SANTANDER UK PLC

National Storage Mechanism | Additional information

RNS Number : 9283Q

Santander UK Plc

02 March 2021

Santander UK plc

Announcement of Annual Report for the twelve months ended 31 December 2020

Santander UK plc (the Company) is pleased to announce the publication of its Annual Report for the twelve months ended 31 December 2020 (the Annual Report), in compliance with Disclosure Guidance & Transparency Rule (DTR) 4.1.

The Annual Report may be accessed via the Investor Relations section of Santander UK's website at www.aboutsantander.co.uk. A copy of the Annual Report has also been submitted to the National Storage Mechanism.

To view the full Annual Report, please paste the following URL into the address bar of your browser:

http://www.rns-pdf.londonstockexchange.com/rns/9283Q_1-2021-3-2.pdf

The following information is extracted from the Annual Report.

This announcement constitutes the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the Annual Report in full.

Form 20-F

It should be noted that the financial results for the twelve months ended 31 December 2020 will be included in the Annual Report on Form 20-F that will be filed with the SEC and will be available online at www.sec.gov.

Forward-Looking Statements

The Company and its ultimate parent Banco Santander SA both caution that this announcement may contain forward-looking statements. Such forward looking-statements are found in various places throughout this announcement with respect to our financial condition, results, operations and business, including future business development and economic performance.

Such forward-looking statements are based on management's current expectations, estimates and projections, and both the Company and Banco Santander SA caution that these statements are not guarantees of future performance. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by any forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Nothing in this announcement constitutes, or should be construed as constituting, a profit forecast.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Santander UK group and Company financial statements in accordance with international accounting standards (IAS) in conformity with the requirements of the Companies Act 2006. Additionally, the Financial Conduct Authority's Disclosure Guidance and Transparency Rules require the Directors to prepare the group financial statements in accordance with IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

In preparing the financial statements, the Directors have also elected to comply with IFRS as issued by the IASB. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Santander UK group and the Company and of the profit or loss of the Santander UK group and the Company for that period.

In preparing the financial statements, the Directors are required to:

-Select suitable accounting policies and then apply them consistently

-State whether, for the Santander UK group and Company, IAS in conformity with the requirements of the Companies Act 2006 and, for the Santander UK group, IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRS issued by the IASB have been followed, subject to any material departures disclosed and explained in the financial statements

-Make judgements and accounting estimates that are reasonable and prudent

-Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Santander UK group and company will continue in business.

The Directors are also responsible for safeguarding the assets of the Santander UK group and the Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Santander UK group's and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Santander UK group and the Company, and enable them to ensure that the financial statements comply with requirements of the Companies Act 2006.

The Directors are responsible for the integrity and maintenance of Santander UK's website.

Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Having taken into account all the matters considered by the Board and brought to its attention during the year, the Directors are satisfied that the Annual Report taken as a whole is fair, balanced and understandable, and provides the information necessary to assess Santander UK's position and performance, business model and strategy.

Each of the Directors at the date of approval of this report confirms, to the best of their knowledge, that:

The group and company financial statements, which have been prepared in accordance with IAS in conformity with the requirements of the Companies Act 2006 and, for the group, IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRS issued by IASB, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Santander UK group

The management report, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the Santander UK group, together with a description of the principal risks and uncertainties they face.

Principal risks

Risk is any uncertainty about us being able to achieve our business objectives. It can be split into a set of key risk types, each of which could affect our results and our financial resources. Enterprise wide risk is the aggregate view of all the key risk types described below:


Key risk types	Description
Credit	The risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for which we have assumed a financial obligation.
Market	Banking market risk - the risk of loss of income or economic value due to changes to interest rates in the banking book or to changes in other market risk factors (e.g. credit spread and inflation risk), where such changes would affect our net worth through a change to revenues, assets, liabilities and off-balance sheet exposures in the banking book. Trading market risk - the risk of changes in market factors that affect the value of positions in the trading book.
Liquidity	The risk that we do not have sufficient liquid financial resources available to meet our obligations as they fall due, or we can only secure such resources at excessive cost.
Capital	The risk that we do not have an adequate amount or quality of capital to meet our internal business objectives, regulatory requirements and market expectations.
Pension	The risk caused by our statutory contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to a moral obligation or for some other reason.
Conduct and regulatory	Conduct risk - the risk that our decisions and behaviours lead to a detriment or poor outcome for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk - the risk of financial or reputational loss, or imposition or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator's rules, guidance and regulatory expectations.
Operational risk	The risk of loss due to inadequate or failed internal processes, people and systems, or external events. We give a particular focus to the following risks which we mitigate through our management of operational risk: Cyber - We rely extensively on the use of technology across our business. It is critically important that we give our customers a secure environment in which to deal with us, especially when the threat from cyber criminals is so prevalent and more sophisticated than ever. Failure to protect the data assets of Santander UK and its customers against theft, damage or destruction from cyber-attacks could result in damage to our reputation and direct financial losses. Change and transformation - A key part of our business strategy is to develop and deliver new banking channels and products. We are also implementing a large number of regulatory and legal changes, impacting all areas of our business. People - People risk include all risks related to employees and third parties working for us, covering resource management, health & safety and employee relations.
Other key risk types	Financial crime risk - the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, bribery and corruption. Failure to meet our legal and regulatory obligations could result in criminal or civil penalties against Santander UK or individuals, as well as affecting our customers and the communities we serve. Legal risk - the risk of an impact arising from legal deficiencies in contracts; failure to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to discharge duties or responsibilities created by law or regulation. Strategic and business risk - the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their poor implementation that impact the long-term interests of our key stakeholders or from an inability to adapt to external developments. Reputational risk - the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors or any other interested party. Model risk - the risk that the predictions of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately.

SANTANDER UK GROUP LEVEL - CREDIT RISK REVIEW

Movement in total exposures and the corresponding ECL (audited)

The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the year. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.


	Stage 1				Stage 2				Stage 3				Total
Exposures(1)		ECL		Exposures(1)		ECL		Exposures(1)		ECL		Exposures(1)		ECL
£m		£m		£m		£m		£m		£m		£m		£m
At 1 January 2020	295,436		147		12,351		348		2,368		368		310,155		863
Transfers from Stage 1 to Stage 2(3)	(9,815)		(47)		9,815		47		-		-		-		-
Transfers from Stage 2 to Stage 1(3)	3,178		110		(3,178)		(110)		-		-		-		-
Transfers to Stage 3(3)	(385)		(8)		(1,126)		(61)		1,511		69		-		-
Transfers from Stage 3(3)	12		2		326		21		(338)		(23)		-		-
Transfers of financial instruments	(7,010)		57		5,837		(103)		1,173		46		-		-
Net ECL remeasurement on stage transfer(4)	-		(101)		-		239		-		241		-		379
Change in economic scenarios(2)	-		15		-		139		-		10		-		164
Changes to model	-		-		-		-		-		25		-		25
New lending and assets purchased(5)	55,546		40		1,371		64		104		52		57,021		156
Redemptions, repayments and assets sold (7)	(50,698)		(30)		(2,295)		(42)		(441)		(18)		(53,434)		(90)
Other(6)	8,141		88		1,072		(53)		185		98		9,398		133
Assets written off (7)	(2)		-		-		-		(393)		(253)		(395)		(253)
At 31 December 2020	301,413		216		18,336		592		2,996		569		322,745		1,377
Net movement in the period	5,977		69		5,985		244		628		201		12,590		514

ECL charge/(release) to the Income Statement			69				244				454				767
Less: Discount unwind			-				-				(14)				(14)
Less: Recoveries net of collection costs			-				-				(108)				(108)
Total ECL charge/(release) to the Income Statement			69				244				332				645



At 1 January 2019	290,882	143	12,011	307	2,571	357	305,464	807
Transfers from Stage 1 to Stage 2(3)	(4,101)	(11)	4,101	11	-	-	-	-
Transfers from Stage 2 to Stage 1(3)	3,458	74	(3,458)	(74)	-	-	-	-
Transfers to Stage 3(3)	(361)	(2)	(595)	(24)	956	26	-	-
Transfers from Stage 3(3)	10	1	516	23	(526)	(24)	-	-
Transfers of financial instruments	(994)	62	564	(64)	430	2	-	-
Net remeasurement of ECL on stage transfer(4)	-	(66)	-	130	-	96	-	160
Change in economic scenarios(2)	-	5	-	(15)	-	(9)	-	(19)
Changes to model	-	-	-	-	-	13	-	13
New lending and assets purchased(5)	42,415	29	827	32	15	9	43,257	70
Redemptions, repayments and assets sold (7)	(40,380)	(32)	(1,344)	(28)	(459)	(42)	(42,183)	(102)
Other(6)	3,514	6	294	(14)	172	191	3,980	183
Assets written off (7)	(1)	-	(1)	-	(361)	(249)	(363)	(249)
At 31 December 2019	295,436	147	12,351	348	2,368	368	310,155	863
Net movement in the period	4,554	4	340	41	(203)	11	4,691	56

ECL charge/(release) to the Income Statement		4		41		260		305
Less: Discount unwind		-		-		(13)		(13)
Less: Recoveries net of collection costs		(10)		(15)		(46)		(71)
Total ECL charge/(release) to the Income Statement		(6)		26		201		221


(1)	Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2)	Changes to assumptions in the year. Isolates the impact on ECL from changes to the economic variables for each scenario, changes to the scenarios themselves as well as changes in the probability weights from all other movements. This also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown within Transfers of financial instruments.
(3)	Total impact of facilities that moved Stage(s) in the year. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the year. Transfers between Stages are based on opening balances and ECL at the start of the year.
(4)	Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.
(5)	Exposures and ECL of facilities that did not exist at the start of the year but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6)	Residual movements on existing facilities that did not change Stage in the year, and which were not acquired in the year. Includes the net increase or decrease in the period of cash at central banks, the impact of changes in risk parameters in the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the year.
(7)	Exposures and ECL for facilities that existed at the start of the year but not at the end.

Financial review

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT



	2020	2019
	£m	£m
Net interest income	3,443	3,292
Non-interest income(1)	532	881
Total operating income	3,975	4,173
Operating expenses before credit impairment losses, provisions and charges	(2,452)	(2,499)
Credit impairment losses	(645)	(221)
Provisions for other liabilities and charges	(273)	(441)
Total operating credit impairment losses, provisions and charges	(918)	(662)
Profit before tax	605	1,012
Tax on profit	(134)	(279)
Profit after tax	471	733

Attributable to:
Equity holders of the parent	452	714
Non- controlling interests	19	19
Profit after tax	471	733

(1) Comprises 'Net fee and commission income' and 'Other operating income'.

A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.

2020 compared to 2019

Profit before tax was down 40% to £605m due to the factors outlined below. By income statement line item, the movements were:

- Net interest income was up 5%, with repricing actions on the 1I2I3 Current Account and other deposits offsetting base rate cuts and back book mortgage margin pressure, including £1.8bn net attrition on SVR and Follow on Rate products (2019: £3.9bn).

- Non-interest income was down 40%, with significantly lower banking and transaction fees in our retail business largely due to the implementation of regulatory changes to overdrafts.

- Operating expenses before credit impairment losses, provisions and charges were down 2%, with efficiency savings, and lower variable pay accrual.

- Credit impairment losses were up £424m to £645m. This includes £448m arising from changes to economic scenarios and weights, the staging reclassification of certain loans, payment holidays and other Covid-19 management judgement overlays. Portfolio performance remains resilient with low write-offs and deterioration seen only on a few single name corporate cases.

- Provisions for other liabilities and charges were down 38% to £273m, largely due to the absence of an additional PPI charge, lower transformation restructuring charges and a release of other conduct provisions related to the sale of interest rate derivatives (IRD). This was partially offset by a previously reported regulatory and other provision in our Retail Banking business.

- Tax on profit decreased £145m to £134m The 2020 Effective Tax rate (ETR) of 22.1% is lower (2019: 27.6% ) primarily as a result of 2019 non-allowable conduct charges which were not repeated in 2020, partially offset by adverse movements in deferred tax.

PROFIT BEFORE TAX BY SEGMENT

The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Consolidated Financial Statements.


