SANTANDER UK PLC

National Storage Mechanism | Additional information RNS Number : 5223I Santander UK Plc 13 August 2021 Santander UK plc Announcement of Half Yearly Financial Report for the six months ended 30 June 2021 Santander UK plc (the Company) is pleased to announce the publication of its Half Yearly Financial Report for the six months ended 30 June 2021 (the Half Yearly Financial Report), in compliance with Disclosure Guidance & Transparency Rule (DTR) 4.1. The Half Yearly Financial Report may be accessed via the Investor Relations section of Santander UK's website at www.aboutsantander.co.uk. A copy of the Half Yearly Financial Report has also been submitted to the National Storage Mechanism. The following information is extracted from the Half Yearly Financial 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 Half Yearly Financial Report in full. Form 6-K It should be noted that the financial results for the six months ended 30 June 2021 will be included in the Half Yearly Financial Report on Form 6-K 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. Directors' responsibilities statement The Directors confirm that to the best of their knowledge these Condensed Consolidated Interim Financial Statements have been prepared in accordance with UK-adopted International Accounting Standard 34, 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and IAS 34 'Interim Financial Reporting' as adopted by the EU, and that the half-year management report herein includes a fair review of the information required by Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA), namely: - An indication of important events that have occurred during the six months ended 30 June 2021 and their impact on the Condensed Consolidated Interim Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and - Material related party transactions in the six months ended 30 June 2021 and any material changes in the related party transactions described in the last Annual Report. Principal risks As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance, withstand stresses, such as the impacts of the Covid-19 pandemic, and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives. Detailed discussions of the impact of Covid-19 on specific risk types are set out in the relevant sections of this Risk review and summarised in the 'Risk management overview' in the Strategic report in the 2020 Annual Report. 30 June 2021 compared to 31 December 2020 In H121, there were no significant changes in our risk governance, including how we define risk and our key risk types, as described in the 2020 Annual Report, except that we updated our climate-related risk minimum standard to consider the impact of environmental and climate-related risk drivers, whether physical or transition-led, which could affect existing risks in the medium and long term. SANTANDER UK GROUP LEVEL - CREDIT RISK REVIEW Customer Loans Gross write- offs Loan Loss Allowance Total Stage 1 Stage 2 Stage 3 30 June 2021 ��bn ��bn ��bn ��bn ��m ��m Retail Banking 186.6 174.9 9.7 2.0 72 603 Corporate & Commercial Banking 17.1 11.3 4.9 0.9 19 534 Corporate & Investment Banking 1.9 1.7 0.2 - - 19 Corporate Centre 2.7 2.7 - - - 36 208.3 190.6 14.8 2.9 91 1,192 Undrawn Balances 40.2 1.4 0.1 Stage 1, Stage 2 and Stage 3(1) ratios % 91.55 7.11 1.43 31 December 2020 ��bn ��bn ��bn ��bn ��m ��m Retail Banking 183.4 170.2 11.3 1.9 180 706 Corporate & Commercial Banking 17.6 11.1 5.5 1.0 51 603 Corporate & Investment Banking 2.8 2.6 0.2 - 22 33 Corporate Centre 3.2 3.2 - - - 35 207.0 187.1 17.0 2.9 253 1,377 Undrawn Balances 41.8 1.3 0.1 Stage 1, Stage 2 and Stage 3(1) ratios % 90.34 8.26 1.45 (1) Stage3 ratio = (Stage3 drawn + Stage3 undrawn assets)/(total drawn assets + Stage3 undrawn assets) Movement in total exposures and the corresponding ECL The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the period. 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 2021 301,413 216 18,336 592 2,996 569 322,745 1,377 Transfers from Stage 1 to Stage 2(3) (3,680) (9) 3,680 9 - - - - Transfers from Stage 2 to Stage 1(3) 4,961 140 (4,961) (140) - - - - Transfers to Stage 3(3) (156) (5) (475) (30) 631 35 - - Transfers from Stage 3(3) 10 1 287 23 (297) (24) - - Transfers of financial instruments 1,135 127 (1,469) (138) 334 11 - - Net ECL remeasurement on stage transfer(4) - (122) - 108 - 40 - 26 Change in economic scenarios(2) - (6) - (86) - (12) - (104) New lending and assets purchased(5) 28,910 25 623 10 11 9 29,544 44 Redemptions, repayments and assets sold(7) (34,471) (29) (1,781) (55) (285) (31) (36,537) (115) Changes in risk parameters and other movements(6) (653) (28) 450 68 69 15 (134) 55 Assets written off(7) - - - - (147) (91) (147) (91) At 30 June 2021 296,334 183 16,159 499 2,978 510 315,471 1,192 Net movement in the period (5,079) (33) (2,177) (93) (18) (59) (7,274) (185) ECL charge/(release) to the Income Statement (33) (93) 32 (94) Less: Discount unwind - - (6) (6) Less: Recoveries net of collection costs - - 23 23 ECL charge/(release) to the Income Statement from continued operations (33) (93) 49 (77) Discontinued operations ECL adjustment - 7 - 7 Total ECL charge/(release) to the Income Statement (33) (86) 49 (70) At 1 January 2020 295,438 147 12,351 348 2,367 368 310,156 863 Transfers from Stage 1 to Stage 2(3) (9,922) (37) 9,922 37 - - - - Transfers from Stage 2 to Stage 1(3) 2,161 80 (2,161) (80) - - - - Transfers to Stage 3(3) (244) (2) (517) (38) 761 40 - - Transfers from Stage 3(3) 5 - 246 17 (251) (17) - - Transfers of financial instruments (8,000) 41 7,490 (64) 510 23 - - Net remeasurement of ECL on stage transfer(4) - (75) - 222 - 83 - 230 Change in economic scenarios(2) - 9 - 129 - 10 - 148 New lending and assets purchased(5) 31,045 21 693 26 63 17 31,801 64 Redemptions, repayments and assets sold(7) (28,485) (17) (1,508) (32) (283) (20) (30,276) (69) Changes in risk parameters and other movements(6) 7,237 32 568 (42) 105 78 7,910 68 Assets written off(7) - - - - (191) (123) (191) (123) At 30 June 2020 297,235 158 19,594 587 2,571 436 319,400 1,181 Net movement in the period 1,797 11 7,243 239 204 68 9,244 318 ECL charge/(release) to the Income Statement 11 239 191 441 Less: Discount unwind - - (6) (6) Less: Recoveries net of collection costs - - (59) (59) ECL charge/(release) to the Income Statement from continued operations 11 239 126 376 Discontinued operations ECL adjustment (5) (2) (5) (12) Total ECL charge/(release) to the Income Statement 6 237 121 364 (1) Exposures that have attracted an ECL, and as reported in the Credit Quality table above. (2) Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, the scenarios themselves, and the probability weights from all other movements. Also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in Transfers of financial instruments. (3) Total impact of facilities that moved Stage(s) in the period. 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 period. Transfers between Stages are based on opening balances and ECL at the start of the period. (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 period 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 period, and which were not acquired in the period. 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 period. (7) Exposures and ECL for facilities that existed at the start of the period but not at the end. Covid-19 support measures A summary of the Covid-19 financial support measures that were in place at 30 June 2021 and 31 December 2020 is set out below: Customers supported Breakdown of total PH granted Outstanding PH Up to date after PH Ongoing PH New to arrears after PH ends In arrears before PH 30 June 2021 % % % % ��bn Payment holidays (PH)(1) Mortgages 256,000 96 - 2 2 0.1 Consumer (auto) finance(2) 58,000 90 - 6 4 <0.1 Unsecured Personal Loans (UPLs) 36,000 92 - 5 3 - Credit Cards 34,000 86 - 11 3 - Business and corporates 3,000 98 - 2 - - 31 December 2020 Payment holidays (PH)(1) Mortgages 251,000 88 8 2 2 2.5 Consumer (auto) finance(2) 54,000 77 11 8 4 0.1 Unsecured Personal Loans (UPLs) 34,000 77 13 4 6 <0.1 Credit Cards 32,000 76 12 8 4 <0.1 Business and corporates 2,500 98 2 - - 0.1 Number of customers Loan balance % of relevant loan book 30 June 2021 ��bn % Government lending schemes BBLS - 100% government guaranteed 153,000 3.9 19 CBILS 2,000 0.7 3 CLBILS 36 0.2 4 31 December 2020 Government lending schemes BBLS - 100% government guaranteed 148,000 4.0 19 CBILS 2,000 0.4 2 CLBILS 30 0.2 3 (1) Retail balances are stock positions for customers supported and loans at period end date that have had, or currently have, PHs granted. (2) Includes customers supported by PSA Finance UK Limited. Financial review Income statement review SUMMARISED CONSOLIDATED INCOME STATEMENT H121 H120 ��m ��m Net interest income 1,905 1,528 Non-interest income(1) 286 300 Total operating income 2,191 1,828 Operating expenses before credit impairment losses, provisions and charges (1,328) (1,212) Credit impairment losses 70 (364) Provisions for other liabilities and charges (190) (64) Total operating credit impairment losses, provisions and charges (120) (428) Profit after tax 562 139 Attributable to: Equity holders of the parent 545 128 Non-controlling interests 17 11 Profit after tax 562 139 (1) Comprises 'Net fee and commission income' and 'Other operating income'. A more detailed Consolidated Income Statement is contained in the Condensed Consolidated Interim Financial Statements. H121 compared to H120 Profit from continuing operations before tax was up 295% to ��743m due to the factors outlined below. By income statement line item, the movements were: - Net interest income was up 25%, with repricing actions on the 1I2I3 Current Account and other deposits offsetting base rate cuts and back book mortgage margin pressure, including ��1.2bn net attrition on SVR and Follow on Rate products (2020: ��1.8bn). - Non-interest income was flat, with the gain on sale of our UK head office offset by 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 up 10% largely related to