Banking giant Santander has seen its profits boosted by higher interest returns but cautioned that rates could peak at 6% in 2024 if inflation remains stubbornly high.

The Spanish retail bank reported pre-tax profits of £1.5 billion for the nine months to September 30, 4% higher than the £1.4 billion it made last year.

Higher net interest income this year drove up the group’s earnings, jumping 11% to £3.3 billion from £3 billion last year.

And its net interest margin – a key metric for lenders showing the returns they make on loans – grew to 2.04% in the first nine months of this year compared to 1.91% in 2021.

Santander said that the increase is partly a result of higher interest rates amid the Bank of England hiking up the base rate in recent months, which has made it more expensive to borrow.

Furthermore, the bank’s net mortgage lending nearly doubled this year, totalling £9.8 billion compared to £5.2 billion last year.

But the UK’s fourth biggest lender revealed that it has set aside £256 million in credit impairment charges as it warned that rising mortgage rates will be challenging for households and businesses.

This could lead to more people defaulting on their loan repayments, although there is no sign that this has happened so far, Santander said.

Its credit impairment provisions have swung to a loss this year after it was able to release £170 million in write-backs last year.

Mortgages are likely to remain “substantially higher” than a year ago in the expectation of further increases to the base rate, while the cost of food, rent and utility bills are also increasing, Santander cautioned.

“While we have seen no material deterioration in our mortgage book to date, we have increased our provisions”, Mike Regnier, Santander’s chief executive said.

“Looking ahead it is clear that the ongoing inflationary pressures, increased energy prices and impact on economic activity will mean the service and support we provide our customers and businesses will continue to be critical.”

Furthermore, economists at the bank predicted that the base rate could peak at 6% in 2024 in the worst-case scenario.

This could happen if inflation stays persistently above the Bank of England’s 2% target and would mean the cost-of-living crisis worsens while consumer demand declines, it said.

Under a different pessimistic scenario, the UK’s gross domestic product could fall by 4.8% in 2023, while house price growth could tumble by 13.5% indicating a housing market crash.

It could happen under a range of risks to the economy, such as weaker investment during the turbulent political environment and a smaller labour force.

But under an optimistic scenario, the Bank of England’s base rate could peak at 2.75% this year and fall back to 2% in the coming years.

Banco Santander reported pre-tax profits of 3.8 billion euros (£3.3 billion) in the third quarter, up 2.7% from 3.7 billion euros (£3.2 billion) last year.