Interim / Quarterly Report • Sep 14, 2017
Interim / Quarterly Report
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National Storage Mechanism | Additional information You don't have Javascript enabled. For full functionality this page requires javascript to be enabled. RNS Number : 6958Q Santander UK Plc 14 September 2017 Santander UK plc 14 September 2017 Half Yearly Financial Report 2017 The Company announces that a copy of the above document has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do In fulfilment of its obligations under the Disclosure and Transparency Rules, Santander UK plc hereby releases the unedited full text of its 2017 Half Yearly Financial Report. Accordingly, page references in the text refer to page numbers in the 2017 Half Yearly Financial Report. A printer-friendly PDF version of the accounts will also be made available on the Company's website: Contacts Bojana Flint Head of Investor Relations 020 7756 6474 Andy Smith Head of Media Relations 020 7756 4212 For more information: www.aboutsantander.co.uk [email protected] The full text of the accounts follows: Santander UK plc PART OF THE BANCO SANTANDER GROUP Important information for readers Santander UK plc and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of Banco Santander (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA. This Half Yearly Financial Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See 'Forward-looking statements' in the Shareholder information section. Santander UK plc Half Yearly Financial Report 2017 2 Introduction 3 Directors' responsibilities statement 4 Financial review 14 Risk review 32 Financial statements 50 Shareholder information Introduction The Company sets out in this report a fair review of its business and a description of its principal risks and uncertainties, including a balanced and comprehensive analysis of the development and performance of the business in the first half of the year and of its position at the end of the period. Principal activities and business review Santander UK plc (the Company) and its subsidiaries (collectively, Santander UK or the Santander UK group) is a major financial services provider, offering a wide range of personal financial products and services, and is a growing participant in the corporate banking market. The Company is authorised and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Customer focused ring fencing model We are progressing well with the implementation of a 'wide' ring-fence structure that will serve our retail, commercial and corporate customers. We believe this model provides greater certainty for our customers, while ensuring minimal disruption as we implement the changes required. This also maintains longer term flexibility for Santander UK, while lowering the overall programme implementation costs with the creation of the ring fence now involving the transfer of fewer customers. The majority of our customer loans and assets as well as customer deposits and liabilities will remain within Santander UK plc, our principal ring-fenced bank. Prohibited activities which cannot be transacted within the ring-fence principally include our derivatives business with financial institutions and certain corporates, elements of our short term markets business and our branches in Jersey, Isle of Man and the US. Customers who cannot be served and services which are not permitted within a ring-fenced bank will be transferred to Banco Santander SA, or its London branch. Customers who cannot be served and services which are not permitted within a ring-fenced bank will be transferred to Banco Santander SA, or its London branch. We intend to use a Part VII Ring-Fence Transfer Scheme to transfer the majority of the prohibited business of the Santander UK group to Banco Santander. We are on track to complete the implementation in advance of the legislative deadline of 1 January 2019, with implementation subject to regulatory and court approvals and various other authorisations. Development and performance of our business in H117 Information on the development and performance of our business in H117 is set out in the 'Income statement review' section of the Financial review and information on our position at the end of the period is set out in the 'Balance sheet review' section of the Financial review. Board appointments We recently announced the appointment of two new Executive Directors. I would like to welcome Antonio Roman, Chief Financial Officer, and Javier San Felix, Head of Retail & Business Banking and Deputy CEO, to the Board of Santander UK. 2017 outlook We expect solid UK economic growth in 2017. However, we see greater uncertainty in the outlook, with the concern that some downside risks could materialise later this year and into 2018. The labour market remains strong, but higher inflation, largely from the lower value of sterling, is now reducing households' real earnings. This is likely to result in lower consumer spending growth which, when combined with a potentially more challenging macro environment, adds a degree of caution to our outlook. We have therefore deliberately controlled growth in certain business areas and in particular those with higher margins and