the transformation programme. - Credit impairment write back of ��70m, mainly due to a ��104m release related to the improved economic outlook. This compared to H120 when we made a significant charge for Covid-19 related ECL build, which was not repeated. New to arrears flows and Stage 3 defaults remain low as all portfolios perform resiliently. - Provisions for other liabilities and charges were up ��126m to ��190m, largely related to the transformation programme. - Tax on profit from continuing operations increased ��157m to ��205m with increased profit. The H121 Effective Tax rate (ETR) of 27.6% (H120: 25.5%) also increased as a result of the increase in profit subject to the bank surcharge. PROFIT BEFORE TAX BY SEGMENT The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Condensed Consolidated Interim Financial Statements. Half year to(3) Retail Banking(2) Corporate & Commercial Banking(2) Corporate & Investment Banking(2) Corporate Centre(2) Total 30 June 2021 ��m ��m ��m ��m ��m Net interest income/(expense) 1,741 203 - (39) 1,905 Non-interest income(1) 189 51 - 46 286 Total operating income/(expense) 1,930 254 - 7 2,191 Operating expenses before credit impairment losses, provisions and charges (922) (177) - (229) (1,328) Credit impairment losses 48 22 - - 70 Provisions for other liabilities and charges (67) (5) - (118) (190) Total operating credit impairment losses, provisions and charges (19) 17 - (118) (120) Profit from continuing operations before tax 989 94 - (340) 743 Half year to(3) 30 June 2020 Net interest income/(expense) 1,369 181 - (22) 1,528 Non-interest income(1) 227 49 - 24 300 Total operating income/(expense) 1,596 230 - 2 1,828 Operating expenses before credit impairment losses, provisions and charges (983) (161) - (68) (1,212) Credit impairment losses (214) (150) - 0 (364) Provisions for other liabilities and charges (56) 3 - (11) (64) Total operating credit impairment losses, provisions and charges (270) (147) - (11) (428) Profit from continuing operations before tax 343 (78) - (77) 188 (1) Comprises 'Net fee and commission income' and 'Other operating income'. (2) The segmental basis of presentation has changed following a management review of our structure and segmental income statements and customer balances for 2020 have been restated accordingly. See Note 2 to the Condensed Consolidated Interim Financial Statements. (3) Adjusted to reflect the presentation of discontinued operations as set out in Note 33 to the Condensed Consolidated Interim Financial Statements. H121 compared to H120 - For Retail Banking, profit from continuing operations before tax increased largely due to higher net interest income following 1I2I3 Current Account and other deposit repricing. Operating expenses were lower, and Covid-19 related credit impairment provisions were released, partially offset by lower non-interest income which was impacted by reduced banking and transaction fees because of regulatory changes to overdrafts. - For Corporate & Commercial Banking, profit from continuing operations before tax increased largely due to lower credit impairment losses following Covid-19 related provision releases because of the improved economic outlook and lower charges related to corporate staging. - For Corporate & Investment Banking, profit from continuing operations before tax of ��nil (H120: ��nil), reflecting the presentation of the Corporate & Investment Banking segment as a single discontinued operations line in the Consolidated Income Statement with any residual amounts remaining being transferred to the Corporate Centre. Prior periods have been restated accordingly. - For Corporate Centre, loss from continuing operations before tax increased largely due to higher transformation charges which impacted operating expenses and provisions for other liabilities and charges. Operating income improved as a result of the gain on sale of our London head office. Discontinued operations CIB summary income statement Half year to Half year to 30 June 2021 30 June 2020 ��m ��m Net interest income 24 25 Non-interest income(1) 27 22 Operating income 51 47 Operating expenses before impairment losses, provisions and charges (22) (33) Credit Impairment losses 7 (12) Provisions for other liabilities and charges (3) (4) Profit/ (loss) from discontinued operations before tax 33 (2) Tax on profit/ (loss) from discontinued operations (9) 1 Profit/ (loss) from discontinued operations after tax 24 (1) (1) Comprises 'Net fee and commission income' and 'Other operating income'. Balance sheet review SUMMARISED CONSOLIDATED BALANCE SHEET June 30 2021 December 31 2020 ��m ��m Assets Cash and balances at central banks 39,021 41,250 Financial assets at fair value through profit or loss 2,181 3,614 Financial assets at amortised cost 228,037 231,194 Financial assets at fair value through other comprehensive income 6,368 8,950 Interest in other entities 183 172 Property, plant and equipment 1,596 1,734 Retirement benefit assets 1,083 495 Tax, intangibles and other assets 4,500 4,923 Assets held for sale 2,645 - Total assets 285,614 292,332 Liabilities Financial liabilities at fair value through profit or loss 2,086 3,018 Financial liabilities at amortised cost 259,561 270,063 Retirement benefit obligations 152 403 Tax, other liabilities and provisions 3,195 2,912 Liabilities held for sale 3,912 - Total liabilities 268,906 276,396 Equity Total shareholders' equity 16,528 15,774 Non-controlling interests 180 162 Total equity 16,708 15,936 Total liabilities and equity 285,614 292,332 A more detailed Consolidated Balance Sheet is contained in the Condensed Consolidated Interim Financial Statements. 30 June 2021 compared to 31 December 2020 Assets Cash and balances at central banks Cash and balances at central banks decreased by 5% to ��39,021m at 30 June 2021 (2020: ��41,250m). This was driven by cash outflows generated from a decrease in repurchase agreements, deposits by customers, deposits by banks and other financial liabilities at fair value through profit or loss, partially offset by lower reverse repurchase agreements. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss decreased by 40% to ��2,181m at 30 June 2021 (2020: ��3,614m), mainly due to a ��1.3bn decrease in derivative exchange rate and interest rate contracts held for hedging. Financial assets at amortised cost Financial assets at amortised cost decreased by 1% to ��228,037m at 30 June 2021 (2020: ��231,194m), largely driven by a ��3.0bn decrease in non-bounce back corporate loans and non-mortgage related lending, the reclassification of ��0.6bn of residential mortgages and ��2.0bn of CIB customer loans as held for sale, a ��1.4bn decrease in reverse repurchase agreements driven by normal business activities, and the disposal of UK Government Gilts, partially offset by a net increase in residential mortgages. Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income decreased by 29% to ��6,368m at 30 June 2021 (2020: ��8,950m) mainly due to the settlement of Japanese Government bonds and US Treasury bonds. Property, plant and equipment Property, plant and equipment decreased by 8% to ��1,596m at 30 June 2021 (2020: ��1,734m) reflecting freehold and leasehold property sales including the sale of our UK head office. Retirement benefit assets Retirement benefit assets increased by 119% to ��1,083m at 30 June 2021 (2020: ��495m). This was mainly due to actuarial gains in the period driven by an increase in the discount rate as a result of higher corporate bond yields, partially offset by actuarial losses due to higher inflation. Tax, intangibles and other assets Tax, intangibles and other assets decreased by 9% to ��4,500m at 30 June 2021 (2020: ��4,923m), mainly due to hedge adjustments resulting from an increase in the 5 year GBP SONIA rate over the period. Assets held for sale Assets held for sale comprise ��0.6bn of residential mortgages and ��2.0bn of CIB assets. For more, see 'Assets and liabilities classified as held for sale' in the Customer balances section that follows, and Note 33 to the Condensed Consolidated Interim Financial Statements. Liabilities Financial liabilities at amortised cost Financial liabilities at amortised cost decreased by 4% to ��259,561m at 30 June 2021 (2020: ��270,063m). This was mainly due to maturities and buybacks across a range of debt securities partially offset by new structured notes issuances ��6.4bn, a decrease in non-trading repurchase agreements as part of normal business activities, a decrease in deposits by banks due to decreased cash collateral partially offset by an increase in time deposits, and a ��1.8bn decrease in customer deposits comprising an increase in retail deposits due to customers continuing to remain cautious with their spending during the Covid-19 pandemic, more than offset by a reduction in financial corporates time deposits and household time deposit balances and the reclassification of ��3.8bn of CIB customer deposits as held for sale. Retirement benefit obligations Retirement benefit obligations decreased by 62% to ��152m at 30 June 2021 (2020: ��403m). This was driven by actuarial losses resulting from higher inflation, partially offset by actuarial gains in the period due to an increase in the discount rate as a result of higher corporate bond yields. Liabilities held for sale Liabilities held for sale comprise ��3.9bn of CIB deposits. For more, see 'Assets and liabilities classified as held for sale' in the Customer balances section that follows, and Note 33 to the Condensed Consolidated Interim Financial Statements. Equity Total shareholders' equity Total shareholders' equity increased by 5% to ��16,528m at 30 June 2021 (2020: ��15,774m). This increase was principally due to retained profits for the period, pension remeasurement and the issue and redemption of other equity instruments, partially offset by decreases in the fair value of cash flow hedges, and dividends paid. CUSTOMER BALANCES Consolidated June 30, 2021 December 31, 2020 ��bn ��bn Customer loans(1) 208.4 207.0 Other assets 77.2 85.3 Total assets 285.6 292.3 Customer deposits(1) 189.4 185.7 Total wholesale funding 56.8 63.1 Other liabilities 22.7 27.5 Total liabilities 268.9 276.3 Shareholders' equity 16.5 15.8 Non-controlling interest 0.2 0.2 Total liabilities and equity 285.6 292.3 (1) Customer loans includes ��2.5bn of loans classified as assets held for sale. Customer deposits includes ��3.8bn of deposits classified as liabilities held for sale. See 'Assets and liabilities classified as held for sale' on the page that follows for details. 