The UK mortgage market will return to growth this year, Abbey, the lender, predicted on Wednesday, as it reported a 25 per cent jump in quarterly profits.

António Horta-Osório, Abbey's chief executive, said that although the UK economy was still struggling, unemployment had not yet risen by as much as the bank had assumed and house prices had not fallen by quite as much as it had expected.

He told The Times: “I am prudently optimistic about our business prospects for the remainder of the year. In spite of this being a very negative environment, it is a little bit better than we thought, although not significantly. We had assumed house prices would fall by [a further] 10 per cent this year and that unemployment would rise from 5 per cent to 8.5 to 9 per cent.”

Mr Horta-Osório said that Abbey — Britain's second-biggest mortgage lender after Halifax - now expected the UK mortgage market to return to overall net lending this year, albeit on a modest basis, as recent cuts in interest rates continued to have an effect. That represents a significant improvement on industry expectations towards the end of last year — when net lending in 2009 was expected to be flat at best. He added: “I expect the market to be positive for the year. Our expectation is that the market will see between £10 billion to £20 billion in net lending.”

Mr Horta-Osório was speaking as Abbey, owned by Santander, the Spanish banking group, reported a 25 per cent increase in pre-tax profits, to £372 million, for the first three months of the year. This was despite bad debts surging to £189 million in the period — from £90 million in last year's final three months — and came as the bank stepped up its lending to small and medium-sized companies and to homebuyers. Alliance & Leicester, for which Abbey paid £1.3 billion in June, and Bradford & Bingley, whose savings book was bought by Abbey in October, after its nationalisation, both contributed to profits.

Mr Horta-Osório said that Abbey had continued to increase its mortgage lending, accounting for 15 per cent of all new lending during the period, compared with 13.5 per cent in the last three months of 2008. He said that, while Abbey's net new lending in the period had hit £800 million, it had taken a similar sum in deposits from savers - preventing it from any reliance on wholesale markets.

He added: “I anticipate that we will continue to lend at this rate. We can continue to offer great value for money for customers - and we've never had so many mentions in the [best buy] league tables.”

Abbey's cost/income ratio, which was 70 per cent when it was bought by Santander in 2004, fell from 45 per cent at the end of 2008 to only 42 per cent at the end of March. Mr Horta-Osório said: “As people bank more with us, that drives revenues, bringing down the cost/income ratio further — it's a virtuous circle.”

The Abbey chief insisted that its mortgage book was of better quality than the books of many rivals, saying that the overall mortgage book had a low loan-to-value of 52 per cent and that only 6 per cent of customers were in negative equity.

Mr Horta-Osório said that it was too soon to call a turn in Britain's battered the housing market. “Not yet,” he said.

Santander steady

— Santander, the eurozone's largest bank, reported a 5 per cent fall in first-quarter net profit to €2.096 billion (£1.9 billion), exceeding analysts' expectations, as the management of loan rate margins and strong business volumes offset default levels

— Bad debts, as a percentage of total lending, rose to 2.49 per cent from 2.04 per cent at the end of 2008. Group provisions in the period rose by 73 per cent to €2.23 billion

— Consumer finance was the worst-performing unit, where bad debts reached 4.64 per cent of lending

— Interest income rose 22.2 per cent to €6.23 billion, and operating profit rose 12 per cent to €9.454 billion

— Santander shares rose €0.40 to €6.96