Chief executive Nathan Bostock said the year ahead would be "changeable" as the group warned over a slowdown in corporate lending and more borrowers falling behind with repayments amid the fallout from Brexit.
Santander posted underlying pre-tax profits of £2.03 billion for 2016, up from £1.79 billion the previous year.
But Spanish owner Banco Santander saw the weak pound knock profits from its UK operation, leaving its British earnings 14.7% lower last year when translated into euros.
Santander UK revealed a marked slowdown in the number of new customers signing up to its popular 123 current account after it raised the monthly fee in January 2016 and halved the interest rate in November.
It added another 483,000 123 customers in 2016, down from around one million in 2015.
Santander said its UK arm also put by another £114 million in the fourth quarter of 2016 for the payment protection insurance (PPI) mis-selling scandal.
Mr Bostock hailed a "strong performance" in 2016 as profits and lending grew, but told the Press Association the outlook was less certain.
He said: "It's changeable, just as it has been this year.
"We keep getting different views and numbers and we'll have that volatility but I think it will be more challenging."
Net mortgage lending - gross lending less redemptions - dropped to £1.5 billion in 2016 from £2.7 billion in 2015, while it also saw £900 million of net business lending last year.
The mortgage market will grow but at a slower rate this year as buy-to-let borrowing falls due to stamp duty changes last April, according to Mr Bostock.
He added that business uncertainty surrounding Brexit is set to see corporate lending slow, while Santander is expecting losses from bad debts to edge up over 2017.
The group is cutting £100 million in costs this year as it braces for a slowdown in economic growth and the impact of soaring inflation.
Mr Bostock said the group was not planning major cuts among its 841 branches.
It will instead focus on "operational efficiency", he said.
The group's net interest margin was hit as the Bank of England slashed base rates to a new all-time low of 0.25% last August, making it harder to make returns on mortgages and savings.
It expects the net interest margin to remain "broadly stable" in 2017, helped by its move to cut interest on 123 accounts.
On a bottom line basis, Santander reported UK statutory profits of £1.91 billion, up 43% on 2015.
The full-year results come after Santander reportedly ditched talks for the second time to buy the 300 Williams & Glyn branches being offloaded by Royal Bank of Scotland.
Mr Bostock remained tight-lipped on the decision, but said the group was focusing on "organic growth".
Full-year results from owner Banco Santander showed a 4% rise in global attributable profits to 6.2 billion euros (£5.3 billion) as a stronger performance in Brazil helped offset the pound's impact on UK earnings.
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