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. 30 June 2021 compared to 31 December 2020 - Customer loans increased ��1.4bn, with ��3.6bn increase in mortgages with strong application volumes and ��17.2bn of gross lending. This was partially offset by lower retail unsecured, consumer (auto) finance and corporate lending including the effect of a migration of customers to SLB in H121. - Customer deposits increased ��3.7bn, with ��4.5bn growth in Retail Banking partially offset by lower corporate deposits including the effect of a migration of customers to SLB in H121. Growth in 1|2|3 Current account balances to ��59bn (H120: ��55bn, 2020: ��57bn), despite repricing actions taken during 2020 and 2021. - Other assets and other liabilities fell, as part of liquidity management during H121. Retail Banking June 30, 2021 December 31, 2020 ��bn ��bn Mortgages 170.6 166.7 Business banking 3.9 3.9 Consumer (auto) finance 7.7 8.0 Other unsecured lending 4.5 4.8 Customer loans 186.7 183.4 Current accounts 80.0 75.6 Savings 58.2 57.4 Business banking accounts 13.1 13.4 Other retail products 5.4 5.8 Customer deposits 156.7 152.2 Corporate & Commercial Banking June 30, 2021 December 31, 2020 ��bn ��bn Non-Commercial Real Estate trading businesses 12.7 12.9 Commercial Real Estate 4.4 4.7 Customer loans 17.1 17.6 Customer deposits 25.3 25.0 Corporate & Investment Banking June 30, 2021 December 31, 2020 ��bn ��bn Customer loans 1.9 2.8 Customer deposits 3.8 6.5 At 30 June 2021, these customer loans and deposits were classified as held for sale, as described below. Corporate Centre June 30, 2021 December 31, 2020 ��bn ��bn Social Housing 2.6 3.0 Non-core 0.1 0.2 Customer loans 2.7 3.2 Customer deposits 3.6 2 Assets and liabilities classified as held for sale Customer loans 30 June 2021 ��bn CIB Part VII banking business transfer scheme 1.9 Retail Mortgages 0.6 Customer loans held for sale 2.5 Customer deposits 30 June 2021 ��bn CIB Part VII banking business transfer scheme 3.8 Customer deposits held for sale 3.8 Capital and funding 30 June 2021 31 December 2020 ��bn ��bn Capital CET1 capital 11.3 11.1 Total qualifying regulatory capital 15.0 15.2 CET1 capital ratio 15.8 % 15.4 % Total capital ratio 21.0 % 21.2 % Risk-weighted assets 71.7 71.9 Funding Total wholesale funding and AT1 59.0 65.3 - of which with a residual maturity of less than one year 17.0 21.1 Liquidity 30 June 2021 31 December 2020 ��bn ��bn Santander UK Domestic Liquidity Sub Group (RFB DoLSub) Liquidity Coverage Ratio (LCR) 144 % 150 % LCR eligible liquidity pool 47.0 51.5 Further analysis of capital, funding and liquidity is included in the Capital risk and Liquidity risk sections of the Risk review. 30 June 2021 compared to 31 December 2020 - CET1 capital ratio increased 40 basis points to 15.8% with capital accretion through retained profits, Risk-Weighted Assets (RWA) management and market driven improvements in the defined benefit pensions scheme. - Total capital ratio reduced by c20bps to 21.0%, reflecting the reduction in AT1 securities in issue and the increased effect from January 2021 of the CRD IV Grandfathering Cap rules that reduce the recognition of grandfathered capital instruments issued by Santander UK plc. - We issued ��2.1bn of MREL eligible senior unsecured securities and repaid ��3.0bn of Term Funding Scheme (TFS), leaving ��3.3bn outstanding and drew ��3.5bn of Term Funding Scheme with additional incentives for SMEs (TFSME), with ��15.2bn outstanding. Wholesale funding costs improved in H121 with buy backs and debt maturities being refinanced at lower cost, this is expected to continue in H221. - The RFB DoLSub LCR of 144% reduced from 150% at year end, remains significantly above regulatory requirements. - Following the announcement from the PRA on 13 July 2021 regarding the return to normalised shareholder distribution framework, we paid a half year ordinary share dividend to our parent in July 2021. - Our structural hedge position remained broadly stable at circa ��98bn, with an average duration of circa 2.5 years. Financial statements Condensed Consolidated Income Statement For the half year to 30 June 2021 and the half year to 30 June 2020 June 30, 2021 June 30, 2020 Notes ��m ��m Interest and similar income 2,355 2,592 Interest expense and similar charges (450) (1,064) Net interest income 1,905 1,528 Fee and commission income 305 380 Fee and commission expense (154) (180) Net fee and commission income 151 200 Other operating income 3 135 100 Total operating income 2,191 1,828 Operating expenses before credit impairment losses, provisions and charges 4 (1,328) (1,212) Credit impairment losses 5 70 (364) Provisions for other liabilities and charges 5 (190) (64) Total operating credit impairment losses, provisions and charges (120) (428) Profit from continuing operations before tax 743 188 Tax on profit from continuing operations 6 (205) (48) Profit from continuing operations after tax 538 140 Profit/(loss) from discontinued operations after tax 33 24 (1) Profit after tax 562 139 Attributable to: Equity holders of the parent 545 128 Non-controlling interests 28 17 11 Profit after tax 562 139 Condensed Consolidated Statement of Comprehensive Income For the half year to 30 June 2021 and the half year to 30 June 2020 Half year to Half year to June 30, 2021 June 30, 2020 ��m ��m Profit after tax 562 139 Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently: Movement in fair value reserve (debt instruments): - Change in fair value (62) 146 - Income statement transfers 59 (166) - Taxation (1) 5 (4) (15) Cash flow hedges: - Effective portion of changes in fair value (618) 2,607 - Income statement transfers 377 (2,041) - Taxation 41 (161) (200) 405 Currency translation on foreign operations - (1) Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently (204) 389 Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently: Pension remeasurement: - Change in fair value 745 (376) - Taxation (248) 97 497 (279) Own credit adjustment: - Change in fair value - 20 - Taxation - (5) - 15 Net other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently 497 (264) Total other comprehensive income net of tax 293 125 Total comprehensive income 855 264 Attributable to: Equity holders of the parent 837 254 Non-controlling interests 18 10 Total comprehensive income 855 264 Condensed Consolidated Balance Sheet At 30 June 2021 and 31 December 2020 June 30, 2021 December 31, 2020 Notes ��m ��m Assets Cash and balances at central banks 39,021 41,250 Financial assets at fair value through profit or loss: - Derivative financial instruments 8 2,002 3,406 - Other financial assets at fair value through profit or loss 9 179 208 Financial assets at amortised cost: - Loans and advances to customers 10 207,998 208,750 - Loans and advances to banks 1,312 1,682 - Reverse repurchase agreements - non trading 12 18,197 19,599 - Other financial assets at amortised cost 13 530 1,163 Financial assets at fair value through other comprehensive income 14 6,368 8,950 Interests in other entities 15 183 172 Intangible assets 16 1,589 1,646 Property, plant and equipment 1,596 1,734 Current tax assets 282 264 Retirement benefit assets 25 1,083 495 Other assets 2,629 3,013 Assets held for sale 33 2,645 - Total assets 285,614 292,332 Liabilities Financial liabilities at fair value through profit or loss: - Derivative financial instruments 8 1,063 1,584 - Other financial liabilities at fair value through profit or loss 18 1,023 1,434 Financial liabilities at amortised cost: - Deposits by customers 19 193,317 195,135 - Deposits by banks 20 20,502 20,958 - Repurchase agreements - non trading 21 14,089 15,848 - Debt securities in issue 22 29,140 35,566 - Subordinated liabilities 23 2,513 2,556 Other liabilities 2,365 2,337 Provisions 24 444 464 Deferred tax liabilities 386 111 Retirement benefit obligations 25 152 403 Liabilities held for sale 33 3,912 - Total liabilities 268,906 276,396 Equity Share capital 3,105 3,105 Share premium 5,620 5,620 Other equity instruments 27 2,191 2,191 Retained earnings 5,306 4,348 Other reserves 306 510 Total shareholders' equity 16,528 15,774 Non-controlling interests 28 180 162 Total equity 16,708 15,936 Total liabilities and equity 285,614 292,332 Condensed Consolidated Cash Flow Statement For the half year to 30 June 2021 and the half year to 30 June 2020 June 30, 2021 June 30, 2020 ��m ��m Cash flows from operating activities Profit after tax 562 139 Adjustments for: Non-cash items included in profit 645 778 Change in operating assets 251 (4,172) Change in operating liabilities(1) 2,725 10,697 Corporation taxes paid (153) (110) Effects of exchange rate differences (534) 891 Net cash flows from operating activities 3,496 8,223 Cash flows from investing activities Purchase of property, plant and equipment and intangible assets (350) (151) Proceeds from sale of property, plant and equipment and intangible assets 272 92 Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income (1,016) (2,626) Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income 3,789 2,581 Net cash flows from investing activities 2,695 (104) Cash flows from financing activities Issue of other equity instruments 210 - Issue of debt securities and subordinated notes 36 4,097 Issuance costs of debt securities and subordinated notes (3) (10) Repayment of debt securities and subordinated notes (8,031) (6,133) Repurchase of preference shares and other equity instruments (210) - Dividends paid on preference shares and other equity instruments (83) (82) Principal