	Retail Banking	Corporate & Commercial Banking	Corporate & Investment Banking	Corporate Centre	Total
31 December 2020	£m	£m	£m	£m	£m
Net interest income/(expense)	3,100	364	55	(76)	3,443
Non-interest income(1)	375	93	68	(4)	532
Total operating income/(expense)	3,475	457	123	(80)	3,975
Operating expenses before credit impairment losses, provisions and charges	(1,913)	(316)	(114)	(109)	(2,452)
Credit impairment losses	(308)	(294)	(7)	(36)	(645)
Provisions for other liabilities and (charges)/releases	(173)	(12)	(10)	(78)	(273)
Total operating credit impairment losses, provisions and charges	(481)	(306)	(17)	(114)	(918)
Profit/(loss) before tax	1,081	(165)	(8)	(303)	605


31 December 2019
Net interest income/(expense)	2,827	422	62	(19)	3,292
Non-interest income(1)	691	109	70	11	881
Total operating income/(expense)	3,518	531	132	(8)	4,173
Operating expenses before credit impairment losses, provisions and charges	(1,980)	(324)	(130)	(65)	(2,499)
Credit impairment (losses)/releases	(156)	(45)	(22)	2	(221)
Provisions for other liabilities and charges	(290)	(22)	(16)	(113)	(441)
Total operating credit impairment losses, provisions and charges	(446)	(67)	(38)	(111)	(662)
Profit/(loss) before tax	1,092	140	(36)	(184)	1,012

(1) Comprises 'Net fee and commission income' and 'Other operating income'.

2020 compared to 2019

- For Retail Banking, profit before tax decreased 1%, with an increase in credit impairment charges largely due to Covid-19, partially offset by an increase in net interest income largely due to 1I2I3 Current Account and other deposit repricing. Non-interest income was impacted by reduced banking and transaction fees as a result of regulatory changes to overdrafts.

- For Corporate & Commercial Banking, loss before tax of £165m, with an increase in credit impairment charges largely due to Covid-19, as well as a small number of single name exposures. Income was impacted by the base rate reductions and lower fees due to lower business activity levels which have been adversely affected by Covid-19.

- For Corporate & Investment Banking, loss before tax of £8m, with lower credit impairment charges and lower operating expenses, driven by transformation programme efficiencies

- For Corporate Centre, loss before tax increased to £303m with net interest income impacted by the effect of the reduction in the base rate on our liquidity asset buffer. Furthermore, operating expenses increased with centrally held transformation programme costs and credit impairment losses. Credit impairment losses were higher driven by a provision for unexpected large single name exposures at risk of defaulting as a result of the Covid-19 crisis. Our structural hedge position has remained stable at c£97bn, with an average duration of c2.5 years. Our structural hedge contribution is reallocated to our other business segments in line with our transfer pricing policy.

Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET


	2020	2019
	£m	£m
Assets
Cash and balances at central banks	41,250	21,180
Financial assets at fair value through profit or loss	3,614	3,702
Financial assets at amortised cost	231,194	239,834
Financial assets at fair value through other comprehensive income	8,950	9,747
Interest in other entities	172	117
Property, plant and equipment	1,734	1,967
Retirement benefit assets	495	669
Tax, intangibles and other assets	4,923	4,486
Total assets	292,332	281,702
Liabilities
Financial liabilities at fair value through profit or loss	3,018	3,161
Financial liabilities at amortised cost	270,063	259,179
Retirement benefit obligations	403	280
Tax, other liabilities and provisions	2,912	3,065
Total liabilities	276,396	265,685
Equity
Total shareholders' equity	15,774	15,857
Non-controlling interests	162	160
Total equity	15,936	16,017
Total liabilities and equity	292,332	281,702

A more detailed Consolidated Balance Sheet is contained in the Consolidated Financial Statements.

31 December 2020 compared to 31 December 2019

Assets

Cash and balances at central banks

Cash and balances at central banks increased by 95% to £41,250m at 31 December 2020 (2019: £21,180m). This was mainly driven by cash inflows from higher customer deposits, lower non-bounce back lending, the drawdown of TFSME funding and normal liquidity management, partially offset by increased mortgage and bounce back lending.

Financial assets at fair value through profit or loss:

Financial assets at fair value through profit or loss decreased by 2% to £3,614m at 31 December 2020 (2019: £3,702m), mainly due to:

- A £0.4bn increase in derivatives held for hedging with an increase in interest rate contracts and a decrease in exchange rate contracts.

- A decrease in derivatives held for trading of £0.3bn, linked to transactions with corporate customers that are not held in hedging relationships.

- A decrease in SRT balances of £0.2bn.

Financial assets at amortised cost:

Financial assets at amortised cost decreased by 4% to £231,194m at 31 December 2020 (2019: £239,834m), largely driven by the disposal of £5.5bn of UK Government gilts, a £4.0bn decrease in reverse repurchase agreements and, a decrease in time deposits and third party cash collateral of £0.6bn, as part of normal liquidity management. This was partially offset by an increase in customer loans of £5.1bn, with £4.4bn increase in mortgages due to pent up demand from the lockdown period and the temporary reduced rates of stamp duty. In addition, consumer (auto) finance increased by £0.3bn, and unsecured retail lending decreased by £0.7bn due to lower consumer spending during lockdown. Corporate loans increased £1.1bn, driven by our participation in the government lending schemes (£4.6bn), partially offset by lower investment appetite resulting borrowing requirements. In addition, there was a decrease due to the transfer of £3.2bn of mortgages assets to Santander Financial Services plc.

Financial assets at fair value through other comprehensive income

Financial assets at fair value through other comprehensive income decreased by 8% to £8,950m at 31 December 2020 (2019: £9,747m) mainly due to the disposal of UK Government bonds and the maturity of bank issued securities, partially offset by an increase in non-UK government securities due to normal liquidity management.

Property, plant and equipment

Property, plant and equipment decreased by 12% to £1,734m at 31 December 2020 (2019: £1,967m) reflecting freehold and leasehold property sales and lower contract hire sales.

Retirement benefit assets

Retirement benefit assets decreased by 26% to £495m at 31 December 2020 (2019: £669m), due to a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme) resulting from a decrease in the discount rate in the period. This was partially offset by a rise in overall asset values.

Tax, intangibles and other assets

Tax, intangibles and other assets increased by 10% to £4,923m at 31 December 2020 (2019: £4,486m), mainly due to changes in interest rates impacting the macro hedge of interest rate risk included in other assets.

Liabilities

Financial liabilities at amortised cost

Financial liabilities at amortised cost increased by 4% to £270,063m at 31 December 2020 (2019: £259,179m). This was mainly due to an increase of £13.9bn in customer deposits, of which £7.6bn was corporate and business banking customers building up their cash reserves and £6.7bn related to retail customers increasing current account balances through reduced spending. Deposits from banks increased £6.6bn reflecting funding received through TFSME and additional amounts deposited as collateral. This was partially offset by a £2.4bn decrease in non-trading repurchase agreements as part of normal liquidity management and a £6.5bn decrease in subordinated liabilities following the repurchase of certain subordinated liabilities as part of ongoing liability management.

Retirement benefit obligations

Retirement benefit obligations increased by 44% to £403m at 31 December 2020 (2019: £280m), due to a decrease in the overall accounting surplus of the Scheme. This was principally due to a decrease in the discount rate in the period due to falling corporate bond yields which increased the value of liabilities in the Scheme. This was partially offset by a rise in overall asset values.

Equity

Total shareholders' equity

Total shareholders' equity decreased by 1% to £15,774m at 31 December 2020 (2019: £15,857m). This was principally due to an increase in the cash flow hedging reserve and profit after tax for the period, partially offset by dividends paid and a decrease in the defined benefit pension asset.

CUSTOMER BALANCES

Consolidated


	2020	2019
	£bn	£bn
Customer loans	207.0	205.0
Other assets	85.3	76.7
Total assets	292.3	281.7
Customer deposits	185.7	171.7
Total wholesale funding	63.1	65.2
Other liabilities	27.5	28.7
Total liabilities	276.3	265.6
Shareholders' equity	15.8	15.9
Non-controlling interest	0.2	0.2
Total liabilities and equity	292.3	281.7

Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.

31 December 2020 compared to 31 December 2019

- Customer loans increased £5.1bn, with a £4.4bn increase in mortgages due to pent-up demand from the lockdown period and the temporary reduced rates of stamp duty. In addition, consumer (auto) finance increased by £0.3bn and unsecured retail lending decreased by £0.7bn due to lower consumer spending during lockdown. Corporate loans increased £1.1bn, driven by our participation in the government lending schemes (£4.6bn), partially offset by lower investment appetite reducing borrowing requirements.

- Customer deposits increased £14bn, of which £7.6bn was corporate and business banking customers building up their cash reserves and £6.7bn related to retail customers increasing current account balances through reduced spending.

Retail Banking


	2020	2019
	£bn	£bn
Mortgages	166.7	165.4
Business banking	3.9	0.2
Consumer (auto) finance	8.0	7.7
Other unsecured lending	4.8	5.5
Customer loans	183.4	178.8
Current accounts	75.6	68.7
Savings	57.4	57.2
Business banking accounts	13.4	10.5
Other retail products	5.8	6.3
Customer deposits	152.2	142.7

Corporate & Commercial Banking


	2020	2019
	£bn	£bn
Non-Commercial Real Estate trading businesses	12.9	13.3
Commercial Real Estate	4.7	5.1
Customer loans	17.6	18.4
Customer deposits	25.0	20.5

Corporate & Investment Banking


	2020	2019
	£bn	£bn
Customer loans	2.8	4.0
Customer deposits	6.5	6.1

Corporate Centre


	2020	2019
	£bn	£bn
Social Housing	3.0	3.6
Non-core	0.2	0.2
Customer loans	3.2	3.8

Customer deposits	2.0	2.4

Capital and funding


	2020		2019
	£bn		£bn
Capital
CET1 capital	11.1		10.4
Total qualifying regulatory capital	15.2		15.8
CET1 capital ratio	15.4	%	14.3	%
Total capital ratio	21.2	%	21.7	%
Risk-weighted assets	71.9		72.6
Funding
Total wholesale funding and AT1	65.3		67.4
- of which with a residual maturity of less than one year	21.1		22.5

Liquidity


	2020		2019
	£bn		£bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)	150	%	142	%
LCR eligible liquidity pool	51.5		42.0

Further analysis of capital, funding and liquidity is included in the Capital risk and Liquidity risk sections of the Risk review.

31 December 2020 compared to 31 December 2019

- CET1 capital increased to £11.1bn with capital accretion through retained profits, the impact of the change in treatment of software assets outlined in the EBA technical standard on the prudential treatment of software assets and a lower deduction from the excess of regulatory expected loss amounts over credit provisions. These increases were partially offset by adverse market driven movements in the defined benefit pension schemes.

- CET1 capital ratio increased 110 basis points to 15.4% with a 4.6p.p. buffer to Maximum Distributable Amount (MDA) restrictions.

- Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17 basis points to the CET1 ratio, through the implementation of the RWA reduction factors for certain Small and Medium-sized Enterprise (SME) and infrastructure exposures.

- The Pillar 2A capital requirement was 4.94%, the majority of which remained with an RWA percentage-based element.

- Following the PRA's announcement regarding the resumption of dividend payments, an interim dividend of £103m for 2020 was paid in Dec 20.

- We issued £5.4bn of wholesale funding, including £1.4bn MREL eligible senior unsecured downstreamed from Santander UK Group Holdings plc and £4bn of core funding, consisting of covered bonds and senior unsecured, issued from Santander UK plc.

- We have £6.3bn outstanding under the TFS and £11.7bn outstanding under the TFSME.

- In October 2020, Santander UK plc transferred £3.2bn of mortgage assets to SFS.