the potential for higher risk. We believe that our proactive risk management policies and low risk appetite will deliver resilient performance going forward. Our principal risks and uncertainties Information on our principal risks and uncertainties is set out in the Risk review by type of risk. Except where noted, there has been no significant change to the description of these risks or key mitigating actions as set out in the 2016 Annual Report. Key performance indicators The directors of the Company's parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which includes the Santander UK plc group) on a business division basis. Key performance indicators are not set, monitored or managed at the Santander UK plc group level. As a result, the Company's Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the Company. The development and performance of the business of the Santander UK plc group is set out in the 'Income statement review' section of the Financial review. The key performance indicators of the Santander UK Group Holdings plc group can be found on page 4 of its 2017 Half Yearly Financial Report, which does not form part of this report. By Order of the Board Nathan Bostock Director 13 September 2017 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 International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union, and that the half-year management report herein includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R and 4.2.8R, namely: - An indication of important events that have occurred during the six months ended 30 June 2017 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 2017 and any material changes in the related party transactions described in the last Annual Report. By Order of the Board Nathan Bostock Chief Executive Officer 13 September 2017 Financial review 5 Income statement review 5 Summarised Consolidated Income Statement 6 Profit before tax by segment 6 - Retail Banking 8 - Commercial Banking 10 - Global Corporate Banking 11 - Corporate Centre 12 Balance sheet review 12 Summarised Condensed Consolidated Balance Sheet Income statement review SUMMARISED CONSOLIDATED INCOME STATEMENT Half year to 30 June 2017 £m Half year to 30 June 2016 £m Net interest income 1,922 1,773 Non-interest income(1) 591 671 Total operating income 2,513 2,444 Operating expenses before impairment losses, provisions and charges (1,215) (1,205) Impairment losses on loans and advances (48) (63) Provisions for other liabilities and charges (186) (97) Total operating impairment losses, provisions and charges (234) (160) Profit before tax 1,064 1,079 Tax on profit (323) (307) Profit after tax for the period 741 772 Attributable to: Equity holders of the parent 730 756 Non-controlling interests 11 16 (1) Comprised of Net fee and commission income and Net trading and other income. H117 compared to H116 Profit before tax was down 1%, with higher provisions for other liabilities and charges, offset by steady income growth, continued cost discipline, and good credit quality. By income statement line, the movements were: - Net interest income was up 8%, driven by retail liability margin improvement and an accrued interest release, partially offset by continued SVR mortgage attrition and pressure on new lending margins. The SVR attrition was £2.5bn in H117, lower than the £3.4bn in H116. NIM was 1.53% in H117, compared to 1.48% in 2016. - Non-interest income was down 12%, with mark-to-market movements on economic hedges and the absence of the gain on sale of Visa Europe Limited in H116. This was partially offset by growth in all customer business segments and the gain on sale of Vocalink Holdings Limited in H117. - Operating expenses before impairment losses, provisions and charges were broadly stable. Operational efficiency continues to absorb higher investment costs in business growth and enhancements to our digital channels. Our costs were also well managed, despite inflationary pressures. - Impairment losses on loans and advances decreased 24% to £48m, as a result of our prudent lending criteria and the ongoing resilience of the UK economy. Furthermore, mortgage releases were £21m in H117 compared to £58m in H116. - Provisions for other liabilities and charges increased to £186m, driven by a Q117 £32m charge for PPI, a Q217 net charge of £37m for a specific PPI portfolio under review and £35m for other conduct matters. - Tax on profit increased 5% to £323m, driven by higher conduct provisions that are disallowed for tax purposes. The effective tax rate increased to 30% from 28%. PROFIT BEFORE TAX BY SEGMENT This section contains a summary of our results, and commentary thereon, by income statement line item for each segment. The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date. For more, see Note 2 to the Condensed Consolidated Interim Financial Statements. RETAIL BANKING Retail Banking offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. Retail Banking serves business banking customers, small businesses with an annual turnover of up to £6.5m, and Santander Consumer Finance, predominantly a vehicle finance business. Its main products are residential mortgage loans, savings and current accounts, credit cards and personal loans