elements of lease payments(1) (13) (28) Net cash flows from financing activities (8,094) (2,156) Change in cash and cash equivalents (1,903) 5,963 Cash and cash equivalents at beginning of the period 45,582 27,817 Effects of exchange rate changes on cash and cash equivalents (10) 94 Cash and cash equivalents at the end of the period 43,669 33,874 Cash and cash equivalents consist of: Cash and balances at central banks 39,021 30,276 Less: regulatory minimum cash balances (897) (772) 38,124 29,504 Other cash equivalents 5,545 4,370 Cash and cash equivalents at the end of the period 43,669 33,874 (1) For H121, Principal elements of lease payments are included as a separate line item in the Condensed Consolidated Cash Flow Statement. As a result, cash flows of ��28m for H120 have been reclassified from 'Change in operating liabilities' within operating activities to 'Principal elements of lease payments' within financing activities. Condensed Consolidated Statement of Changes in Equity For the half year to 30 June 2021 and the half year to 30 June 2020 Other reserves Non-controlling interests Share capital Share premium Other equity instruments Fair value Cash flow hedging Currency translation Retained earnings Total Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 January 2021 3,105 5,620 2,191 28 481 1 4,348 15,774 162 15,936 Profit after tax - - - - - - 545 545 17 562 Other comprehensive income, net of tax: - Fair value reserve (debt instruments) - - - (4) - - - (4) - (4) - Cash flow hedges - - - - (200) - - (200) - (200) - Pension remeasurement - - - - - - 496 496 1 497 Total comprehensive income - - - (4) (200) - 1,041 837 18 855 Issue of other equity instruments - - 210 - - - - 210 - 210 Repurchase of other equity instruments - - (210) - - - - (210) - (210) Dividends on preference shares and other equity instruments - - - - - - (83) (83) - (83) At 30 June 2021 3,105 5,620 2,191 24 281 1 5,306 16,528 180 16,708 At 1 January 2020 3,105 5,620 2,191 23 371 1 4,546 15,857 160 16,017 Profit after tax - - - - - - 128 128 11 139 Other comprehensive income, net of tax: - Fair value reserve (debt instruments) - - - (15) - - - (15) - (15) - Cash flow hedges - - - - 405 - - 405 - 405 - Pension remeasurement - - - - - - (278) (278) (1) (279) - Own credit adjustment - - - - - - 15 15 - 15 - Currency translation on foreign operations - - - - - (1) - (1) - (1) Total comprehensive income - - - (15) 405 (1) (135) 254 10 264 Dividends on preference shares and other equity instruments - - - - - - (82) (82) - (82) At 30 June 2020 3,105 5,620 2,191 8 776 - 4,329 16,029 170 16,199 1. ACCOUNTING POLICIES The financial information in these Condensed Consolidated Interim Financial Statements is unaudited and does not constitute statutory accounts as defined in section 434 of the UK Companies Act 2006. Statutory accounts for the year ended 31 December 2020 have been delivered to the Registrar of Companies. The Condensed Consolidated Interim Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of operations for the interim period. All such adjustments to the financial information are of a normal, recurring nature. Because the results from common banking activities are so closely related and responsive to changes in market conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the year. On 31 December 2020, International Financial Reporting Standards (IFRSs) as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards (IAS), with future changes being subject to endorsement by the UK Endorsement Board. Santander UK plc (the Company) and its subsidiaries (collectively Santander UK or the Santander UK group) transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework. The Condensed Consolidated Interim Financial Statements have been prepared in accordance with UK adopted IAS 34 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB), IAS 34 'Interim Financial Reporting' as adopted by the EU, and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA). They do not include all the information and disclosures normally required for full annual financial statements and should be read in conjunction with the Consolidated Financial Statements of Santander UK for the year ended 31 December 2020 which were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Those consolidated financial statements were also prepared in accordance with IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, as there were no applicable differences from IFRSs as issued by the IASB for the periods presented. At 30 June 2021, there were no differences between IFRSs adopted by the UK, IFRSs issued by the IASB, and IFRSs adopted by the EU in terms of their application to Santander UK. The financial statements for Santander UK for the year ended 31 December 2021 will be prepared in accordance with IFRS as adopted by the UK, IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, and IFRSs as adopted by the EU. Except as noted below, the same accounting policies, presentation and methods of computation are followed in these Condensed Consolidated Interim Financial Statements as were applied in the presentation of Santander UK's 2020 Annual Report. Non-current assets held for sale Non-current assets (or disposal groups) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction rather than continuing use. In order to be classified as held for sale, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary and the sale must be highly probable. Non-current assets (or disposal groups) held for sale are measured at the lower of carrying amount and fair value less cost to sell, with the exception of financial instruments which remain governed by the requirements of IFRS 9, and are held at their IFRS 9 carrying value. For details of the disposal of assets and liabilities in connection with the transfer of the Corporate & Investment Banking (CIB) business to the London Branch of Banco Santander SA (SLB), and for details on the sale of Retail Banking residential mortgage assets, see Note 33. Discontinued operations A discontinued operation is a component of the Santander UK group that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the Condensed Consolidated Income Statement. Prior periods have been restated accordingly. Future accounting developments At 30 June 2021, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued, including those which are not yet effective or which have otherwise not been early adopted where permitted. Going concern In light of the continuing economic uncertainty, the Directors updated their going concern assessment in preparing these Condensed Consolidated Interim Financial Statements. After making enquiries, the Directors have a reasonable expectation that Santander UK has adequate resources to continue in operational existence for at least twelve months from the date of this report and, therefore, having reassessed the principal risks and uncertainties, the Directors consider it appropriate for the Condensed Consolidated Interim Financial Statements to be prepared on a going concern basis. In making their going concern assessment in connection with preparing the Condensed Consolidated Interim Financial Statements, the Directors considered a wide range of information that included Santander UK's long-term business and strategic plans, forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities and the reasonably possible changes in trading performance arising from potential economic, market and product developments. The Directors' assessment specifically considered the impacts of Covid-19, including for the following areas: - Economic scenarios and probability weights: These underpin our ECL impairment allowances and are discussed in detail in the Credit risk section of the Risk review. The Directors reviewed the economic scenarios to ensure that they captured the wide range of potential outcomes for the UK economy. Whereas the outlook for 2021 is more positive following the success of the vaccination programme and cautious optimism that the worst of the health crisis has passed, the downside scenarios continue to encapsulate different potential outcomes including higher-for-longer unemployment, and emergence of Covid-19 variants that are more resistant to existing vaccines leading to further lockdowns and a slower recovery that is more akin to the 'U' shape of past recessions. - Liquidity: Santander UK remains in a strong liquidity position and Covid-19 did not trigger a liquidity stress. - Capital: Santander UK remains strongly capitalised and Covid-19 did not trigger a capital stress. - Customers: Santander UK has supported many thousands of individuals and businesses affected by Covid-19 with a range of measures, including payment holidays on mortgages, personal loans and credit cards as well as taking an active part in UK Government loan schemes to help businesses. The majority of customers who took payment holidays have resumed payments. We continue to work with those customers who remain affected to understand their individual situations and, where necessary, help them resume payments. - Operations: All our operations continue to operate effectively with a significant majority of staff working from home and the majority of branches remaining open and returning to more normal hours. The current operating model could be sustained indefinitely with additional resilience being continuously implemented and is not affecting our ability to operate all our services, or raising concerns about our Business Continuity Planning, and - Key suppliers: Suppliers continue to be closely monitored in line with our Third Party Risk Management Framework. No significant service issues have been reported across our cohort of critical suppliers, and no material issues have been reported across our broader (non-critical) supply chain. Isolated supplier impacts have been seen, but these are being managed. CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATES The preparation of the Condensed Consolidated Interim Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Condensed