Financial statements

Consolidated Income Statement

For the years ended 31 December


		2020	2019
	Notes	£m	£m
Interest and similar income	3	5,105	5,917
Interest expense and similar charges	3	(1,662)	(2,625)
Net interest income		3,443	3,292
Fee and commission income	4	756	1,112
Fee and commission expense	4	(371)	(426)
Net fee and commission income		385	686
Other operating income	5	147	195
Total operating income		3,975	4,173
Operating expenses before credit impairment losses, provisions and charges	6	(2,452)	(2,499)
Credit impairment losses	8	(645)	(221)
Provisions for other liabilities and charges	8	(273)	(441)
Total operating credit impairment losses, provisions and charges		(918)	(662)
Profit before tax		605	1,012
Tax on profit	9	(134)	(279)
Profit after tax		471	733

Attributable to:
Equity holders of the parent		452	714
Non-controlling interests	34	19	19
Profit after tax		471	733

Consolidated Statement of Comprehensive Income

For the years ended 31 December



	2020	2019
	£m	£m
Profit after tax	471	733
Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently:
Movement in fair value reserve (debt instruments):
- Change in fair value	114	147
- Income statement transfers	(107)	(147)
- Taxation	(2)	0
	5	0
Cash flow hedges:
- Effective portion of changes in fair value	971	(857)
- Income statement transfers	(809)	1,013
- Taxation	(52)	(41)
	110	115
Currency translation on foreign operations	0	(4)
Net other comprehensive income that may be reclassified to profit or loss subsequently	115	111
Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently:
Pension remeasurement:
- Change in fair value	(505)	(522)
- Taxation	133	131
	(372)	(391)
Own credit adjustment:
- Change in fair value	(3)	(77)
- Taxation	0	19
	(3)	(58)
Net other comprehensive expense that will not be reclassified to profit or loss subsequently	(375)	(449)
Total other comprehensive income/(expense) net of tax	(260)	(338)
Total comprehensive income	211	395

Attributable to:
parent	194	374
Non-controlling interests	17	21
Total comprehensive income	211	395

Consolidated Balance Sheet

At 31 December


		2020	2019
	Notes	£m	£m
Assets
Cash and balances at central banks		41,250	21,180
Financial assets at fair value through profit or loss:
- Derivative financial instruments	11	3,406	3,316
- Other financial assets at fair value through profit or loss	12	208	386
Financial assets at amortised cost:
- Loans and advances to customers	13	208,750	207,287
- Loans and advances to banks		1,682	1,855
- Reverse repurchase agreements - non trading	16	19,599	23,636
- Other financial assets at amortised cost	17	1,163	7,056
Financial assets at fair value through other comprehensive income	18	8,950	9,747
Interests in other entities	19	172	117
Intangible assets	20	1,646	1,766
Property, plant and equipment		1,734	1,967
Current tax assets		264	200
Retirement benefit assets	30	495	669
Other assets		3,013	2,520
Total assets		292,332	281,702
Liabilities
Financial liabilities at fair value through profit or loss:
- Derivative financial instruments	11	1,584	1,448
- Other financial liabilities at fair value through profit or loss	22	1,434	1,713
Financial liabilities at amortised cost:
- Deposits by customers	23	195,135	181,883
- Deposits by banks	24	20,958	14,353
- Repurchase agreements - non trading	25	15,848	18,286
- Debt securities in issue	26	35,566	41,129
- Subordinated liabilities	27	2,556	3,528
Other liabilities		2,337	2,344
Provisions	29	464	572
Deferred tax liabilities		111	149
Retirement benefit obligations	30	403	280
Total liabilities		276,396	265,685
Equity
Share capital	32	3,105	3,105
Share premium	32	5,620	5,620
Other equity instruments	33	2,191	2,191
Retained earnings		4,348	4,546
Other reserves		510	395
Total shareholders' equity		15,774	15,857
Non-controlling interests	34	162	160
Total equity		15,936	16,017
Total liabilities and equity		292,332	281,702

Consolidated Cash Flow Statement

For the years ended 31 December


	2020	2019
	£m	£m
Cash flows from operating activities
Profit after tax	471	733

Adjustments for:
Non-cash items included in profit:
- Depreciation and amortisation	562	543
- Provisions for other liabilities and charges	273	441
- Impairment losses	672	239
- Corporation tax charge	134	279
- Other non-cash items	(267)	(439)
- Pension charge/(credit) for defined benefit pension schemes	38	35
	1,412	1,098
Net change in operating assets and liabilities:
- Cash and balances at central banks	(147)	(71)
- Derivative assets	(90)	1,943
- Other financial assets at fair value through profit or loss	1,603	1,664
- Loans and advances to banks and customers	(2,654)	170
- Other assets	(340)	247
- Deposits by banks and customers	19,977	641
- Derivative liabilities	136	79
- Other financial liabilities at fair value through profit or loss	(1,618)	(959)
- Debt securities in issue	1,201	(529)
- Other liabilities	(966)	(568)
	17,102	2,617
Corporation taxes paid	(159)	(292)
Effects of exchange rate differences	410	(1,079)
Net cash flows from operating activities	19,236	3,077
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets	(373)	(505)
Proceeds from sale of property, plant and equipment and intangible assets	166	108
Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income	(3,015)	(5,013)
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income	9,858	8,300
Net cash flows from investing activities	6,636	2,890
Cash flows from financing activities
Issue of other equity instruments	-	500
Issue of debt securities and subordinated notes	4,190	4,145
Issuance costs of debt securities and subordinated notes	(13)	(15)
Repayment of debt securities and subordinated notes	(12,037)	(7,969)
Repurchase of preference shares and other equity instruments	-	(318)
Dividends paid on ordinary shares	(129)	(315)
Dividends paid on preference shares and other equity instruments	(148)	(142)
Dividends paid on non-controlling interests	(15)	(12)
Net cash flows from financing activities	(8,152)	(4,126)
Change in cash and cash equivalents	17,720	1,841
Cash and cash equivalents at beginning of the year	27,817	26,029
Effects of exchange rate changes on cash and cash equivalents	45	(53)
Cash and cash equivalents at the end of the year	45,582	27,817

Cash and cash equivalents consist of:
Cash and balances at central banks	41,250	21,180
Less: regulatory minimum cash balances	(854)	(707)
	40,396	20,473
Other cash equivalents	5,186	7,344
Cash and cash equivalents at the end of the year	45,582	27,817

(1) Total cash outflow for leases was £48m (2019: £58m), including payment of principal amount of £45m (2019: £54m).

Consolidated Statement of Changes in Equity

For years ended 31 December


				Other reserves						Non-controlling interests
	Share capital	Share premium	Other equity instruments	Available for sale	Fair value	Cash flow hedging	Currency translation	Retained earnings
	Total	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2020	3,105	5,620	2,191		23	371	1	4,546	15,857	160	16,017
Profit after tax	-	-	-		-	-	-	452	452	19	471
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	-	-	-		5	-	-	-	5	-	5
- Cash flow hedges	-	-	-		-	110	-	-	110	-	110
- Pension remeasurement	-	-	-		-	-	-	(370)	(370)	(2)	(372)
- Own credit adjustment	-	-	-		-	-	-	(3)	(3)	-	(3)
Total comprehensive income	-	-	-		5	110	-	79	194	17	211
Dividends on ordinary shares	-	-	-		-	-	-	(129)	(129)	-	(129)
Dividends on preference shares and other equity instruments	-	-	-		-	-	-	(148)	(148)	-	(148)
Dividends on non-controlling interests	-	-	-		-	-	-	-	-	(15)	(15)
At 31 December 2020	3,105	5,620	2,191		28	481	1	4,348	15,774	162	15,936

At 1 January 2019	3,119	5,620	1,991		23	256	5	4,744	15,758	151	15,909
Profit after tax	-	-	-		-	-	-	714	714	19	733
Other comprehensive income, net of tax:
- Cash flow hedges	-	-	-		-	115	-	-	115	-	115
- Pension remeasurement	-	-	-		-	-	-	(393)	(393)	2	(391)
- Own credit adjustment	-	-	-		-	-	-	(58)	(58)	-	(58)
- Currency translation on foreign operations	-	-	-		-	-	(4)	-	(4)	-	(4)
Total comprehensive income	-	-	-		-	115	(4)	263	374	21	395
Issue of other equity instruments	-	-	500		-	-	-	-	500	-	500
Repurchase of other equity instruments	(14)	-	(300)		-	-	-	(4)	(318)	-	(318)
Dividends on ordinary shares	-	-	-		-	-	-	(315)	(315)	-	(315)
Dividends on preference shares and other equity instruments	-	-	-		-	-	-	(142)	(142)	-	(142)
Dividends on non-controlling interests	-	-	-		-	-	-	-	-	(12)	(12)
At 31 December 2019	3,105	5,620	2,191		23	371	1	4,546	15,857	160	16,017

1. ACCOUNTING POLICIES

These financial statements are prepared for Santander UK plc (the Company) and the Santander UK plc group (the Santander UK group) under the UK Companies Act 2006. The principal activity of the Santander UK group is the provision of a wide range of banking and financial services to personal, business and corporate customers. Santander UK plc is a public company, limited by shares and incorporated in England and Wales having a registered office at 2 Triton Square, Regent's Place, London, NW1 3AN, phone number 0870-607-6000. It is an operating company undertaking banking and financial services transactions

Basis of preparation

These financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. The consolidated financial statements have been prepared on the going concern basis using the historical cost convention, except for financial assets and liabilities that have been measured at fair value. An assessment of the appropriateness of the adoption of the going concern basis of accounting is disclosed in the statement of going concern in the Directors' Report.

Compliance with International Financial Reporting Standards

The consolidated financial statements of the Santander UK group and the separate financial statements of the Company comply with international accounting standards in conformity with the requirements of the Companies Act 2006 and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The financial statements are also prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSs as issued by the IASB for the periods presented.

Disclosures required by IFRS 7 'Financial Instruments: Disclosure' relating to the nature and extent of risks arising from financial instruments, and IAS 1 'Presentation of Financial Statements' relating to objectives, policies and processes for managing capital, can be found in the Risk review. Those disclosures form an integral part of these financial statements.

Recent accounting developments

Interest Rate Benchmark Reform

In September 2019, the IASB issued 'Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7'. The Santander UK group applies IAS 39 hedge accounting so the amendments to IFRS 9 do not apply. The IAS 39 amendments apply to all hedging relationships directly affected by uncertainties related to interbank offered rate (IBOR) reform and must be applied for annual periods beginning on or after 1 January 2020. Following their endorsement for use in the European Union, the Santander UK group adopted the IAS 39 and IFRS 7 amendments in the preparation of the financial statements for the year ended 31 December 2019. The exceptions given by the IAS 39 amendments mean that IBOR reform had no impact on hedge relationships for affected hedges.

In August 2020, the IASB issued 'Interest Rate Benchmark Reform - Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16'. These amendments apply only to changes required by IBOR reform to financial instruments and hedging relationships. The amendments are effective from 1 January 2021 and must be applied retrospectively without restating comparative information. Following their endorsement for use in the European Union and the UK, the Santander UK group has elected to apply the amendments in the preparation of these financial statements. The amendments address the accounting issues for financial instruments when IBOR reform is implemented including providing a practical expedient for changes to contractual cash flows, giving relief from specific hedge accounting requirements, and specifying a number of additional disclosures to enable users of financial statements to understand the effect of IBOR reform on an entity's financial instruments and risk management strategy.

Further details of the impact of these amendments on the financial statements for the year ended 31 December 2020 and the additional disclosures required are provided in Note 43.

Other changes

The Santander UK group adopted IFRS 16 and amendments to IAS 12 in 2019 and adopted IFRS 9 in 2018, with the impact included in the statement of changes in equity for that year end.

Future accounting developments

At 31 December 2020, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective or which have otherwise not been early adopted where permitted.

Comparative information

As required by US public company reporting requirements, these financial statements include two years of comparative information for the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related Notes.

Consolidation

a) Subsidiaries

The Consolidated Financial Statements incorporate the financial statements of the Company and entities (including structured entities) controlled by it and its subsidiaries. Control is achieved where the Company (i) has power over the investee; (ii) is exposed, or has rights, to variable returns from its involvement with the investee; and (iii) has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company's voting rights in an investee are sufficient to give it power, including:

- The size of the Company's holding of voting rights relative to the size and dispersion of holdings of the other vote holders

- Potential voting rights held by the Company, other vote holders or other parties

- Rights arising from other contractual arrangements

- Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and the consolidated statement of comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Inter-company transactions, balances and unrealised gains on transactions between Santander UK group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.

The acquisition method of accounting is used to account for the acquisition of subsidiaries which meet the definition of a business. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. Acquisition-related costs are expensed as incurred. The excess of the cost of acquisition, as well as the fair value of any interest previously held, over the fair value of the Santander UK group's share of the identifiable net assets of the subsidiary at the date of acquisition is recorded as goodwill. When the Santander UK group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in a former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 or, when applicable, the costs on initial recognition of an investment in an associate or joint venture.

Business combinations between entities under common control (i.e. fellow subsidiaries of Banco Santander SA, the ultimate parent) are outside the scope of IFRS 3 - 'Business Combinations', and there is no other guidance for such transactions under IFRS. The Santander UK group elects to account for business combinations between entities under common control at their book values in the acquired entity by including the acquired entity's results from the date of the business combination and not restating comparatives. Reorganisations of entities within the Santander UK group are also accounted for at their book values.

Interests in subsidiaries are eliminated during the preparation of the Consolidated Financial Statements. Interests in subsidiaries in the Company unconsolidated financial statements are held at cost subject to impairment.

Credit protection entities established as part of significant risk transfer (SRT) transactions are not consolidated by the Santander UK group in cases where third party investors have the exposure, or rights, to all of the variability of returns from the performance of the entities.

b) Joint ventures

Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to its net assets. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Accounting policies of joint ventures have been aligned to the extent there are differences from the Santander UK group's policies. Investments in joint ventures are accounted for by the equity method of accounting and are initially recorded at cost and adjusted each year to reflect the Santander UK group's share of their post-acquisition results. When the Santander UK group's share of losses of a joint venture exceed its interest in that joint venture, the Santander UK group discontinues recognising its share of further losses. Further losses are recognised only to the extent that the Santander UK group has incurred legal or constructive obligations or made payments on behalf of the joint venture.

