2025 will likely be the decisive factor—either unlocking relief or compounding losses. Until then, caution reigns.