Consolidated Interim 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 the course of preparing the Condensed Consolidated Interim 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. There have been no significant changes in the basis upon which judgements and accounting estimates have been determined compared to that applied in the 2020 Annual Report, except as described below. Management have considered the impact of Covid-19 on critical judgements and accounting estimates. a) Credit impairment losses Key judgements - Determining an appropriate definition of default - Establishing the criteria for a significant increase in credit risk (SICR) and, for corporate borrowers, internal credit risk rating - Applying post model adjustments - Assessing individual corporate Stage 3 exposures Key estimates - Forward-looking multiple economic scenario assumptions - Probability weights assigned to multiple economic scenarios For more on each of these key judgements and estimates, including the impact of Covid-19 on them, see 'Management judgements and estimates 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 Key judgements - Determining whether a present obligation exists - Assessing the likely outcome of future legal decisions Key estimates - Probability, timing, nature and amount of any outflows that may arise from past events Note 26 'Contingent liabilities and commitments' 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. These judgements 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, or to calculate any resulting sensitivities. For more on each of these key judgements and estimates, see Notes 24 and 26. c) Pensions Key judgements - Setting the criteria for constructing the corporate bond yield curve used to determine the discount rate - Determining the methodology for setting the inflation assumption Key estimates - Discount rate applied to future cash flows - Rate of price inflation - Expected lifetime of the schemes' members For more on each of these key judgements and estimates, including the impact of Covid-19 on them, see Note 25. Sensitivity of defined benefit pension scheme estimates For detailed disclosures see 'Actuarial assumption sensitivities' in Note 25. d) Goodwill Key judgements: - Determining the basis of goodwill impairment calculation assumptions, including management's planning assumptions considering internal capital allocations needed to support Santander UK's strategy, current market conditions and the macro-economic outlook. Key estimates: - Forecast cash flows for cash generating units, including estimated allocations of regulatory capital - Growth rate beyond initial cash flow projections - Discount rates which factor in risk-free rates and applicable risk premiums These are variables subject to fluctuations in external market rates and economic conditions beyond management's control For more on each of these key judgements and estimates, see Note 16. Sensitivity of goodwill For detailed disclosures, see 'Sensitivities of key assumptions in calculating VIU' in Note 20 to the Consolidated Financial Statements in the 2020 Annual Report. 2. SEGMENTS Santander UK's principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of 4 segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies. As reflected in the 2020 Annual Report, the segmental basis of presentation in these Condensed Consolidated Interim Financial Statements changed following a management review of our structure. At 31 December 2020 this resulted in customer assets of ��2.0bn and customer deposits of ��3.1bn being transferred from Business Banking (in Retail Banking) to CCB, non-core corporate mortgages of ��0.4bn transferring from Corporate Centre to CCB, and a number of smaller business lines transferring from CIB to Corporate Centre. For H120, this resulted in an increase in profit before tax in Retail Banking of ��28m, a decrease in CCB of ��31m, a decrease in CIB of ��4m, and an increase of ��7m in Corporate Centre. The net impact for Santander UK was nil. Proposed transfer of the CIB business to SLB Following a hearing held on 23 June 2021, the High Court of England and Wales has sanctioned the transfer of substantially all the CIB business of Santander UK to SLB by way of a Part VII banking business transfer scheme. The transfers of CIB business to SLB under the scheme are scheduled to take place before the end of 2021. Management considered the related business transfers to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the assets and liabilities relating to the CIB business. For more details, see Note 33. At 30 June 2021, the CIB business met the requirements for presentation as discontinued operations. For more details, see Note 33. Results by segment Half year to Retail Banking Corporate & Commercial Banking Corporate & Investment Banking Corporate Centre Total 30 June 2021 ��m ��m ��m ��m ��m Net interest income/(expense) 1,741 203 - (39) 1,905 Non-interest income 189 51 - 46 286 Total operating income 1,930 254 - 7 2,191 Operating expenses before credit impairment losses, provisions and charges (922) (177) - (229) (1,328) Credit impairment losses 48 22 - - 70 Provisions for other liabilities and charges (67) (5) - (118) (190) Total operating credit impairment losses, provisions and charges (19) 17 - (118) (120) Profit/(loss) before tax - Revenue from external customers 2,197 273 - (279) 2,191 Inter-segment revenue (267) (19) - 286 - Total operating income 1,930 254 - 7 2,191 Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) - Current account and debit card fees 185 23 - - 208 - Insurance, protection and investments 33 - - - 33 - Credit cards 29 - - - 29 - Non-banking and other fees(2) 6 29 - - 35 Total fee and commission income 253 52 - - 305 Fee and commission expense (140) (10) - (4) (154) Net fee and commission income/(expense) 113 42 - (4) 151 30 June 2021 Customer loans 186,706 17,055 1,913 2,673 208,347 Total assets(3) 195,480 17,055 2,057 71,022 285,614 Of which assets held for sale 608 - 2,037 - 2,645 Customer deposits 156,713 25,244 3,817 3,596 189,370 Total liabilities 157,268 25,263 3,912 82,463 268,906 Of which liabilities held for sale - - 3,912 - 3,912 (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. Half year to(4)(5) Retail Banking Corporate & Commercial Banking Corporate & Investment Banking Corporate Centre Total 30 June 2020 ��m ��m ��m ��m ��m Net interest income/(expense) 1,369 181 - (22) 1,528 Non-interest income 227 49 - 24 300 Total operating income/(expense) 1,596 230 - 2 1,828 Operating expenses before credit impairment losses, provisions and charges (983) (161) - (68) (1,212) Credit impairment losses (214) (150) - - (364) Provisions for other liabilities and charges (56) 3 - (11) (64) Total operating credit impairment losses, provisions and charges (270) (147) - (11) (428) Profit/(loss) before tax 315 (47) (24) (57) 187 Revenue from external customers 1,973 278 - (424) 1,827 Inter-segment revenue (377) (48) - 426 1 Total operating income/(expense) 1,596 230 - 2 1,828 Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) - Current account and debit card fees 245 21 - - 266 - Insurance, protection and investments 31 - - - 31 - Credit cards 35 - - - 35 - Non-banking and other fees(2) 20 24 - 4 48 Total fee and commission income 331 45 - 4 380 Fee and commission expense (164) (12) - (4) (180) Net fee and commission income 167 33 - - 200 31 December 2020 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 (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 (4) Restated, as reflected in Note 2 to the Consolidated Financial Statements in the 2020 Annual Report, following a management review of our structure. (5) Restated to reflect the presentation of discontinued operations, as set out in Note 33. 3. OTHER OPERATING INCOME In H121, the Santander UK group repurchased certain debt securities as part of ongoing liability management exercises, resulting in a loss of ��27m. In H120, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of ��17m. In H121, the Santander UK group sold its UK head office site in Triton Square, London to a wholly owned subsidiary of its parent, Banco Santander SA, given the decision to invest in a new Milton Keynes campus. Other operating income includes a ��71m gain on sale of the UK head office site. The net gain reflects a sale price based on independent valuations. 4. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES Half year to Half year to(1) June 30, 2021 June 30, 2020 ��m ��m Staff costs: Staff costs 577 576 Other administration expenses 431 367 Depreciation, amortisation and impairment 320 269 Total 1,328 1,212 (1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33. 5. CREDIT IMPAIRMENT LOSSES AND PROVISIONS Half year to Half year to(1) June 30, 2021 June 30, 2020 ��m ��m Credit impairment loss/(release): Loans and advances to customers (33) 384 Recoveries of loans and advances, net of collection costs (13) (15) Off-balance sheet exposures (See Note 24) (24) (5) (70) 364 Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 24) 191 64 Provisions for residual value and voluntary termination (1) - 190 64 120 428 (1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33. 6. TAXATION The Santander UK group's effective tax rate for H121 was 27.6% (H120: 25.5%). The tax on profit before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows: Half year to Half year to(1) 30 June 2021 30 June 2020 ��m ��m Profit from continuing operations before tax 743 188 Tax calculated at a tax rate of 19% (H120: 19%) 141 36 Bank surcharge on profits 49 9 Non-deductible preference dividends paid 6 3 Non-deductible UK Bank Levy 14 6 Other non-deductible costs and non-taxable income 14 4 Effect of change in tax rate on deferred tax provision 13 7 Tax relief on dividends in respect of other equity instruments (32) (13) Adjustment to prior year provisions - (4) Tax on profit from continuing operations 205 48 (1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33. The UK government announced in its budget on 3 March 2021 that it would increase the main rate of corporation tax by 6% to 25% with effect from 1 April 2023. This change was substantively enacted on 24 May 2021 and, as a result, the effect has been reflected in the closing deferred tax position included in these financial statements. The comparative 2020 results reflected an increase in tax rates by 2% following an announcement in the 2020 budget to reverse a previously planned rate reduction from April 2020. 