as well as insurance policies. Summarised income statement Half year to 30 June 2017 £m Half year to 30 June 2016 £m Net interest income 1,730 1,531 Non-interest income 314 283 Total operating income 2,044 1,814 Operating expenses before impairment losses, provisions and charges (919) (922) Impairment losses on loans and advances (39) (34) Provisions for other liabilities and charges (155) (77) Total operating impairment losses, provisions and charges (194) (111) Profit before tax 931 781 H117 compared to H116 Profit before tax increased by £150m to £931m in H117 (H116: £781m). By income statement line, the movements were: - Net interest income increased 13%, with liability margin improvement offsetting continued SVR mortgage attrition and pressure on new lending margins. - Non-interest income increased 11%, with higher current account and wealth management fees. - Operating expenses before impairment losses, provisions and charges were flat with operational efficiencies, offsetting continued investment in business growth and digital enhancements. - Impairment losses on loans and advances increased by £5m to £39m, with lower mortgage impairment releases of £21m in H117 compared to £58m in H116, which are starting to normalise from cyclically low levels. - Provisions for other liabilities and charges increased to £155m, due to PPI charges in Q117 and Q217 and a charge for other conduct matters. Balances 30 June 2017 £bn 31 December 2016 £bn Customer loans 168.2 168.6 - of which mortgages 154.1 154.3 - of which business banking(1) 2.0 2.3 - of which consumer finance 6.9 6.8 - of which other unsecured lending 5.2 5.2 Risk-weighted assets (RWAs) 43.9 43.6 Customer deposits 148.7 148.1 - of which current accounts 66.3 64.8 - of which savings 62.3 64.7 - of which business banking accounts 10.5 10.0 - of which other retail products 9.6 8.6 (1) Following a periodic review in Q117, a number of business banking customers were transferred to Commercial Banking, where their ongoing needs can be better served. The balance associated was c£200m. Prior periods have not been amended. 30 June 2017 compared to 31 December 2016 - Mortgage lending balances decreased £0.2bn, reflecting management pricing actions in late 2016 that impacted new mortgage completions in H117. We retained c75% of mortgages reaching the end of their incentive period. - Consumer finance and other unsecured lending balances were flat, in part as a result of controlled management actions in an increasingly competitive environment. - Customer deposits were up £0.6bn, with ongoing demand for our current accounts and other retail products, partially offset by lower savings balances, which declined £2.4bn. - Business banking deposits increased £0.5bn, as we continue to deepen relationships with our SME customers and focus on growing our lending capabilities. - Retail Banking deposit spread narrowed, with a 30bps improvement to (0.27)% from (0.57)% in December 2016. Business volumes(1) Half year to 30 June 2017 £bn Half year to 30 June 2016 £bn Mortgage gross lending 11.6 12.7 Mortgage net lending (0.2) 0.6 Business banking net lending (0.3) (0.1) Consumer finance gross lending 1.7 1.6 Consumer finance net lending 0.1 0.3 (1) Gross and net lending figures exclude any assets purchased or transferred in the period. H117 compared to H116 - Lower mortgage gross lending at £11.6bn reflects management pricing actions in Q416 that impacted new mortgage completions in the first half of the year. In H117, we helped 10,900 first-time buyers (£1.8bn of gross lending) purchase their new home. Interest-only mortgage balances decreased £1.7bn to £50.6bn (2016: £52.3bn) while Buy-to-Let (BTL) mortgage balances increased £0.3bn to £6.9bn (2016: £6.6bn). We continued to focus our BTL book on non-professional landlords, as this segment is closely aligned with residential mortgages and accounts for the majority of the volume in the BTL market. In H117, we completed 2,728 BTL mortgages, representing 4% of the value of our new business flow, at an average LTV of 62%. - Consumer finance gross lending was £1.7bn with higher retail loans, partially offset by a decrease in the stock of new car registrations. We continue to benefit from our partnership with manufacturers and joint ventures, supported by prudent underwriting criteria within our traditional prime vehicle business. Business development - In the first half of the year, we introduced a new set of tools that aim to improve the customer experience across all channels. In January 2017, the new CRM tool was launched to enable our people to continue conversations with customers which may have started in another channel. It also utilises information from connected systems to facilitate new conversations. In addition, we updated the SmartBank app with voice commands capabilities. Furthermore, in March 2017, we simplified the process to open a current account online with instant decisions and document upload where required. Lastly, in June 2017, we launched a new service that allows customers to apply for a mortgage via video link to an advisor. - Our digital customer base continued to grow in H117, gaining an average of 1,200 new active mobile users per day for a total of 