Foreign currency translation

Items included in the financial statements of each entity in the Santander UK group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the functional currency). The Consolidated Financial Statements are presented in sterling, which is the functional currency of the Company.

Income statements and cash flows of foreign entities are translated into the Santander UK group's presentation currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences on the translation of the net investment in foreign entities are recognised in other comprehensive income. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Foreign currency transactions are translated into the functional currency of the entity involved at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement unless recognised in other comprehensive income in connection with a cash flow hedge. Non-monetary items denominated in a foreign currency measured at historical cost are not retranslated. Exchange rate differences arising on non-monetary items measured at fair value are recognised in the consolidated income statement except for differences arising on equity securities measured at fair value through other comprehensive income (FVOCI), which are recognised in other comprehensive income.

Revenue recognition

a) Interest income and expense

Interest and similar income comprises interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI and interest income on hedging derivatives. Interest expense and similar charges comprises interest expense on financial liabilities measured at amortised cost, and interest expense on hedging derivatives. Interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI and interest expense on financial liabilities other than those at fair value through profit or loss (FVTPL) is determined using the effective interest rate method.

The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the gross carrying amount of the financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding expected credit losses. The calculation includes all amounts paid or received by the Santander UK group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of the financial instrument and all other premiums or discounts.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have subsequently become credit-impaired (or 'Stage 3'), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of the ECL provision). For more information on stage allocations of credit risk exposures, see 'Significant increase in credit risk' in the 'Santander UK group level - credit risk management' section of the Risk Review.

During Q4 2020, we revised the accounting treatment for certain items of mortgage income. Mortgage account fees, which are normally paid at the end of the mortgage and were previously recognised as received in fee income, are now recognised in interest income as part of the effective interest rate method throughout the life of the mortgage to better reflect the requirements of IFRS. In addition, we no longer accrue interest income relating to the period after mortgages revert to the standard variable rate (or equivalent) beyond the incentive period. This better aligns our policy to current practice. These changes resulted in an increase in net interest income of £44m for 2020. The net impact of these changes is not material and comparatives have not been restated.

b) Fee and commission income and expense

Fees and commissions that are not an integral part of the effective interest rate are recognised when the service is performed. Most fee and commission income is recognised at a point in time. Certain commitment, upfront and management fees are recognised over time but are not material. For retail and corporate products, fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK group's branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial products.

For insurance products, fee and commission income consists principally of commissions and profit share arising from the sale of building and contents insurance and life protection insurance. Commissions arising from the sale of buildings and contents insurance are recognised over the period of insurance cover, adjusted to take account of cancelled policies. Profit share income from the sale of buildings and contents insurance which is not subject to any adjustment is recognised when the profit share income is earned. Commissions and profit share arising from the sale of life protection insurance is subject to adjustment for cancellations of policies within 3 years from inception.

Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (for example certain loan commitment fees) is recognised as an adjustment to the effective interest rate and recorded in 'Interest income'.

c) Dividend income

Except for equity securities classified as trading assets or financial assets held at fair value through profit or loss, described below, dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity securities.

d) Other operating income

Other operating income includes all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss (comprising financial assets and liabilities held for trading, trading derivatives and other financial assets and liabilities at fair value through profit or loss), together with related interest income, expense, dividends and changes in fair value of any derivatives managed in conjunction with these assets and liabilities. Changes in fair value of derivatives in a fair value hedging relationship are also recognised in other operating income. Other operating income also includes income from operating lease assets, and profits and losses arising on the sales of property, plant and equipment and subsidiary undertakings.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, including computer software, which are assets that necessarily take a substantial period of time to develop for their intended use, are added to the cost of those assets, until the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period in which they occur.

Pensions and other post-retirement benefits

a) Defined benefit schemes

A defined benefit scheme is a pension scheme that guarantees an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. Pension costs are charged to 'Administration expenses', within the line item 'Operating expenses before impairment losses, provisions and charges' with the net interest on the defined benefit asset or liability included within 'Net interest income' in the income statement. The asset or liability recognised in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date, less the fair value of scheme assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The assets of the schemes are measured at their fair values at the balance sheet date.

The present value of the defined benefit obligation is estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, then discounted to present value using the yield applicable to high-quality AA rated corporate bonds of the same currency and which have terms to maturity closest to the terms of the scheme liabilities, adjusted where necessary to match those terms. In determining the value of scheme liabilities, demographic and financial assumptions are made by management about life expectancy, inflation, discount rates, pension increases and earnings growth, based on past experience and future expectations. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively.

Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme. The income statement includes the net interest income/expense on the net defined benefit liability/asset, current service cost and any past service cost and gain or loss on settlement. Remeasurement of defined benefit pension schemes, including return on scheme assets (excludes amounts included in net interest), actuarial gains and losses (arising from changes in demographic assumptions, the impact of scheme experience and changes in financial assumptions) and the effect of the changes to the asset ceiling (if applicable), are recognised in other comprehensive income. Remeasurement recognised in other comprehensive income will not be reclassified to the income statement. Past-service costs are recognised as an expense in the income statement at the earlier of when the scheme amendment or curtailment occurs and when the related restructuring costs or termination benefits are recognised. Curtailments include the impact of significant reductions in the number of employees covered by a scheme, or amendments to the terms of the scheme so that a significant element of future service will no longer qualify for benefits or will qualify only for reduced benefits. Curtailment gains and losses on businesses that meet the definition of discontinued operations are included in profit or loss for the year from discontinued operations. Gains and losses on settlements are recognised when the settlement occurs.

b) Defined contribution plans

A defined contribution plan is a pension scheme under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund). The pension paid to the member at retirement is based on the amount in the separate fund for each member. The Santander UK group has no legal or constructive obligations to pay further contributions into the fund to 'top up' benefits to a certain guaranteed level. The regular contributions constitute net periodic costs for the year in which they are due and are included in staff costs within Operating expenses in the income statement.

c) Post-retirement medical benefit plans

Post-retirement medical benefit liabilities are determined using the projected unit credit method, with actuarial valuations updated at each year-end. The expected benefit costs are accrued over the period of employment using an accounting methodology similar to that for the defined benefit pension scheme.

Share-based payments

The Santander UK group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its employees. Shares of the Santander UK group's parent, Banco Santander SA are purchased in the open market by the Santander UK group (for the Employee Sharesave scheme) or are purchased by Banco Santander SA or another Banco Santander subsidiary (including awards granted under the Long-Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options or awards as they vest.

Options granted under the Employee Sharesave scheme are accounted for as cash-settled share-based payment transactions. Awards granted under the Long-Term Incentive Plan and Deferred Shares Bonus Plan are accounted for as equity-settled share-based payment transactions.

The fair value of the services received is measured by reference to the fair value of the shares or share options initially on the date of the grant for both the cash and equity settled share-based payments and then subsequently at each reporting date for the cash-settled share-based payments. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement in administration expenses over the period that the services are received i.e. the vesting period.

A liability equal to the portion of the services received is recognised at the fair value determined at each balance sheet date for cash-settled share-based payments. A liability equal to the amount to be reimbursed to Banco Santander SA is recognised at the fair value determined at the grant date for equity-settled share-based payments.

The fair value of the options granted under the Employee Sharesave scheme is determined using an option pricing model, which takes into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the Banco Santander SA share price over the life of the option and the dividend growth rate. The fair value of the awards granted for the Long-Term Incentive Plan was determined at the grant date using an option pricing model, which takes into account the share price at grant date, the risk free interest rate, the expected volatility of the Banco Santander SA share price over the life of the award and the dividend growth rate. Vesting conditions included in the terms of the grant are not taken into account in estimating fair value, except for those that include terms related to market conditions. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee service so that, ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market-related vesting conditions are met, provided that the non-market vesting conditions are met.

Where an award has been modified, as a minimum, the expense of the original award continues to be recognised as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or increase the number of equity instruments, the incremental fair value of the award or incremental fair value of the modification of the award is recognised in addition to the expense of the original grant, measured at the date of modification, over the modified vesting period.

Cancellations in the vesting period are treated as an acceleration of vesting, and recognised immediately for the amount that would otherwise have been recognised for services over the vesting period.

Goodwill and other intangible assets

Goodwill represents the excess of the cost of an acquisition, as well as the fair value of any interest previously held, over the fair value of the share of the identifiable net assets of the acquired subsidiary, associate, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in intangible assets. Goodwill on acquisitions of associates is included as part of investment in associates. Goodwill is tested for impairment annually, or more frequently when events or changes in circumstances dictate, and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business sold.

Other intangible assets are recognised if they arise from contractual or other legal rights or if they are capable of being separated or divided from Santander UK and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over their useful economic life of three to seven years. Other intangible assets are reviewed annually for impairment indicators and tested for impairment where indicators are present.

Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of those products can be measured reliably. These costs include payroll, materials, services and directly attributable overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of three to seven years, unless the software is an integral part of the related computer hardware, in which case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended. Costs of maintaining software are expensed as incurred.

Property, plant and equipment

Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software. Property, plant and equipment also includes operating leases where the Santander UK group is the lessor and right-of-use assets where the Santander UK group is the lessee, as described further in 'Leases' below. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. A review for indications of impairment is carried out at each reporting date. Gains and losses on disposal are determined by reference to the carrying amount and are reported in other operating income. Repairs and renewals are charged to the income statement when the expenditure is incurred. Internally developed software meeting the criteria set out in 'Goodwill and other intangible assets' above and externally purchased software are classified in property, plant and equipment where the software is an integral part of the related computer hardware (for example operating system of a computer). Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life, as follows:


Owner-occupied properties	Not exceeding 50 years
Office fixtures and equipment	3 to 15 years
Computer software	3 to 7 years
Right-of-use assets (see 'Leases - The Santander UK group as lessee' below)	Shorter of the lease term or the useful life of the underlying asset

Depreciation is not charged on freehold land and assets under construction. Depreciation on operating lease assets where the Santander UK group is the lessor is described in 'Leases' below.

Financial instruments

a) Initial recognition and measurement

Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander UK group determines the classification of its financial assets and liabilities at initial recognition and measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs of financial assets and financial liabilities carried at FVTPL are expensed in profit or loss. Immediately after initial recognition, an expected credit loss (ECL) allowance is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI.

A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the market place concerned. Regular way purchases of financial assets classified as loans and receivables, issues of equity or financial liabilities measured at amortised cost are recognised on settlement date; all other regular way purchases and issues are recognised on trade date.

b) Financial assets and liabilities

i) Classification and subsequent measurement

The Santander UK group classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL.

Financial assets and financial liabilities are classified as FVTPL where there is a requirement to do so or where they are otherwise designated at FVTPL on initial recognition. Financial assets and financial liabilities which are required to be held at FVTPL include:

- Financial assets and financial liabilities held for trading

- Debt instruments that do not have solely payments of principal and interest (SPPI) characteristics. Otherwise, such instruments are measured at amortised cost or FVOCI, and

- Equity instruments that have not been designated as held at FVOCI.

Financial assets and financial liabilities are classified as held for trading if they are derivatives or if they are acquired or incurred principally for the purpose of selling or repurchasing in the near-term, or form part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.

In certain circumstances, other financial assets and financial liabilities are designated at FVTPL where this results in more relevant information. This may arise because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on a different basis, where the assets and liabilities are managed and their performance evaluated on a fair value basis or, in the case of financial liabilities, where it contains one or more embedded derivatives which are not closely related to the host contract.

The classification and measurement requirements for financial asset debt and equity instruments and financial liabilities are set out below.

a) Financial assets: debt instruments

Debt instruments are those instruments that meet the definition of a financial liability from the issuer's perspective, such as loans and government and corporate bonds. Classification and subsequent measurement of debt instruments depend on the Santander UK group's business model for managing the asset, and the cash flow characteristics of the asset.

Business model

The business model reflects how the Santander UK group manages the assets in order to generate cash flows and, specifically, whether the Santander UK group's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of the assets. If neither of these is applicable, such as where the financial assets are held for trading purposes, then the financial assets are classified as part of an 'other' business model and measured at FVTPL. Factors considered in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the assets' performance is evaluated and reported to key management personnel, and how risks are assessed and managed.

SPPI

Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Santander UK group assesses whether the assets' cash flows represent SPPI. In making this assessment, the Santander UK group considers whether the contractual cash flows are consistent with a basic lending arrangement (i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement). Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the related asset is classified and measured at FVTPL.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.

Based on these factors, the Santander UK group classifies its debt instruments into one of the following measurement categories:

-Amortised cost - Financial assets that are held for collection of contractual cash flows where those cash flows represent SPPI, and that are not designated at FVTPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any ECL recognised and measured as presented in Note 13. Interest income from these financial assets is included in 'Interest and similar income' using the effective interest rate method. When estimates of future cash flows are revised, the carrying amount of the respective financial assets or financial liabilities is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in the income statement.