7. DIVIDENDS ON ORDINARY SHARES No interim dividend was declared on the Company's ordinary shares in issue (H120: ��0). 8. DERIVATIVE FINANCIAL INSTRUMENTS June 30, 2021 December 31, 2020 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 12,227 229 215 14,951 395 418 Interest rate contracts 31,912 545 440 40,160 888 542 Equity and credit contracts 1,106 141 53 1,140 123 55 Total derivatives held for trading 45,245 915 708 56,251 1,406 1,015 Derivatives held for hedging Designated as fair value hedges: Exchange rate contracts 598 52 1 789 84 6 Interest rate contracts 84,311 981 1,319 93,748 1,225 1,885 84,909 1,033 1,320 94,537 1,309 1,891 Designated as cash flow hedges: Exchange rate contracts 23,756 1,131 381 27,020 1,978 409 Interest rate contracts 26,609 307 38 19,407 467 23 50,365 1,438 419 46,427 2,445 432 Total derivatives held for hedging 135,274 2,471 1,739 140,964 3,754 2,323 Derivative netting(1) (1,384) (1,384) (1,754) (1,754) Total derivatives 180,519 2,002 1,063 197,215 3,406 1,584 (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 ��401m (2020: ��330m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was ��245m (2020: ��651m). 9. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS June 30, 2021 December 31, 2020 ��m ��m Loans and advances to customers: Loans to housing associations 12 13 Other loans 62 86 74 99 Debt securities 105 109 179 208 10. LOANS AND ADVANCES TO CUSTOMERS June 30, 2021 December 31, 2020 ��m ��m Net loans and advances to customers 207,998 208,750 For movements in expected credit losses, see the 'Movement in total exposures and the corresponding ECL' table in the Santander UK group level - Credit risk review section of the Risk review. The balance at 30 June 2021 excludes loans and advances to customers classified as assets held for sale. For more, see Note 33. 11. SECURITISATIONS AND COVERED BONDS The gross assets securitised, or for the covered bond programme assigned, at 30 June 2021 and 31 December 2020 were: June 30, 2021 December 31, 2020 ��m ��m Mortgage-backed master trust structures: - Holmes 2,566 3,073 - Fosse 2,170 2,258 - Langton 0 2,782 4,736 8,113 Other asset-backed securitisation structures: - Motor 103 189 - Auto ABS UK Loans 1,325 1,460 1,428 1,649 Total securitisation programmes 6,164 9,762 Covered bond programmes - Euro 35bn Global Covered Bond Programme 19,000 23,670 Total securitisation and covered bond programmes 25,164 33,432 The following table sets out the internal and external issuances and redemptions in H121 and H120 for each securitisation and covered bond programme. Internal issuances External issuances Internal redemptions External redemptions H121 H120 H121 H120 H121 H120 H121 H120 ��bn ��bn ��bn ��bn ��bn ��bn ��bn ��bn Mortgage-backed master trust structures: - Holmes - - - - - 0.1 0.3 0.5 - Langton - - - - 2.4 - - - Other asset-backed securitisation structures: - Motor - - - - 0.1 0.1 - 0.1 - Auto ABS UK Loans - - - - 0.1 - 0.1 0.1 Covered bond programme - - - 3 - - 4.5 1.8 - - - 3 2.6 0.2 4.9 2.5 In H121, the remaining Langton bonds were redeemed and the associated mortgages were repurchased by Santander UK plc. 16. INTANGIBLE ASSETS Intangible assets comprise goodwill and computer software. Goodwill The following CGUs include in their carrying values goodwill that comprises the goodwill reported by Santander UK. The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives. For key assumptions used in the value in use (VIU) calculation, as the basis of the recoverable amount of each CGU, see Note 20 to the Consolidated Financial Statements in the 2020 Annual Report. At H121 a review was performed to identify any potential impairment indicators. No indicators of impairment were identified and so a full impairment test was not performed for the half year. The key assumptions are set out in the table below. Goodwill Discount rate Growth rate beyond initial cash flow projections 30 June 2021 31 December 2020 30 June 2021 31 December 2020 30 June 2021 31 December 2020 CGU ��m ��m % % % % Personal financial services 1,169 1,169 14.6 13.6 1.6 1.6 Private banking 30 30 11.0 8.9 1.6 1.6 Other 4 4 14.6 13.6 1.6 1.6 1,203 1,203 17. PROPERTY, PLANT AND EQUIPMENT Property Office fixtures and equipment Computer software Operating lease assets Right-of-use assets Total(2) ��m ��m ��m ��m ��m ��m Cost: At 1 January 2021 1,272 1,375 436 720 218 4,021 Additions 23 12 - 194 59 288 Disposals (306) (267) - (122) (20) (715) At 30 June 2021 989 1,120 436 792 257 3,594 Accumulated depreciation: At 1 January 2021 489 1,068 434 178 118 2,287 Charge for the period(1) 17 46 - 48 10 121 Impairment during the period 57 29 - - 19 105 Disposals (210) (236) - (50) (19) (515) At 30 June 2021 353 907 434 176 128 1,998 Net book value 636 213 2 616 129 1,596 Cost: At 1 January 2020 1,270 1,436 439 738 212 4,095 Additions 61 43 2 185 8 299 Disposals (59) (104) (5) (203) (2) (373) At 31 December 2020 1,272 1,375 436 720 218 4,021 Accumulated depreciation: At 1 January 2020 454 1,016 434 164 60 2,128 Charge for the year(1) 55 111 - 92 58 316 Impairment during the year 24 - - - - 24 Disposals (44) (59) - (78) - (181) At 31 December 2020 489 1,068 434 178 118 2,287 Net book value 783 307 2 542 100 1,734 (1) Following a review of the estimated useful lives of property as part of Santander UK's transformation program, the charge for the period includes accelerated property depreciation of ��4m (2020: ��9m). (2) Property, plant and equipment includes assets under construction of ��72m (2020: ��55m Property, office fixtures and equipment and right-of-use assets were impaired in the period as a result of our multi-year transformation project. The impairment relates to leasehold properties within the scope of our branch network restructuring programme and head office sites which are either closing or consolidating. 24. 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 2021 76 8 34 45 75 226 464 Additional provisions (See Note 5) - - - 43 - 148 191 Provisions released (See Note 5) - - - - (24) - (24) Utilisation and other (39) - (34) (9) - (105) (187) Recharge - - - - - - - At 30 June 2021 37 8 - 79 51 269 444 Conduct remediation Payment Protection Insurance (PPI) At 30 June 2021, the remaining provision for PPI redress and related costs was ��37m (2020: ��76m). There was no additional provision in H121. At 30 June 2021, the outstanding activities which drive the ongoing provision requirement relate to the final aspects of complaints close down activity and the commercial settlement with the Official Receiver. Customers continue to 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. 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. Property Property provisions were impacted by ��43m of transformation charges in H121. These relate to a multi-year project to deliver on our strategic priorities and enhance efficiency in order for us to better serve our customers and meet our medium-term targets. These charges consist of costs relating to leasehold properties within the scope of our branch network restructuring programme and decommissioning costs relating to head office sites which are either closing or consolidating. Regulatory and other In H121 there was a charge of ��69m as part of our multi-year transformation programme to improve future returns, focused on simplifying, digitising and automating the bank, comprising mainly of redundancy costs of ��57m relating to branch and head office site closures. There was also a charge for operational risk provisions of ��50m, due to an increase in Push Payment fraud volumes and losses, ��13m for legal provisions and smaller charges for other provisions. In H121 we did not experience any material operational risk losses. The losses were in line with H120 and remained comfortably within our forecast and 2021 risk appetite. Aligned to the rest of the industry, we continue to experience losses related to Push Payment fraud. In addition, provisions are being managed to cover existing customer remediation programmes and associated costs. 25. RETIREMENT BENEFIT PLANS The amounts recognised in the balance sheet were as follows: June 30, 2021 December 31, 2020 ��m ��m Assets/(liabilities) Funded defined benefit pension scheme - surplus 1,083 495 Funded defined benefit pension scheme - deficit (113) (361) Unfunded pension and post retirement medical benefits (39) (42) Total net assets 931 92 a) Defined contribution pension plans An expense of ��33m (H120: ��33m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 4). b) Defined benefit pension schemes The total amount charged to the income statement was ��23m (H120: ��17m). The amounts recognised in other comprehensive income were as follows: H121 H120 ��m ��m Return on plan assets (excluding amounts included in net interest expense) 383 (1,115) Actuarial losses arising from changes in demographic assumptions - 38 Actuarial gains arising from experience adjustments (30) (10) Actuarial (gains)/losses arising from changes in financial assumptions (1,098) 1,463 Pension remeasurement (745) 376 The net assets recognised in the balance sheet were determined as follows: 30 June 2021 31 December 2020 ��m ��m Present value of defined benefit obligations (12,675) (13,887) Fair value of scheme assets 13,606 13,979 Net defined benefit assets 931 92 Actuarial assumptions The principal actuarial assumptions used for the defined benefit schemes were: June 30, 2021 December 31, 2020 % % To determine benefit obligations: - Discount rate for scheme liabilities 1.9 1.3 - General price inflation 3.2 3.0 - General salary increase 1.0 1.0 - Expected rate of pension increase 3.1 2.9 Years Years Longevity at 60 for current pensioners, on the valuation date: - Males 27.5 27.5 - Females 30.1 30.0 Longevity at 60 for future pensioners currently aged 40, on the valuation date: - Males 29.1 29.0 - Females 31.6 31.5 In March 2021, the Trustee entered into a longevity swap. Approximately 85% of pensioner liabilities were covered by the longevity swap at inception. The value of the swap at 30 June 2021 was nil. Actuarial assumption sensitivities The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. (Decrease)/increase 30 June 2021 31 December 2020 Assumption Change in pension obligation at period end from ��m ��m Discount rate 25 bps increase (573) (662) General price inflation(1) 25 bps increase 411 480 Mortality Each additional year of longevity assumed 453 515 (1) The comparative figure for general price inflation sensitivity of ��365m as at 31 December 2020 has been restated. This was due to an error and does not impact the actual reported assumption value. 