2.4 million mobile customers, of which 1.6 million exclusively use our mobile app in their transactions with us. In the same period 47% of our mortgages were retained online, 34% of current account openings and 46% of credit card openings were made through digital channels. - Our Cyber Resilience programme operates with a layered defence approach, continually evolving and adapting to cyber threats. Protecting our customers, systems and information is a top priority and a key area of focus. We have increased our resources and are leveraging connections with Banco Santander's Cyber Security Operations Centre. - 1I2I3 World customers increased, although at a slower rate, to 5.2 million. Whilst there has been an expected reduction in 1I2I3 Current Account openings, following fee and interest rate changes in January 2016 and November 2016, the current account base continues to grow (up 43,000), reflecting the strength and stability of the franchise. We believe the 1I2I3 Current Account and 1I2I3 Lite Current Account continue to be outstanding propositions for many customers. - We continue to make investments accessible to all our customers and have expanded our wealth management business by growing our Private Banking and Financial Planning advisory teams. From March 2017 through April 2017, we ran a media campaign that successfully raised awareness of our improved wealth management offering. As a result, over 8,600 customers registered on our new Investment Hub and over 18,000 customer appointments were scheduled with our Private Banking and Financial Planning advisory teams. In June 2017, we also launched the new World Elite Mastercard, offering our Select and Private Banking customers extensive travel and lifestyle benefits whilst also providing cashback on purchases. - We plan to grow the Santander Business franchise with a relationship led approach and strong emphasis on increasing customer loyalty. In particular we see an opportunity to expand our lending capabilities by identifying innovative solutions that meet the needs of our SME customers. COMMERCIAL BANKING Commercial Banking offers a wide range of products and financial services provided by relationship teams that are based in a network of regional Corporate Business Centres (CBCs) and through telephony and digital channels. The management of our customers is organised across two relationship teams - the Regional Corporate Bank (RCB) that covers trading businesses with annual turnover from £6.5m to £500m and Specialist Sector Groups (SSG) that cover real estate, housing finance, education, healthcare, and hotels. Commercial Banking products and services include loans, bank accounts, deposits, treasury services, invoice discounting, cash transmission, trade finance and asset finance. Summarised income statement Half year to 30 June 2017 £m Half year to 30 June 2016 £m Net interest income 198 203 Non-interest income 44 41 Total operating income 242 244 Operating expenses before impairment losses, provisions and charges (109) (113) Impairment losses on loans and advances (3) (11) Provisions for other liabilities and charges (29) - Total operating impairment losses, provisions and charges (32) (11) Profit before tax 101 120 H117 compared to H116 Profit before tax decreased by £19m to £101m in H117 (H116: £120m). By income statement line, the movements were: - Net interest income decreased 2%, with continued asset margin pressures, partially offset by customer lending growth. - Non-interest income increased 7% to £44m. Growth in asset restructuring fees, up 11%, international, up 13%, and digital and payment, up 10%, was partially offset by lower rates management fees. - Operating expenses before impairment losses, provisions and charges decreased 4%, with continued focus on strong cost management and operational efficiency. - Impairment losses on loans and advances were lower at £3m. Overall, the loan book continues to perform well and is supported by our prudent lending policy. - Provisions for other liabilities and charges increased to £29m, mainly due to conduct provisions taken in Q217. Balances 30 June 2017 £bn 31 December 2016 £bn Customer loans(1) 19.6 19.4 RWAs 20.1 20.4 Customer deposits 18.1 17.2 (1) Following a periodic review in Q117, a number of business banking customers were transferred to Commercial Banking, where their ongoing needs can be better served. The balance associated was c£200m. Prior periods have not been amended. 