-FVOCI - Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets' cash flows represent SPPI, and that are not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are recognised in OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument's amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in 'Other operating income'. Interest income from these financial assets is included in 'Interest and similar income' using the effective interest rate method.

- FVTPL - Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument that is subsequently measured at FVTPL, including any debt instruments designated at fair value, is recognised in profit or loss and presented in the income statement in 'Other operating income' in the period in which it arises.

The Santander UK group reclassifies financial assets when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent.

b) Financial assets: equity instruments

Equity instruments are instruments that meet the definition of equity from the issuer's perspective, being instruments that do not contain a contractual obligation to pay cash and that evidence a residual interest in the issuer's net assets. All equity investments are subsequently measured at FVTPL, except where management has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. When this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal. ECLs (and reversal of ECLs) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the right to receive payments is established. Gains and losses on equity investments at FVTPL are included in the 'Other operating income' line in the income statement.

c) Financial liabilities

Financial liabilities are classified as subsequently measured at amortised cost, except for:

- Financial liabilities at fair value through profit or loss: this classification is applied to derivatives and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability) and partially in profit or loss (the remaining amount of change in the fair value of the liability)

- Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Santander UK group recognises any expense incurred on the financial liability, and

- Financial guarantee contracts and loan commitments.

Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits. The principal products are Capital Guaranteed/Protected Products which give the customers a limited participation in the upside growth of an equity index. In the event the index falls in price, a cash principal element is guaranteed/protected. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers. The cash principal element is accounted for as deposits by customers at amortised cost. The embedded derivatives are separated from the host instrument and are separately accounted for as derivatives.

d) Sale and repurchase agreements (including stock borrowing and lending)

Securities sold subject to a commitment to repurchase them at a predetermined price (repos) under which substantially all the risks and rewards of ownership are retained by the Santander UK group remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (reverse repos) are not recognised on the balance sheet and the consideration paid is recorded as an asset. The difference between the sale and repurchase price is treated as trading income in the income statement, except where the repo is not treated as part of the trading book, in which case the difference is recorded in interest income or expense.

Securities lending and borrowing transactions are generally secured, with collateral in the form of securities or cash advanced or received. Securities lent or borrowed are not reflected on the balance sheet. Collateral in the form of cash received or advanced is recorded as a deposit or a loan. Collateral in the form of securities is not recognised.

e) Day One profit adjustments

The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, sometimes the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When such evidence exists, the Santander UK group recognises a trading gain or loss at inception (Day One gain or loss), being the difference between the transaction price and the fair value. When significant unobservable parameters are used, the entire Day One gain or loss is deferred and is recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or an offsetting transaction is entered into.

ii) Impairment of debt instrument financial assets

The Santander UK group assesses on a forward-looking basis the ECL associated with its debt instrument assets carried at amortised cost and FVOCI and with the exposure arising from financial guarantee contracts and loan commitments. The Santander UK group recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects:

- An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes

- The time value of money, and

- Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

Grouping of instruments for losses measured on a collective basis

We typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in Retail Banking - credit risk management in the Risk review) using one or more statistical models. Where we have used internal capital or similar models as the basis for our ECL models, this typically results in a large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models. We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed, as described below.

Individually assessed impairments (IAIs)

We assess significant Stage 3 cases individually. We do this for CIB and Corporate & Commercial Banking cases, but not for Business Banking cases in Retail Banking which we assess collectively. To calculate the estimated loss, we estimate the future cash flows under several scenarios each of which uses case-specific factors and circumstances. We then probability-weight the net present value of the cash flows under each scenario to arrive at a weighted average provision requirement. We update our assessment process every quarter and more frequently if there are changes in circumstances that might affect the scenarios, cash flows or probabilities we apply.

For more on how ECL is calculated, see the Credit risk section of the Risk review.

a) Write-off

For secured loans, a write-off is only made when all collection procedures have been exhausted and the security has been sold and/or a claim made on any mortgage indemnity guarantee or other insurance. In the corporate loan portfolio, there may be occasions where a write-off occurs for other reasons, such as following a consensual restructure or refinancing of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than its face value.

There is no threshold based on past due status beyond which all secured loans are written off as there can be significant variations in the time needed to enforce possession and sale of the security, especially due to the different legal frameworks that apply in different regions of the UK. For unsecured loans, a write-off is only made when all internal avenues of collecting the debt have been exhausted. Where appropriate the debt is passed over to external collection agencies. A past due threshold is applied to unsecured debt where accounts that are P180D days past due are written off unless there is a dispute awaiting resolution. Contact is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried out only when the steps described above have been undertaken without success.

All write-offs are assessed / made on a case-by-case basis, taking account of the exposure at the date of write-off, after accounting for the value from any collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once investigations have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances.

b) Recoveries

Recoveries of credit impairment losses are not included in the impairment loss allowance, but are taken to income and offset against credit impairment losses. Recoveries of credit impairment losses are classified in the income statement as 'Credit impairment losses'.

iii) Modifications of financial assets

The treatment of a renegotiation or modification of the contractual cash flows of a financial asset normally depends upon whether the renegotiation or modification is due to financial difficulties of the borrower or for other commercial reasons.

- Contractual modifications due to financial difficulties of the borrower: where the Santander UK group modifies the contractual conditions to enable the borrower to fulfil their payment obligations, the asset is not derecognised. The gross carrying amount of the financial asset is recalculated as the present value of the renegotiated/modified contractual cash flows that are discounted at the financial asset's original EIR and any gain or loss arising from the modification is recognised in the income statement.

- Contractual modifications for other commercial reasons: an assessment is performed to determine whether the terms of the new agreement are substantially different from the terms of the existing agreement, after considering changes in the cash flows arising from the modified terms and the overall instrument risk profile. Where terms are substantially different, such modifications are treated as a new transaction resulting in derecognition of the original financial asset, and the recognition of a 'new' financial asset with any difference between the carrying amount of the derecognised asset and the fair value of the new asset is recognised in the income statement as a gain or loss on derecognition. Where terms are not substantially different, the carrying value of the financial asset is adjusted to reflect the present value of modified cash flows discounted at the original EIR with any gain or loss arising from modification recognised immediately in the income statement.

Any other contractual modifications, such as where a regulatory authority imposes a change in certain contractual terms or due to legal reasons, are assessed on a case-by-case basis to establish whether or not the financial asset should be derecognised.

iv) Derecognition other than on a modification

Financial assets are derecognised when the rights to receive cash flows have expired or the Santander UK group has transferred its contractual right to receive the cash flows from the assets and either: (1) substantially all the risks and rewards of ownership have been transferred; or (2) the Santander UK group has neither retained nor transferred substantially all of the risks and rewards, but has transferred control.

Financial liabilities are derecognised when extinguished, cancelled or expired.

c) Financial guarantee contracts and loan commitments

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities.

Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of the amount of the loss allowance, and the premium received on initial recognition less income recognised in accordance with the principles of IFRS 15. Loan commitments are measured as the amount of the loss allowance (determined in accordance with IFRS 9 as described in Credit risk section of the Risk review). The Santander UK group has not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument.

For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision and charged to credit impairment losses in the income statement. The loss allowance in respect of revolving facilities is classified in loans and advances to customers to the extent of any drawn balances. The loss allowance in respect of undrawn amounts is classified in provisions. When amounts are drawn, any related loss allowance is transferred from provisions to loans and advances to customers.

Derivative financial instruments (derivatives)

Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures, and equity index options.

Derivatives are held for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge accounting relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described in 'Hedge accounting' below.

Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are estimated using valuation techniques, including discounted cash flow and option pricing models.

Certain derivatives may be embedded in hybrid contracts, such as the conversion option in a convertible bond. If the hybrid contract contains a host that is a financial asset, then the Santander UK group assesses the entire contract as described in the financial asset section above for classification and measurement purposes. Otherwise, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Contracts containing embedded derivatives are not subsequently reassessed for separation unless either there has been a change in the terms of the contract which significantly modifies the cash flows (in which case the contract is reassessed at the time of modification) or the contract has been reclassified (in which case the contract is reassessed at the time of reclassification).

All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, except where netting is permitted. The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments and, if the latter, the nature of the risks being hedged. Gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement, and included within Other operating income.

Offsetting financial assets and liabilities

Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. The Santander UK group is party to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.

Hedge accounting

The Santander UK group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of its risk management strategies. Derivatives are used to hedge exposures to interest rates, exchange rates and certain indices such as retail price indices.

At the time a financial instrument is designated as a hedge (i.e. at the inception of the hedge), the Santander UK group formally documents the relationship between the hedging instrument(s) and hedged item(s), its risk management objective and strategy for undertaking the hedge. The documentation includes the identification of each hedging instrument and respective hedged item, the nature of the risk being hedged (including the benchmark interest rate being hedged in a hedge of interest rate risk) and how the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value attributable to the hedged risk is to be assessed. Accordingly, the Santander UK group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been and will be highly effective in offsetting changes in the fair value attributable to the hedged risk during the period that the hedge is designated. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Santander UK group can expect, and actual results indicate, that changes in the fair value or cash flow of the hedged items are effectively offset by changes in the fair value or cash flow of the hedging instrument. If at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.

Where derivatives are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the derivatives may be designated as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (fair value hedges); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedges); or (iii) a hedge of a net investment in a foreign operation (net investment hedges). The Santander UK group applies fair value and cash flow hedge accounting, but not hedging of a net investment in a foreign operation.

a) Fair value hedge accounting

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Where the hedged item is measured at amortised cost, the fair value changes due to the hedged risk adjust the carrying amount of the hedged asset or liability. Changes in the fair value of portfolio hedged items are presented separately in the consolidated balance sheet in macro hedge of interest rate risk and recognised in the income statement within other operating income. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. For fair value hedges of interest rate risk, the cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity. For portfolio hedged items, the cumulative adjustment is amortised to the income statement using the straight line method over the period to maturity.

b) Cash flow hedge accounting

The effective portion of changes in the fair value of qualifying cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. The Santander UK group is exposed to cash flow interest rate risk on its floating rate assets, foreign currency risk on its fixed rate debt issuances denominated in foreign currency and equity price risk arises from the Santander UK group operating the Employee Sharesave scheme. Cash flow hedging is used to hedge the variability in cash flows arising from these risks.

Securitisation transactions

The Santander UK group has entered into arrangements where undertakings have issued mortgage-backed and other asset-backed securities or have entered into funding arrangements with lenders in order to finance specific loans and advances to customers. The Santander UK group has also entered into synthetic securitisation arrangements, as part of significant risk transfer (SRT) transactions to reduce its risk-weighted assets, where undertakings have issued credit-linked notes and deposited the funds raised as collateral for credit protection in respect of specific loans and advances to customers. As the Santander UK group has retained substantially all the risks and rewards of the underlying assets, such financial instruments continue to be recognised on the balance sheet, and a liability recognised for the proceeds of the funding transaction, or in the case of SRT transactions, collateral deposited.

Impairment of non-financial assets

At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment (including operating lease assets) and intangible assets (including goodwill) are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review. The impairment review comprises a comparison of the carrying amount of the asset or cash generating unit with its recoverable amount: the higher of the asset's or cash-generating unit's fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at which non-financial assets, including goodwill, are monitored for internal management purposes and is not larger than an operating segment.

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Value in use is calculated by discounting management's expected future cash flows obtainable as a result of the asset's continued use (after making allowance for increases in regulatory capital requirements), including those resulting from its ultimate disposal, at a market-based discount rate on a pre-tax basis. The recoverable amounts of goodwill have been based on value in use calculations.

The carrying values of property, plant and equipment, goodwill and other intangible assets are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss relating to property, plant and equipment may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the property, plant and equipment's recoverable amount. The carrying amount of the property, plant and equipment will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.

Leases

a) The Santander UK group as lessor

Operating lease assets are recorded at cost and depreciated over the life of the asset after taking into account anticipated residual value (RV). Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset. After initial recognition, residual values are reviewed regularly, and any changes are recognised prospectively through remaining depreciation charges.

Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Santander UK group's net investment in the leases. Finance lease income is allocated to accounting periods to reflect a constant periodic rate of return on the Santander UK group's net investment outstanding in respect of the leases and hire purchase contracts. A provision is recognised to reflect a reduction in any anticipated unguaranteed RV. A provision is also recognised for voluntary termination of the contract by the customer, where appropriate.

b) The Santander UK group as lessee

The Santander UK group assesses whether a contract is or contains a lease at the inception of the contract and recognises a right-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases, except for leases with a term of 12 months or less which are expensed in the income statement on a straight-line basis over the lease terms. Lease payments exclude irrecoverable VAT which is expensed in the income statement as lease payments are made.