26. CONTINGENT LIABILITIES AND COMMITMENTS June 30, 2021 December 31, 2020 ��m ��m Guarantees given to third parties 739 939 Formal standby facilities, credit lines and other commitments 40,957 42,221 41,696 43,160 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 SA in 2008 and subsequently transferred to Santander UK plc) and a Banco Santander SA 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. During H121, AXA France commenced litigation against the Santander Entities seeking recovery of ��636 m and any further losses relating to pre-2005 PPI. The Santander Entities acknowledged service indicating their intention to defend the claim in full and have now issued an application for AXA France's claim to be struck out/summarily dismissed. 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 24 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 24 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 H121 we 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. Consumer credit The Santander UK group's unsecured lending and other consumer credit business is governed by consumer credit law and related regulations, including the CCA. Claims brought by customers in relation to these requirements, including potential breaches, could result in costs to the Santander UK group where such potential breaches are not found to be de minimis. The CCA includes very detailed and prescriptive requirements for lenders, including in relation to post contractual information. Other provisions include an amount of ��41m (2020: ��47m) arising from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice. The Regulatory and other provision in Note 24 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 practicable to provide an estimate of the risk and amount of any further financial impact. FCA civil regulatory investigation into Santander UK plc financial crime systems, processes and controls and compliance with the Money Laundering Regulations 2007 Santander UK plc is cooperating with 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. The FCA's investigation focuses primarily on the period 2012 to 2017 and includes consideration of high risk customers including Money Service Businesses. It is not currently possible to make a reliable assessment of any liability resulting from the investigation including any financial penalty. Taxation The Santander UK group engages in discussion, and co-operates, with HM Revenue & Customs (HMRC) in their oversight of the Santander UK group's tax matters. The Santander UK group adopted the UK's Code of Practice on Taxation for Banks in 2010. Certain leases in which the Santander UK group is or was the lessor have been under review by HMRC in connection with claims for tax allowances. Under the terms of the lease agreements, the Santander UK group is fully indemnified in all material respects by the respective lessees for any liability arising from the disallowance of tax allowances plus accrued interest. During H121, an outline agreement in principle in respect of a number of these lease arrangements was reached directly between the lessee and HMRC. Certain other lease arrangements, where the tax liabilities are considered immaterial, remain under review. Whilst legal opinions have been obtained to support the Santander UK group's position, the matter remains uncertain pending formal resolution with HMRC and any subsequent litigation. These matters moved to formal litigation in 2020, as required under the terms of the leases, and it is currently anticipated that hearings will be held at the First Tier Tax Tribunal in 2022. Other On 2 November 2015, Visa Europe Ltd agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Ltd, Santander UK received upfront consideration made up of cash and convertible preferred stock. The convertible preferred stock is now held by Santander Equity Investments Limited (SEIL), outside the ring fenced bank. Conversion of the preferred stock into Class A Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK & Ireland (UK&I) multilateral interchange fees (MIFs). In June 2020, the Supreme Court issued a judgement finding that MIFs restricted competition. In addition, Santander UK and certain other UK&I banks have agreed to indemnify Visa Inc. in the event that the preferred stock is insufficient to meet the costs of this litigation. Visa Inc. has recourse to this indemnity once more than ��1bn of losses relating to UK&I MIFs have arisen or once the total value of the preferred stock issued to UK&I banks on closing has been reduced to nil. Whilst Santander UK's liability under this indemnity is capped at ��39.85m, Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism. At this stage, it is unclear whether the litigation will give rise to more than ��1bn of losses relating to UK&I MIFs which means it is difficult to predict the resolution of the matter including the timing or the significance of the possible impact. As part of the sale of subsidiaries, businesses and other entities, and as is normal in such circumstances, Santander UK has given warranties and indemnities to the purchasers. 31. 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 to the Consolidated Financial Statements in the 2020 Annual Report 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 30 June 2021 and 31 December 2020. 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. Details of the valuation methodology of the financial assets and financial liabilities carried at amortised cost can be found in Note 40(e) to the Consolidated Financial Statements in the 2020 Annual Report. June 30, 2021 December 31, 2020 Carrying Carrying Fair value value Fair value value ��m ��m ��m ��m Assets Loans and advances to customers 210,815 207,998 211,279 208,750 Loans and advances to banks 1,312 1,312 1,682 1,682 Reverse repurchase agreements - non trading 18,198 18,197 19,608 19,599 Other financial assets at amortised cost 539 530 1,192 1,163 Assets held for sale(1) 2,493 2,486 - - 233,357 230,523 233,761 231,194 Liabilities Deposits by customers 193,389 193,317 195,242 195,135 Deposits by banks 20,503 20,502 20,967 20,958 Repurchase agreements - non trading 14,088 14,089 15,847 15,848 Debt securities in issue 29,890 29,140 36,397 35,566 Subordinated liabilities 3,080 2,513 3,069 2,556 Liabilities held for sale(1) 3,790 3,790 - - 264,740 263,351 271,522 270,063 (1) Assets and liabilities classified as held for sale are measured in accordance with IFRS 9. Any assets and liabilities held for sale which are measured at fair value are included in the fair value table in section (c) below. c) 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 30 June 2021 and 31 December 2020, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3. June 30, 2021 December 31, 2020 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 - 1,403 1 1,404 - 2,455 2 2,457 A Interest rate contracts - 1,841 - 1,841 - 2,566 14 2,580 A & C Equity and credit contracts - 93 48 141 - 71 52 123 B & D Netting - (1,384) - (1,384) - (1,754) - (1,754) - 1,953 49 2,002 - 3,338 68 3,406 Other financial assets at FVTPL Loans and advances to customers - - 74 74 - - 99 99 A Debt securities - - 105 105 - - 109 109 A, B & D - - 179 179 - - 208 208 Financial assets at FVOCI Debt securities 6,160 188 - 6,348 8,501 428 - 8,929 D Loans and advances to customers - - 20 20 - - 21 21 D 6,160 188 20 6,368 8,501 428 21 8,950 Assets held for sale(1) - 143 16 159 - - - - Total assets at fair value 6,160 2,284 264 8,708 8,501 3,766 297 12,564 Liabilities Derivative financial instruments Exchange rate contracts - 565 - 565 - 833 - 833 A Interest rate contracts - 1,827 2 1,829 - 2,447 3 2,450 A & C Equity and credit contracts - 23 30 53 - 26 29 55 B & D Netting - (1,384) - (1,384) - (1,754) - (1,754) - 1,031 32 1,063 - 1,552 32 1,584 Other financial liabilities at FVTPL Debt securities in issue - 666 5 671 - 1,051 6 1,057 A Structured deposits - 347 - 347 - 375 - 375 A Collateral and associated financial guarantees - 3 2 5 - - 2 2 D - 1,016 7 1,023 - 1,426 8 1,434 Liabilities held for sale(1) - 122 - 122 - - - - Total liabilities at fair value - 2,169 39 2,208 - 2,978 40 3,018 (1) Includes assets and liabilities held for sale which are measured at fair value. Transfers between levels of the fair value hierarchy In H121 there were no significant (H120: no significant) transfers of financial instruments between levels of the fair value hierarchy. d) Valuation techniques The main valuation techniques employed in internal models to measure the fair value of the financial instruments are disclosed in Note 40(c) to the Consolidated Financial Statements in the 2020 Annual Report. The Santander UK group did not make any material changes to the valuation techniques and internal models it used during H121. e) 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: 30 June 2021 31 December 2020 ��m ��m Risk-related: - Bid-offer and trade specific adjustments (7) (8) - Uncertainty 21 23 - Credit risk adjustment 7 11 - Funding