30 June 2017 compared to 31 December 2016 - Customer loans were broadly flat at £19.6bn, with solid lending growth to trading business customers, offset by the continued active management of our CRE exposures amid economic uncertainty. - RWAs were lower, driven by the reduction of our CRE exposures. - We continue to attract deposit balances, through our strong customer relationships, supported by a comprehensive product range and competitive pricing. Business volumes Half year to 30 June 2017 Half year to 30 June 2016 New facilities (£bn) 3.5 4.3 Bank account openings (No.) 1,621 1,314 Online banking (Connect) active users (1) (No.) 28,843 26,100 (1) Online banking (Connect) active users include both business banking and Commercial Banking customers. H117 compared to H116 - We continue to open bank accounts and extend new facilities, despite a competitive environment and economic uncertainty. Our Relationship Managers are building their portfolios by leveraging our comprehensive suite of products and services. - There was a continuation in the pickup of our corporate banking platform 'Connect', with active users increasing 11% year on year. Business development - The focus of the Commercial Banking division is to expand its franchise by both growing the overall customer base, as well as deepening loyalty amongst our existing customers. We aim to increase loyalty by leveraging our international reach and proposition as well as continuing to develop our product capabilities to meet our customers' needs. - Coverage of our commercial clients is organised by local relationship teams or by sectors. Our sector teams support our clients by using specialist knowledge of the individual business and its operating environment to recommend solutions. Furthermore, we have identified key strategic sectors and have partnered with leading trade bodies to deliver a customer led proposition that leverages our international presence and connectivity to access on-the-ground support overseas, connect to potential new business partners and enter global supply chains. Our partnerships also run a wide range of collaborative activity, including market reports, insight and events. - We are working with Banco Santander SA and key strategic partners to develop trade initiatives that make it easier for clients to grow their business internationally. Our Spain-UK corridor has facilitated introductions to relationship directors by simplifying the process for cross-border account referrals. We have also launched a US-UK corridor and formalised an alliance with YES bank, India's fourth largest private sector bank, to support trade and offer our customers new business opportunities in the respective markets. These initiatives allow us to attract new clients and deepen existing relationships, as well as compliment some of our existing services, for example Santander Trade Club and Santander Passport. - Breakthrough Growth Capital provides new funding and identifies key partnerships at milestones in the development of our clients' business. In the first six months of the year, we assisted 26 businesses in accessing £86m of facilities. Since inception, the Growth Capital team has completed 152 funding solutions for 108 companies, providing £438m of facilities, which will create over 6,360 jobs. - Our innovative offering was recognised at the 2017 Business Moneyfacts Awards, winning a number of prestigious awards including: 'Business Bank of the Year' and the 'Best International Solutions Provider', both for the third consecutive year, to name a few. The industry recognition is a testament to Santander UK's commitment to become the bank of choice for UK companies and shows the strength of our overall value proposition for businesses, built on our relationship banking approach. GLOBAL CORPORATE BANKING Global Corporate Banking (GCB) services corporate clients with a turnover of £500m and above per annum and financial institutions. GCB clients require specially tailored solutions and value-added services due to their size, complexity and sophistication. We provide these clients with products to manage currency fluctuations, protect against interest rate risk, and arrange capital markets finance and specialist trade finance solutions, as well as providing support to the rest of Santander UK's business segments. Summarised income statement Half year to 30 June 2017 £m Half year to 30 June 2016 £m Net interest income 40 39 Non-interest income 206 184 Total operating income 246 223 Operating expenses before impairment losses, provisions and charges (145) (141) Impairment losses on loans and advances (9) (21) Provisions for other liabilities and charges - - Total operating provisions and charges (9) (21) Profit before tax 92 61 H117 compared to H116 Profit before tax increased by £31m to £92m in H117 (H116: £61m). By income statement line, the movements were: - Net interest income was broadly flat at £40m, with ongoing demand for project and acquisition finance, transactional services and factoring products, offset by continued asset margin pressures. This also includes £10m income arising from favourable conditions in market rates. - Non-interest income increased 12% to £206m, driven by security financing, derivative and cash sales, and market making activities. - Operating expenses before impairment losses, provisions and charges increased 3% to £145m, with continued investment to improve our operating model. - Impairment losses on loans and advances were lower at £9m, with continued good performance of the loan book. - There were no provisions for other liabilities and charges in the period. Balances 30 June 2017 £bn 31 December 2016 £bn Customer loans 6.5 5.7 RWAs 16.4 16.9 Customer deposits 4.4 4.1 30 June 2017 compared to 31 December 2016 - Customer loans increased to £6.5bn, driven by our refinancing and origination activities relating to project and acquisition finance and transactional services, as well as increased client drawdowns. - RWAs