The lease liability, which is included in Other liabilities on the balance sheet, is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate appropriate to the lease term. The lease liability is subsequently measured at amortised cost using the effective interest rate method. Remeasurement of the lease liability occurs if there is a change in the lease payments (when a corresponding adjustment is made to the ROU asset), the lease term or in the assessment of an option to purchase the underlying asset.

At inception, the ROU asset, which is included in Property, plant and equipment on the balance sheet, comprises the lease liability, initial direct costs and the obligations to restore the asset, less any incentives granted by the lessor. The ROU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset and is reviewed for impairment as for owned assets. The obligation to restore the asset is included in Provisions on the balance sheet.

Income taxes, including deferred taxes

The tax expense represents the sum of the income tax currently payable and deferred income tax.

Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Current taxes associated with the repurchase of equity instruments are reported directly in equity.

A current tax liability for the current or prior period is measured at the amount expected to be paid to the tax authorities. Where the amount of the final tax liability is uncertain or where a position is challenged by a taxation authority, the liability recognised is the most likely outcome. Where a most likely outcome cannot be determined, a weighted average basis is applied.

Deferred income tax is the tax expected to be payable or recoverable on income tax losses available to carry forward and on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the assets may be utilised as they reverse. Such deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Deferred tax assets and liabilities are not recognised from the initial recognition of other assets (other than in a business combination) and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on rates enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Santander UK group is able to control reversal of the temporary difference and it is probable that it will not reverse in the foreseeable future. The Santander UK group reviews the carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax relating to actuarial gains and losses on defined benefits is recognised in other comprehensive income. Deferred tax relating to fair value re-measurements of financial instruments accounted for at FVOCI and cash flow hedging instruments is charged or credited directly to other comprehensive income and is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.

Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks and short-term investments in securities. Balances with central banks represent amounts held at the Bank of England as part of the Santander UK group's liquidity management activities. In addition, it includes certain minimum cash balances held for regulatory purposes required to be maintained with the Bank of England.

Provisions

Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefits will be necessary to settle the obligation, and it can be reliably estimated.

Conduct provisions are made for the estimated cost of making redress payments with respect to the past sales of products, using conclusions such as the number of claims the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main features.

When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.

Loan commitments are measured as the amount of the loss allowance, determined in line with IFRS 9 as set out in the Credit risk section of the Risk review.

Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.

Share capital

a) Share issue costs

Incremental external costs directly attributable to the issue of new shares are deducted from equity net of related income taxes.

b) Dividends

Dividends on ordinary shares are recognised in equity in the period in which the right to receive payment is established.

CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATES

The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions. In preparing the Consolidated Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, provisions and contingent liabilities, pensions and goodwill.

The following accounting estimates, as well as the judgements inherent within them, are considered important to the portrayal of the Santander UK group's financial results and financial condition because: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates, and (ii) any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group's future financial results and financial condition. In calculating each accounting estimate, a range of outcomes was calculated based principally on management's conclusions regarding the input assumptions relative to historical experience. The actual estimates were based on what management concluded to be the most probable assumptions within the range of reasonably possible assumptions.

a) Credit impairment allowance

The application of the ECL impairment methodology for calculating credit impairment allowances is highly susceptible to change from period to period. The methodology requires management to make judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the future financial results and financial condition. The impact of Covid-19 has increased the uncertainty around ECL impairment calculations, and has required management to make additional judgements and accounting estimates that affect the amount of assets and liabilities at the reporting date and the amount of income and expenses in the reporting period. The key additional judgements due to the impact of Covid-19 mainly reflect the increased uncertainty around forward-looking economic data and the need for additional post model adjustments.

Key areas of judgement in accounting estimates

The key judgements made by management in applying the ECL impairment methodology are the definition of default, forward-looking economic scenarios, probability weights, SICR thresholds, post model adjustments, internal credit risk rating for corporate borrowers and individually assessed corporate Stage 3 exposures. For more on each of these key judgements, including the impact of Covid-19 on them, see 'Management judgement applied in calculating ECL' in the 'Credit risk - Santander UK group level - credit risk management' section of the Risk review.

Sensitivity of ECL allowance

For detailed disclosures, see 'Sensitivity of ECL allowance' in the 'Credit risk - Santander UK group level - credit risk management' section of the Risk review.

b) Provisions and contingent liabilities

Significant judgment may be required when accounting for provisions, including in determining whether a present obligation exists and in estimating the probability and amount of any outflows. These judgments are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters. As a result it is often not possible to make reliable estimates of the likelihood and amount of any potential outflows. The main areas of judgement relating to provisions and contingent liabilities are set out below. For more details, see Notes 29 and 31.

Included in Regulatory and other provisions in Note 29 is an amount in respect of management's best estimate of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints. Note 31 provides disclosure relating to ongoing factual issues and reviews that could impact the timing and amount of any outflows.

In addition, Note 31 includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions, as well as an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. It also includes disclosure relating to certain leases in which current and former Santander UK group members were the lessor that are currently under review by HMRC in connection with claims for tax allowances.

c) Pensions

The Santander UK group operates a number of defined benefit pension schemes as described in Note 30 and estimates their position as described in the accounting policy 'Pensions and other post retirement benefits'.

Key areas of judgement in accounting estimates

Accounting for defined benefit pension schemes requires management to make assumptions principally about the discount rate adopted, but also about price inflation and life expectancy. Management's assumptions are based on past experience and current economic trends, which are not necessarily an indication of future experience. These are described in more detail in the 'Actuarial assumptions' section in Note 30.

Sensitivity of defined benefit pension scheme estimates

Had management used different assumptions, a larger or smaller pension remeasurement gain or loss would have resulted that could have had a material impact on the Santander UK group's reported financial position. Detailed disclosures on the actuarial assumption sensitivities of the schemes can be found in the 'Actuarial assumption sensitivities' section of Note 30.

d) Goodwill

The carrying amount of goodwill is based on the application of judgements including the basis of goodwill impairment calculation assumptions. Santander UK undertakes an annual assessment to evaluate whether the carrying value of goodwill is impaired, carrying out this assessment more frequently if reviews identify indicators of impairment or when events or changes in circumstances dictate.

Estimates include the determination of the carrying value of the Personal Financial Services Cash Generating Unit based on an allocation of regulatory capital, forecasts used for determining cash flows for Cash Generating Units and discount rates which factor in risk-free rates and applicable risk premiums, which are variables subject to fluctuations in external market rates and economic conditions beyond management's control. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and is subject to potential change over time. For more on these assumptions, including changes in the assumptions that would trigger an impairment, see Note 20.

2. SEGMENTS

Santander UK's principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of four segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies.

- Retail Banking offers a wide range of products and financial services to individuals and small businesses through our omni-channel presence comprising branches, ATMs, telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with simple banking needs and Santander Consumer Finance, predominantly a vehicle finance business.

- Corporate & Commercial Banking offers a wide range of financial services and solutions to more complex businesses across multiple sectors, typically with annual turnovers of between £2m and £500m. Service and expertise are provided by relationship managers, product specialists and through digital and telephony channels, and cover clients' needs both in the UK and overseas.

- Corporate & Investment Banking services corporate clients with an annual turnover of £500m and above. CIB clients require specially tailored solutions and value-added services due to their size, complexity and sophistication. We provide these clients with products to manage currency fluctuations, protect against interest rate risk, and arrange capital markets finance and specialist trade finance solutions, as well as providing support to the rest of Santander UK's business segments.

- Corporate Centre mainly includes the treasury, non-core corporate and legacy portfolios. Corporate Centre is also responsible for managing capital and funding, balance sheet composition, structure, pension and strategic liquidity risk. To enable a more targeted and strategically aligned apportionment of capital and other resources, revenues and costs incurred in Corporate Centre are allocated to the three business segments. The non-core corporate and legacy portfolios are being run-down and/or managed for value.

The segmental basis of presentation in this Annual Report has changed following a management review of our structure. As a result, customer assets of £2.0bn and customer deposits of £3.1bn have been transferred from Business Banking (in Retail Banking) to CCB, non-core corporate mortgages of £0.4bn have been transferred from Corporate Centre to CCB, and a number of smaller business lines have been transferred from CIB to Corporate Centre. This resulted in an increase in profit before tax in Retail Banking of £18m (2019: decrease of £36m), a decrease in CCB of £9m (2019: increase of £24m), a decrease in CIB of £10m (2019: decrease of £1m), and an increase of £1m in Corporate Centre (2019: increase of £13m). The net impact for Santander UK was nil.

The segmental data below is presented in a manner consistent with the internal reporting to the committee which is responsible for allocating resources and assessing performance of the segments and has been identified as the chief operating decision maker. The segmental data is prepared on a statutory basis of accounting, in line with the accounting policies set out in Note 1. Transactions between segments are on normal commercial terms and conditions. Internal charges and internal UK transfer pricing adjustments are reflected in the results of each segment. Revenue sharing agreements are used to allocate external customer revenues to a segment on a reasonable basis. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on Santander UK's cost of wholesale funding. Interest income and interest expense have not been reported separately. The majority of segment revenues are interest income in nature and net interest income is relied on primarily to assess segment performance and to make decisions on the allocation of segment resources.

Results by segment


	Retail Banking	Corporate & Commercial Banking	Corporate & Investment Banking	Corporate Centre	Total
31 December 2020	£m	£m	£m	£m	£m
Net interest income/(expense)	3,100	364	55	(76)	3,443
Non-interest income	375	93	68	(4)	532
Total operating income/(expense)	3,475	457	123	(80)	3,975
Operating expenses before credit impairment losses, provisions and charges	(1,913)	(316)	(114)	(109)	(2,452)
Credit impairment losses	(308)	(294)	(7)	(36)	(645)
Provisions for other liabilities and (charges)/release	(173)	(12)	(10)	(78)	(273)
Total operating credit impairment losses, provisions and charges	(481)	(306)	(17)	(114)	(918)
Profit/(loss) before tax	1,081	(165)	(8)	(303)	605

Revenue from external customers	4,160	549	123	(857)	3,975
Inter-segment revenue	(685)	(92)	-	777	-
Total operating income/(expense)	3,475	457	123	(80)	3,975

Revenue from external customers includes the following fee and commission income disaggregated by income type:(1)
- Current account and debit card fees	441	41	10	-	492
- Insurance, protection and investments	65	-	-	-	65
- Credit cards	67	-	-	-	67
- Non-banking and other fees(2)	15	47	66	4	132
Total fee and commission income	588	88	76	4	756
Fee and commission expense	(335)	(19)	(10)	(7)	(371)
Net fee and commission income/(expense)	253	69	66	(3)	385


Customer loans	183,404	17,626	2,784	3,196	207,010
Total assets(3)	192,070	17,626	2,784	79,852	292,332
Customer deposits	152,167	24,985	6,506	2,049	185,707
Total liabilities	152,715	25,011	6,517	92,153	276,396

Average number of full-time equivalent staff	19,151	2,092	716	39	21,998


(1)	The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2)	Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)	Includes customer loans, net of credit impairment loss allowances.


	Retail Banking	Corporate & Commercial Banking	Corporate & Investment Banking	Corporate Centre	Total
31 December 2019	£m	£m	£m	£m	£m
Net interest income/(expense)	2,827	422	62	(19)	3,292
Non-interest income	691	109	70	11	881
Total operating income/(expense)	3,518	531	132	(8)	4,173
Operating expenses before credit impairment losses, provisions and charges	(1,980)	(324)	(130)	(65)	(2,499)
Credit impairment (losses)/releases	(156)	(45)	(22)	2	(221)
Provisions for other liabilities and charges	(290)	(22)	(16)	(113)	(441)
Total operating credit impairment losses, provisions and charges	(446)	(67)	(38)	(111)	(662)
Profit/(loss) before tax	1,092	140	(36)	(184)	1,012

Revenue from external customers	4,255	633	138	(853)	4,173
Inter-segment revenue	(737)	(102)	(6)	845	-
Total operating income/(expense)	3,518	531	132	(8)	4,173

Revenue from external customers includes the following fee and commission income disaggregated by income type:(1)
- Current account and debit card fees	696	49	13	-	758
- Insurance, protection and investments	76	-	-	1	77
- Credit cards	86	-	-	-	86
- Non-banking and other fees(2)	61	58	67	5	191
Total fee and commission income	919	107	80	6	1,112
Fee and commission expense	(373)	(23)	(17)	(13)	(426)
Net fee and commission income/(expense)	546	84	63	(7)	686


Customer loans	178,762	18,391	4,041	3,814	205,008
Total assets(3)	185,920	18,391	4,046	73,345	281,702
Customer deposits	142,735	20,546	6,102	2,332	171,715
Total liabilities	143,602	20,572	6,233	95,278	265,685


(1)	The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2)	Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)	Includes customer loans, net of credit impairment loss allowances.