fair value adjustment 2 3 23 29 Risk-related adjustments Risk-related adjustments are driven, in part, by the magnitude of Santander UK's market or credit risk exposure, and by external market factors, such as the size of market spreads. For more details, see 'Risk-related adjustments' in Note 40(g) to the Consolidated Financial Statements in the 2020 Annual Report. f) 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 H121 and H120: Assets Liabilities Derivatives Other financial assets at FVTPL Financial assets at FVOCI Assets held for sale Total Derivatives Other financial liabilities at FVTPL Liabilities held for sale Total ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 January 2021 68 208 21 - 297 (32) (8) - (40) Total (losses)/gains recognised: - Fair value movements (1) (7) (1) - (9) - 3 - 3 Transfers to held for sale - (16) - 16 - - (2) - (2) Netting(1) - 5 - - 5 - - - - Settlements (18) (11) - - (29) - - - - At 30 June 2021 49 179 20 16 264 (32) (7) - (39) Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period (1) (7) (1) - (9) - 3 - 3 At 1 January 2020 75 386 56 - 517 (32) (61) - (93) Total gains/(losses) recognised: - Fair value movements 6 (2) 1 - 5 (1) 15 - 14 - Foreign exchange and other movements - (2) - - (2) - 2 - 2 Transfers out - - - - - - 28 - 28 Netting(1) - (37) - - (37) - - - - Additions - - - - - - (1) - (1) Sales - (11) (19) - (30) - - - - Settlements (17) (110) (8) - (135) 3 1 - 4 At 30 June 2020 64 224 30 - 318 (30) (16) - (46) Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period 6 (4) 1 - 3 (1) 17 - 16 (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 to the Consolidated Financial Statements in the 2020 Annual Report. Effect of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3) There has been no significant change to the unobservable inputs and sensitivities used in Level 3 fair values as set out in Note 40(h) to the Consolidated Financial Statements in the 2020 Annual Report. 32. INTEREST RATE BENCHMARK REFORM The following tables show the notional amounts of assets, liabilities and off-balance sheet commitments at 30 June 2021 and 31 December 2020 affected by IBOR reform that have yet to transition to an alternative benchmark interest rate as provided internally to key management personnel. June 30, 2021 GBP(2) LIBOR USD(2) LIBOR Other(2) Total ��m ��m ��m ��m Assets Derivatives(1) 21,893 2,580 653 25,126 Other financial assets at fair value through profit and loss 808 20 - 828 Financial assets at amortised cost 12,706 157 83 12,946 Financial assets at fair value through comprehensive income 189 - - 189 37,198 2,918 736 40,852 Liabilities Derivatives(1) 26,227 2,558 56 28,841 Other financial liabilities at fair value through profit and loss 967 41 - 1,008 Financial liabilities at amortised cost 895 567 - 1,462 28,089 3,193 56 31,338 Off-balance sheet commitments given 10,277 803 198 11,278 December 31, 2020 GBP(2) LIBOR USD(2) LIBOR Other(2) Total ��m ��m ��m ��m Assets Derivatives(1) 33,486 4,514 2,149 40,149 Other financial assets at fair value through profit and loss 968 22 - 990 Financial assets at amortised cost 15,062 1,191 90 16,343 Financial assets at fair value through comprehensive income 428 - - 428 49,944 5,727 2,239 57,910 Liabilities Derivatives(1) 35,217 5,205 88 40,510 Other financial liabilities at fair value through profit and loss 1,129 69 - 1,198 Financial liabilities at amortised cost 2,354 1,319 - 3,673 38,700 6,593 88 45,381 Off-balance sheet commitments given 11,400 2,126 573 14,099 (1) Many of the Santander UK group's derivatives subject to IBOR reform are governed by ISDA definitions. In October 2020 ISDA issued an IBOR fallbacks supplement setting out how the amendments to new alternative benchmark rates will be accomplished, the effect of which is to create fallback provisions in derivatives that describe what floating rates will apply on the permanent discontinuation of certain key IBORs or upon ISDA declaring a non-representative determination of an IBOR. The Santander UK group has adhered to the protocol to implement the fallbacks to derivative contracts that were entered into before the effective date of the supplement (25 January 2021). If derivative counterparties also adhere to the protocol, new fallbacks will automatically be implemented in existing derivative contracts when the supplement becomes effective. Following the announcement by the FCA on 5 March 2021 that certain LIBOR settings will permanently cease immediately after 31 December 2021 (and for overnight and 12-month US dollar LIBOR after 30 June 2023), the ISDA fallback spread adjustment is fixed as of the date of the FCA announcement. (2) Cessation dates are: GBP, JPY, NOK LIBOR 31/12/21, USD LIBOR 30/06/23, EONIA 3/1/22 IBOR Reform The table below shows the notional amount of derivatives in hedging relationships directly affected by uncertainties related to IBOR reform. 30 June 2021 31 December 2020 GBP LIBOR USD LIBOR Other Total GBP LIBOR USD LIBOR Other Total ��m ��m ��m ��m ��m ��m ��m ��m Total notional value of hedging instruments: - Cash flow hedges 11,610 2,894 - 14,504 15,198 5,119 - 20,317 - Fair value hedges 20,758 160 696 21,614 32,223 1,077 778 34,078 32,368 3,054 696 36,118 47,421 6,196 778 54,395 Maturing after cessation date(1) - Cash flow hedges 9,788 2,533 - 12,321 10,553 2,562 - 13,115 - Fair value hedges 16,232 160 696 17,088 12,477 162 720 13,359 26,020 2,693 696 29,409 23,030 2,724 720 26,474 (1) Cessation dates are: GBP, JPY, NOK LIBOR 31/12/21, USD LIBOR 30/06/23, EONIA 3/1/22 33. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE Discontinued operations Proposed transfer of the CIB business to SLB Following a hearing held on 23 June 2021 , the High Court of England and Wales has sanctioned the transfer of substantially all the CIB business of Santander UK to SLB by way of a Part VII banking business transfer scheme. The transfers of CIB business to SLB under the scheme are scheduled to take place before the end of 2021. At 30 June 2021, the CIB business met the requirements for presentation as discontinued operations. The financial performance and cash flow information relating to the discontinued operations were as follows: Half year to Half year to 30 June 2021 30 June 2020 ��m ��m Net interest income 24 25 Net fee and commission income 27 22 Total operating income 51 47 Operating expenses before credit impairment losses, provisions and charges (22) (33) Credit impairment losses 7 (12) Provisions for other liabilities and charges (3) (4) Total operating credit impairment losses, provisions and charges 4 (16) Profit/(loss) from discontinued operations before tax 33 (2) Tax on profit/(loss) from discontinued operations (9) 1 Profit/(loss) from discontinued operations after tax 24 (1) There were no gains or losses recognised on the measurement to fair value less costs to sell or on the disposal of the asset groups constituting the discontinued operations. In H121, the net cash flows attributable to the operating activities, investing activities and financing activities in respect of discontinued operations were ��1,754m outflow (H120: ��524m inflow), ��nil (H120: ��nil) and ��nil (H120: ��nil), respectively. Assets and liabilities held for sale Proposed transfer of the CIB business to SLB Management considered the related business transfers to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the assets and liabilities relating to the CIB business. These business transfers will be made for a cash consideration equivalent to the book value of the associated assets and liabilities, which represents a fair value for the Santander UK group. Costs to sell are expected to be immaterial. Sale of Retail Banking mortgage assets At 30 June 2021, Santander UK was in the process of selling a portfolio of Retail Banking residential mortgage assets and expected to complete the transaction on 16 August 2021. Management considered the sale to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the mortgage assets. The sale is expected to be made for a cash consideration exceeding the book value of the mortgage assets, resulting in a gain on disposal. Costs to sell are expected to be immaterial. Assets and liabilities held for sale At 30 June 2021, the assets and liabilities held for sale comprised of: Net assets/liabilities held for sale CIB business transfer to SLB Sale of residential mortgages Total ��m ��m ��m Assets Derivative financial instruments 143 - 143 Other financial assets at fair value through profit or loss 16 - 16 Loans and advances to customers 1,878 608 2,486 Total assets held for sale 2,037 608 2,645 Liabilities Derivative financial instruments 95 - 95 Other financial liabilities at fair value through profit or loss 27 - 27 Deposits by customers 3,769 - 3,769 Deposits by banks 21 - 21 Total liabilities held for sale 3,912 - 3,912 Net assets/liabilities held for sale (1,875) 608 (1,267) 34. EVENTS AFTER THE BALANCE SHEET DATE There have been no significant events between 30 June 2021 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except for the following non-adjusting event: On 30 July 2021, the Santander UK group through Santander Consumer (UK) plc sold its entire 50% shareholding in PSA Finance UK Limited (PSA) to PSA Financial Services Spain EFC SA, a joint venture between Santander Consumer Finance SA, a fellow subsidiary of Banco Santander SA, and Banque PSA Finance SA, the auto finance arm of Group PSA Peugeot Citro��n. The impact of the sale was to derecognise total assets of ��3.2bn, total liabilities of ��2.9bn and a non-controlling interest of ��0.15bn. No material gain or loss arose on sale. For more information on PSA, including summary financial information, see Note 19 to the Consolidated Financial Statements in the 2020 Annual Report. This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com. RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy. END IR KZGMRLZMGMZM

AI Terminal

4587_ir_2021-08-13_7cc31ebb-721b-4a4f-a3b8-fd284fa27d0c.html

More from SANTANDER UK PLC

Talk to a Data Expert