5. OTHER OPERATING INCOME



	2020	2019
	£m	£m
Net losses on financial instruments designated at fair value through profit or loss	(75)	(134)
Net gains on financial instruments mandatorily at fair value through profit or loss	46	70
Hedge ineffectiveness	20	8
Net profit on sale of financial assets at fair value through other comprehensive income	17	15
Income from operating lease assets	126	124
Other	13	112
	147	195

Following the implementation of our ring-fencing plans in 2018, assets and liabilities held at fair value through profit or loss, including derivatives, are predominantly used to provide customers with risk management solutions, and to manage and hedge the Santander UK group's own risks, and do not give rise to significant overall net gains/(losses) in the income statement.

'Net gains on financial instruments mandatorily at fair value through profit or loss' includes fair value gains of £89m (2019: losses of £42m, 2018: gains of £22m) on embedded derivatives bifurcated from certain equity index-linked deposits, as described in the derivatives accounting policy in Note 1. The embedded derivatives are economically hedged, the results of which are also included in this line item, and amounted to losses of £88m (2019: gains of £43m, 2018: losses of £21m). As a result, the net fair value movements recognised on the equity index-linked deposits and the related economic hedges were net gains of £1m (2019: £1m, 2018: £1m).

In 2019, 'net profit on sale of financial assets at fair value through other comprehensive income' included additional consideration of £15m in connection with the 2017 Vocalink Holdings Limited shareholding sale.

Exchange rate differences recognised in the Consolidated Income Statement on items not at fair value through profit or loss were £751m expense (2019: £1,102m income, 2018: £689m expense) and are presented in the line 'Other'. These are principally offset by related releases from the cash flow hedge reserve of £809m income (2019: £1,013m expense, 2018: £752m income) as set out in the Consolidated Statement of Comprehensive Income, which are also presented in 'Other'. Exchange rate differences on items measured at fair value through profit or loss are included in the line items relating to changes in fair value.

In 2020, Santander UK repurchased certain securities as part of its ongoing liability management exercises, resulting in a loss of £24m.

6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES


	2020	2019
	£m	£m
Staff costs:
Wages and salaries	831	852
Performance-related payments	97	159
Social security costs	101	111
Pensions costs: - defined contribution plans	66	66
defined benefit plans	38	35
Other share-based payments	-	0
Other personnel costs	33	40
	1,166	1,263
Other administration expenses	724	693
Depreciation, amortisation and impairment	562	543
Total	2,452	2,499

8. CREDIT IMPAIRMENT LOSSES AND PROVISIONS


	2020	2019
	£m	£m
Credit impairment losses:
Loans and advances to customers	672	239
Recoveries of loans and advances, net of collection costs	(24)	(40)
Off-balance sheet exposures (See Note 29)	(3)	22
	645	221
Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 29)	267	435
Provisions for residual value and voluntary termination	6	6
	273	441
	918	662

9. TAXATION



	2020	2019
	£m	£m
Current tax:
UK corporation tax on profit for the year	120	265
Adjustments in respect of prior years	(24)	(25)
Total current tax	96	240
Deferred tax:
Charge for the year	34	46
Adjustments in respect of prior years	4	(7)
Total deferred tax	38	39
Tax on profit	134	279

The standard rate of UK corporation tax was 27% for banking entities and 19% for non-banking entities (2019: 27% for banking entities and 19% for non-banking entities; 2018: 27% for banking entities and 19% for non-banking entities) following the introduction of an 8% surcharge to be applied to banking companies from 1 January 2016. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. Finance Act 2016 introduced a reduction in the standard rate of corporation tax rate to 17% from 2020 but this was reversed in the UK Budget in March 2020. As a result, the standard rate of corporation tax remains at 19% and the effect of the increase of 2% over that expected at 31 December 2019 has been reflected in the opening deferred tax balance at 2020.

10. DIVIDENDS ON ORDINARY SHARES

Dividends on ordinary shares declared and paid in the year were as follows:


	2020	2019	2020	2019
	Pence per share	Pence per share	£m	£m

In respect of current year - first interim	0.42	0.53	129	164
- second interim	-	0.49	-	151
	0.42	1.02	129	315

Following the PRA's announcement regarding the resumption of dividend payments, an interim dividend of £129m for 2020 was paid in December 2020.

11. DERIVATIVE FINANCIAL INSTRUMENTS


	2020			2019
		Fair value			Fair value
	Notional amount	Assets	Liabilities	Notional amount	Assets	Liabilities
	£m	£m	£m	£m	£m	£m
Derivatives held for trading:
Exchange rate contracts	14,951	395	418	14,149	134	200
Interest rate contracts	40,160	888	542	46,564	718	315
Equity and credit contracts	1,140	123	55	2,474	283	160
Total derivatives held for trading	56,251	1,406	1,015	63,187	1,135	675
Derivatives held for hedging
Designated as fair value hedges:
Exchange rate contracts	789	84	6	1,482	166	2
Interest rate contracts	93,748	1,225	1,885	94,550	1,022	1,488
	94,537	1,309	1,891	96,032	1,188	1,490
Designated as cash flow hedges:
Exchange rate contracts	27,020	1,978	409	28,502	2,023	462
Interest rate contracts	19,407	467	23	17,451	184	35
Equity derivative contracts	-	-	-	-	-	-
	46,427	2,445	432	45,953	2,207	497
Total derivatives held for hedging	140,964	3,754	2,323	141,985	3,395	1,987
Derivative netting(1)		(1,754)	(1,754)		(1,214)	(1,214)
Total derivatives	197,215	3,406	1,584	205,172	3,316	1,448

(1) Derivative netting excludes the effect of cash collateral, which is offset against the gross derivative position. The amount of cash collateral received that had been offset against the gross derivative assets was £330m (2019: £222m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £651m (2019: £629m).

12. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS


	2020	2019
	£m	£m
Loans and advances to customers:
Loans to housing associations	13	12
Other loans	86	80
	99	92
Debt securities	109	294
	208	386

13. LOANS AND ADVANCES TO CUSTOMERS


	2020		2019
£m		£m
Net loans and advances to customers	208,750		207,287

For movements in expected credit losses, see the Credit risk section of the Risk review.

14. SECURITISATIONS AND COVERED BONDS

The gross assets securitised, or for the covered bond programme assigned, at 31 December 2020 and 31 December 2019 were:


	2020		2019
£m		£m
Mortgage-backed master trust structures:
- Holmes	3,073		4,262
- Fosse	2,258		3,708
- Langton	2,782		3,076
	8,113		11,046
Other asset-backed securitisation structures:
- Motor	189		490
- Auto ABS UK Loans	1,460		1,532
	1,649		2,022
Total securitisation programmes	9,762		13,068
Covered bond programmes
- Euro 35bn Global Covered Bond Programme	23,670		23,323
Total securitisation and covered bond programmes	33,432		36,391

The following table sets out the internal and external issuances and redemptions in 2020 and 2019 for each securitisation and covered bond programme.


	Internal issuances		External issuances		Internal redemptions		External redemptions
	2020	2019	2020	2019	2020	2019	2020	2019
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Mortgage-backed master trust structures:
- Holmes	-	-	-	-	0.3	-	0.9	1.1
- Fosse	-	1.4	-	0.1	-	-	-	-
Other asset-backed securitisation structures:
- Motor	-	-	-	-	0.1	0.2	0.2	0.4
- Auto ABS UK Loans	-	0.1	0.3	0.2	-	0.1	0.1	0.2
Covered bond programme	-	-	3.0	2.9	-	0.5	2.7	1.5
	-	1.5	3.3	3.2	0.4	0.8	3.9	3.2

29. PROVISIONS


	Conduct remediation
	PPI		Other products		Bank Levy		Property		Off balance sheet ECL		Regulatory and other		Total

£m		£m		£m		£m		£m		£m		£m
At 1 January 2020	189		25		46		59		78		175		572
Additional provisions (See Note 8)	-		-		72		9		-		208		289
Provisions released (See Note 8)	-		(15)		-		(6)		(3)		(1)		(25)
Utilisation and other(1)	(113)		(2)		(94)		(16)		-		(157)		(382)
Recharge(2)	-		-		10		-		-		-		10
At 31 December 2020	76		8		34		46		75		225		464
To be settled:
- Within 12 months	76		2		34		25		75		111		323
- In more than 12 months	-		6		-		21		-		114		141
	76		8		34		46		75		225		464

a) Conduct remediation

i) Payment Protection Insurance (PPI)

At 31 December 2020, the remaining provision for PPI redress and related costs was £76m (2019: £189m). There was no additional provision in 2020.

Cumulative complaints from the inception of the PPI complaints process to 31 December 2020, regardless of the likelihood of Santander UK incurring a liability, were 4.6m At 31 December 2020, there were an estimated 3,500 complaints still requiring assessment and we had also entered into a commercial negotiation with the Official Receiver.

Although the deadline for bringing complaints has passed, customers can still commence litigation concerning the historical sale of PPI. Provision has been made for the best estimate of any obligation to pay compensation in respect of current stock and estimated future claims. However, there are ongoing factual issues to be resolved regarding such litigation which may have legal consequences including the volume and quality of future litigation claims. As a result, the extent of the potential liability and amount of any compensation to be paid remains uncertain.

The provision for conduct remediation recognised represents management's best estimate of Santander UK's liability in respect of mis-selling of PPI policies.

(ii) Other products

A provision for conduct remediation has also been recognised in respect of sales of other products. A number of uncertainties remain as to the eventual costs with respect to conduct remediation in respect of these products given the inherent difficulties in determining the number of customers involved and the amount of any redress to be provided to them. The remaining provision for other conduct was £8m (2019: £25m), which primarily related to the sale of mortgage endowments.

e) Regulatory and other

Regulatory and other provisions principally comprised amounts in respect of regulatory charges (including fines), operational loss and operational risk provisions, restructuring charges and litigation and related expenses. A number of uncertainties exist with respect to these provisions given the uncertainties inherent in operational, restructuring and litigation matters that affect the amount and timing of any potential outflows with respect to which provisions have been established. These provisions are reviewed at least quarterly.

At 31 December 2020 Regulatory and other provisions included an amount of £47m (2019: £68m) that arose from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act (CCA). This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2020 of potential costs in respect of the identified issue. As detailed in Note 31, there are aspects of the issue which remain under review.

The balance also included an amount in respect of our best estimate of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints, further described in Note 31. No further information on the best estimate is provided on the basis that it would be seriously prejudicial.

In 2020 there was a charge of £17m included in Regulatory and other provisions, relating to breaches of certain requirements to provide SMS warning alerts to customers regarding overdraft charges in our Retail Banking Business. It also included a charge of £65m as part of our multi-year transformation programme to improve future returns, focused on simplifying, digitising and automating the bank, a charge for operational risk provisions of £91m, and smaller charges for legal and redundancy provisions.

30. RETIREMENT BENEFIT PLANS

The amounts recognised in the balance sheet were as follows:


	2020	2019
	£m	£m
Assets/(liabilities)
Funded defined benefit pension scheme - surplus	495	669
Funded defined benefit pension scheme - deficit	(361)	(239)
Unfunded pension and post retirement medical benefits	(42)	(41)
Total net assets	92	389

a) Defined contribution pension plans

An expense of £66m (2019: £66m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 6).

b) Defined benefit pension schemes

The total amount charged to the income statement was as follows:


		Group
	2020	2019
	£m	£m
Net interest income	(10)	(23)
Current service cost	36	34
Past service and GMP costs	1	1
Administration costs	8	8
	35	20

Movements in the present value of defined benefit scheme obligations were as follows:


	Group
	2020	2019
	£m	£m
At 1 January	(12,158)	(10,804)
Current service cost paid by Santander UK plc	(24)	(22)
Current service cost paid by subsidiaries	(12)	(12)
Interest cost	(253)	(308)
Employer salary sacrifice contributions	(2)	(9)
Past service cost	(1)	(1)
Remeasurement due to actuarial movements arising from:
- Changes in demographic assumptions	(34)	(42)
- Experience adjustments	141	42
- Changes in financial assumptions	(1,940)	(1,377)
Benefits paid	396	375
At 31 December	(13,887)	(12,158)

Movements in the fair value of the schemes' assets were as follows:


	Group
	2020	2019
	£m	£m
At 1 January	12,547	11,532
Interest income	263	331
Contributions paid by employer and scheme members	245	212
Administration costs paid	(8)	(8)
Return on plan assets (excluding amounts included in net interest expense)	1,328	855
Benefits paid	(396)	(375)
At 31 December	13,979	12,547

Actuarial assumptions

The principal actuarial assumptions used for the defined benefit schemes were:


	2020	2019
	%	%
To determine benefit obligations:
- Discount rate for scheme liabilities	1.3	2.1
- General price inflation	3.0	3.0
- General salary increase	1.0	1.0
- Expected rate of pension increase	2.9	2.9


	Years	Years
Longevity at 60 for current pensioners, on the valuation date:
- Males	27.5	27.3
- Females	30.0	29.8
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
- Males	29.0	28.9
- Females	31.5	31.3

Discount rate for scheme liabilities

The rate used to discount the retirement benefit obligation for accounting purposes is based on the annual yield at the balance sheet date of high-quality corporate bonds on that date. There are only a limited number of higher quality Sterling-denominated corporate bonds, particularly those that are longer-dated. Therefore, in order to set a suitable discount rate, we need to construct a corporate bond yield curve. The model which we use for constructing the curve uses corporate bond data but excludes most convertible and asset-backed bonds. The curve is then constructed from this data by extrapolating the horizontal forward curve from 30 years, with the level of this forward rate being the average of the fitted forward rates over the 15 to 30 year range. When considering an appropriate assumption, we project forward the expected cash flows of the Scheme and adopt a single equivalent cash flow weighted discount rate, subject to management judgement.

General price inflation

Consistent with our discount rate methodology, we set the inflation assumption using the expected cash flows of the Scheme, fitting them to an inflation curve to give a weighted average inflation assumption. We then deduct an inflation risk premium to reflect the compensation holders of fixed rate instruments expect to receive for taking on the inflation risk. This premium is subject to a cap, to better reflect management's view of inflation expectations. In 2020, management amended the general price inflation assumptions to reflect the expectation that the Retail Price Index would be brought in line with the Consumer Price Index from 2030. At 31 December 2020, this change increased the liabilities of the Scheme by £64m.

General salary increase

From 1 March 2015, a cap on pensionable pay increases of 1% each year was applied to staff in the Scheme.

Expected rate of pension increase

The pension increase assumption methodology uses a stochastic model, which is calibrated to consider both the observed historical volatility term structure and derivative pricing. The model allows for the likelihood that high or low inflation in one-year feeds into inflation remaining high or low in the next year.

Mortality assumptions

The mortality assumptions are based on an independent analysis of the Scheme's actual mortality experience, carried out as part of the triennial actuarial valuation, together with recent evidence from the Continuous Mortality Investigation. An allowance is then made for expected future improvements to life expectancy based on the Continuous Mortality Investigation Tables. Following this review the S3 Medium all pensioner mortality table was adopted with appropriate adjustments to reflect the actual mortality experience. For future improvements, at 31 December 2020 the CMI 2019 projection model was adopted, with model parameters selected having had regard to the Scheme's membership profile with an initial addition to improvements of 0.15% per annum, together with a long-term rate of future improvements to life expectancy of 1.25% for male and female members. Both of these are published by the Continuous Mortality Investigation.

In 2019, the methodology for setting the demographic assumptions was changed to better represent current expectations, following a review carried out by the Trustee as part of the 2019 triennial valuation and a separate review conducted on early retirement experience. These reviews resulted in changes in the assumptions for commutation, family statistics and early retirement, which were retained at 31 December 2020.

31. CONTINGENT LIABILITIES AND COMMITMENTS


	2020	2019
	£m	£m
Guarantees given to third parties	939	1,198
Formal standby facilities, credit lines and other commitments	42,221	40,397
	43,160	41,595

(1) In 2020, an administrative error was identified in which £5,053m of loan commitments had been omitted in 2019. This has been corrected.

Other legal actions and regulatory matters

Santander UK engages in discussion, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.

In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition, where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made.

Payment Protection Insurance

In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is in its early stages. The dispute relates to the liability for PPI mis-selling complaints relating to pre-2005 PPI policies underwritten by AXA France IARD and AXA France Vie (together, AXA France - previously Financial Insurance Company Ltd and Financial Assurance Company Ltd respectively) and involves Santander Cards UK Limited (a former GE Capital Corporation entity and distributor of pre-2005 PPI known as GE Capital Bank Limited which was acquired by Banco Santander S.A. in 2008 and subsequently transferred to Santander UK plc) and a Banco Santander S.A. subsidiary Santander Insurance Services UK Limited (together the Santander Entities). During the relevant period, AXA France were owned by Genworth Financial International Holdings, Inc. (Genworth).

In September 2015 AXA S.A. acquired AXA France from Genworth. In July 2017, the Santander Entities notified AXA France that they did not accept liability for losses on PPI policies relating to this period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with AXA France pursuant to which it agreed to handle complaints on their behalf, and AXA France agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis. A standstill agreement was entered into between the Santander Entities and AXA France as a condition of the CHA.

In July 2020 Genworth announced that it had agreed to pay AXA circa £624m in respect of PPI mis-selling losses in settlement of the related dispute concerning obligations under the sale and purchase agreement pursuant to which Genworth sold AXA France to AXA. The CHA between Santander UK plc and AXA France terminated on 26 December 2020. On 30 December 2020, AXA France provided written notice to the Santander Entities to terminate the standstill agreement and claimed that the Santander Entities are liable to reimburse AXA France for pre-2005 PPI mis-selling losses, currently estimated at £631 million. This dispute is at an early stage and there are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is difficult to reliably predict the outcome or the timing of the resolution of the matter. The Regulatory and other provision in Note 29 includes our best estimate of the Santander Entities' liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial to the Santander Entities' interests in connection with the dispute.

In addition, and in relation to PPI more generally the PPI provision includes an amount relating to legal claims challenging the FCA's industry guidance on the treatment of Plevin / recurring non-disclosure assessments. This provision is based on current stock levels, future projected claims, and average redress. There remains a risk that volumes received in future may be higher than forecast. The provision in Note 29 includes our best estimate of Santander UK's liability for the specific issue. The actual cost of customer compensation could differ from the amount provided. It is not currently practicable to provide an estimate of the risk and amount of any further financial impact.

German dividend tax arbitrage transactions

In June 2018 the Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a loophole of a specific German settlement mechanism through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.

During 2020 we have continued to cooperate with the German authorities and, with the assistance of external experts, to progress an internal investigation into the matters in question. From Santander UK plc's perspective the investigation is focused principally on the period 2009-2011 and remains on-going. There remain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact. Any potential losses, claims or expenses suffered or incurred by Santander Financial Services plc in respect of these matters have been fully indemnified by Santander UK plc, as part of the ring-fencing transfer scheme between Santander UK plc, Santander Financial Services plc and Banco Santander SA.

40. FINANCIAL INSTRUMENTS

a) Measurement basis of financial assets and liabilities

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.

b) Fair values of financial instruments carried at amortised cost

The following tables analyse the fair value of the financial instruments carried at amortised cost at 31 December 2020 and 2019, including their levels in the fair value hierarchy - Level 1, Level 2 and Level 3. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Cash and balances at central banks, which consist of demand deposits with the Bank of England, together with cash in tills and ATMs, have been excluded from the table as the carrying amount is deemed an appropriate approximation of fair value. The fair value of the portfolio of UK Government debt securities, included in other financial assets at amortised cost, is the only material financial instrument categorised in Level 1 of the fair value hierarchy.


	2020				2019
			Carrying				Carrying
	Total		value		Total		value
£m		£m		£m		£m
Assets
Loans and advances to customers	211,279		208,750		211,796		207,287
Loans and advances to banks	1,682		1,682		1,855		1,855
Reverse repurchase agreements - non trading	19,608		19,599		23,634		23,636
Other financial assets at amortised cost	1,192		1,163		7,110		7,056
	233,761		231,194		244,395		239,834
Liabilities
Deposits by customers	195,242		195,135		182,013		181,883
Deposits by banks	20,967		20,958		14,363		14,353
Repurchase agreements - non trading	15,847		15,848		18,292		18,286
Debt securities in issue	36,397		35,566		42,694		41,129
Subordinated liabilities	3,069		2,556		4,220		3,528
	271,522		270,063		261,582		259,179

f) Fair values of financial instruments measured at fair value

The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 31 December 2020 and 31 December 2019, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.


		2020				2019
		Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total	Valuation
		£m	£m	£m	£m	£m	£m	£m	£m	technique
Assets
Derivative financial instruments	Exchange rate contracts	-	2,455	2	2,457	-	2,317	6	2,323	A
	Interest rate contracts	-	2,566	14	2,580	-	1,915	9	1,924	A & C
	Equity and credit contracts	-	71	52	123	-	223	60	283	B & D
	Netting	-	(1,754)	-	(1,754)	-	(1,214)	-	(1,214)
		-	3,338	68	3,406	-	3,241	75	3,316
Other financial assets at FVTPL	Loans and advances to customers	-	-	99	99	-	-	92	92	A
	Debt securities	-	-	109	109	-	-	294	294	A, B & D
		-	-	208	208	-	-	386	386
Financial assets at FVOCI	Debt securities	8,501	428	-	8,929	9,209	482	-	9,691	D
	Loans and advances to customers	-	-	21	21	-	-	56	56	D
		8,501	428	21	8,950	9,209	482	56	9,747
Total assets at fair value		8,501	3,766	297	12,564	9,209	3,723	517	13,449

Liabilities
Derivative financial instruments	Exchange rate contracts	-	833	-	833	-	660	4	664	A
	Interest rate contracts	-	2,447	3	2,450	-	1,836	2	1,838	A & C
	Equity and credit contracts	-	26	29	55	-	134	26	160	B & D
	Netting	-	(1,754)	-	(1,754)	-	(1,214)	-	(1,214)
		-	1,552	32	1,584	-	1,416	32	1,448
Other financial liabilities at FVTPL	Debt securities in issue	-	1,051	6	1,057	-	1,099	6	1,105	A
	Structured deposits	-	375	-	375	-	406	29	435	A
	Collateral and associated financial guarantees	-	-	2	2	-	147	26	173	D
		-	1,426	8	1,434	-	1,652	61	1,713
Total liabilities at fair value		-	2,978	40	3,018	-	3,068	93	3,161

g) Fair value adjustments

The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model.

Santander UK classifies fair value adjustments as either 'risk-related' or 'model-related'. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table:


	2020	2019
	£m	£m
Risk-related:
- Bid-offer and trade specific adjustments	(8)	(12)
- Uncertainty	23	17
- Credit risk adjustment	11	6
- Funding fair value adjustment	3	6
	29	17
Model-related	-	-
Day One profit	-	-
	29	17

e) Internal models based on information other than market data (Level 3)

Reconciliation of fair value measurement in Level 3 of the fair value hierarchy

The following table sets out the movements in Level 3 financial instruments in 2020 and 2019:


				Assets	Liabilities
	Derivatives	Other financial assets at FVTPL	Financial assets at FVOCI	Total	Derivatives	Other financial liabilities at FVTPL	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2020	75	386	56	517	(32)	(61)	(93)
Total (losses)/gains recognised:
- Fair value movements	10	(1)	(4)	5	(6)	18	12
- Foreign exchange and other movements	-	(5)	-	(5)	-	8	8
Transfers in	1	-	-	1	-	-	-
Transfers out	-	-	-	-	-	28	28
Netting(1)	-	(42)	-	(42)	-	-	-
Additions	2	-	-	2	-	(2)	(2)
Sales	-	(19)	(19)	(38)	-	-	-
Settlements	(20)	(111)	(12)	(143)	6	1	7
At 31 December 2020	68	208	21	297	(32)	(8)	(40)

Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period	10	(6)	(4)	-	(6)	26	20

At 1 January 2019	94	976	73	1,143	(66)	(49)	(115)
Total gains/(losses) recognised:
- Fair value movements	18	(9)	(2)	7	(6)	(6)	(12)
- Foreign exchange and other movements	-	6	-	6	-	(6)	(6)
Transfers in	-	11	-	11	-	-	-
Netting(1)	-	(430)	-	(430)	-	-	-
Additions	2	188	-	190	-	(3)	(3)
Settlements	(39)	(356)	(15)	(410)	40	3	43
At 31 December 2019	75	386	56	517	(32)	(61)	(93)

Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period	18	(3)	(2)	13	(6)	(12)	(18)

(1) This relates to the effect of netting on the fair value of the credit linked notes due to a legal right of set-off between the principal amounts of the senior notes and the associated cash deposits. For more, see 'ii) Credit protection entities' in Note 19.

42. EVENTS AFTER THE BALANCE SHEET DATE

There have been no significant events between 31 December 2020 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except as follows:

Proposed transfer of the Corporate & Investment Banking (CIB) business to the London Branch of Banco Santander SA (SLB)

As part of our drive for continuous improvement in customer experience and following a review of the way we operate the CIB business in the UK, we intend to conduct substantially all of this business from SLB beginning later in 2021. To undertake this change, and subject to court approval, we are proposing to transfer substantially all of the CIB business to SLB in H2 2021 by way of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000.

Although this decision was made prior to 31 December 2020, the transfer, which is subject to court approval, is proposed to take effect in H2 2021. We will continue to engage with regulators in relation to the proposed transfer.

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