were lower, driven by a decrease in counterparty credit and market risk that was partially offset by asset growth. RWAs attributable to customer loans were £8.0bn (2016: £7.5bn). - Customer deposits were higher at £4.4bn, primarily driven by growth in cash management products. Business development - We continue to enhance our compliance and risk frameworks, with improvements to our internal process in compliance monitoring and financial crime management. We are also rolling out our client management service function to Commercial Banking, to simplify the client on-boarding process and improve the customer experience. - In H117, we formed a mergers and acquisitions advisory team that will complement our existing product capabilities. The team is building a healthy pipeline of deals to support fee income growth. There was also solid momentum in business activity and increased demand from our Financial Institution Group clients for debt capital market services. Our ongoing focus is to maximise return on capital, by effectively leveraging our transactional banking products, FX and advisory services. CORPORATE CENTRE Corporate Centre predominantly consists of the non-core corporate and treasury legacy portfolios. Corporate Centre is also responsible for managing capital and funding, balance sheet composition, structure and strategic liquidity risk. The non-core corporate and treasury legacy portfolios are being run-down and/or managed for value. Summarised income statement Half year to 30 June 2017 £m Half year to 30 June 2016 £m Net interest expense (46) - Non-interest income 27 163 Total operating (expense)/income (19) 163 Operating expenses before impairment losses, provisions and charges (42) (29) Impairment releases on loans and advances 3 3 Provisions for other liabilities and charges (2) (20) Total operating impairment releases, provisions and charges 1 (17) (Loss)/profit before tax (60) 117 H117 compared to H116 Profit before tax decreased by £177m to a loss of £60m in H117 (H116: £117m profit). By income statement line, the movements were: - Net interest expense of £46m, reflects changes in the commercial balance sheet profile, partially offset by a £39m release of accrued interest on a foreign tax liability that is no longer payable. Due to the lower interest rate environment, we envisage that net interest income from the structural hedge will continue to decrease as a result of maturing positions being reinvested at lower prevailing rates. The majority of new mortgage flows are left un-hedged to provide stable returns. The average duration of our fixed term new mortgage flows is about 2.5 years, with a total structural hedge position of c£80bn. - Non-interest income was impacted by mark-to-market movement on economic hedges and the absence of the £119m gain on sale of Visa Europe Limited in H116, partially offset by the £48m gain on sale of Vocalink Holdings Limited in H117. - Operating expenses before impairment losses, provisions and charges, predominantly represent £42m of regulatory compliance and project costs relating to Banking Reform. - Impairment releases on loans and advances were flat, in line with the continued management of the non-core portfolio. - Provisions for other liabilities and charges decreased to £2m, predominantly due to the absence of restructuring costs. Balances 30 June 2017 £bn 31 December 2016 £bn Non-core customer loans 6.0 6.5 - of which Social Housing 5.1 5.4 RWAs 6.8 6.7 Customer deposits 3.2 3.0 30 June 2017 compared to 31 December 2016 - Non-core customer loans decreased £0.5bn, as we continue to implement our exit strategy from individual loans and leases in the non-core corporate and legacy portfolios. - RWAs were broadly flat with higher counterparty credit risk, partially offset by a reduction in non-core customer loans and the Vocalink Holdings Limited shareholder sale. RWAs attributable to non-core customer loans amounted to £1.1bn (2016: £1.3bn). - Customer deposits increased £0.2bn, as we continue to rebalance the deposit base tenor. Balance sheet review SUMMARISED CONDENSED CONSOLIDATED BALANCE SHEET 30 June 2017 £m 31 December 2016 £m Assets Cash and balances at central banks 18,255 17,107 Trading assets 34,423 30,035 Derivative financial instruments 21,611 25,471 Financial assets designated at fair value 2,161 2,140 Loans and advances to banks 4,404 4,348 Loans and advances to customers 199,799 199,738 Loans and receivables securities 1,424 257 Available-for-sale securities 9,574 10,561 Held-to-maturity investments 6,613 6,648 Macro hedge of interest rate risk 914 1,098 Interest in other entities 66 61 Property, plant and equipment 1,508 1,491 Retirement benefit assets 500 398 Tax, intangibles and other assets 3,669 3,789 Total assets 304,921 303,142 Liabilities Deposits by banks 11,890 9,769 Deposits by customers 181,189 177,172 Trading liabilities 21,490 15,560 Derivative financial instruments 18,488 23,103 Financial liabilities designated at fair value 2,976 2,440 Debt securities in issue 43,997 50,346 Subordinated liabilities 4,109 4,303 Macro hedge of interest rate risk 281 350 Retirement benefit obligations 220 262 Tax, other liabilities and provisions 3,400 3,753 Total liabilities 288,040 287,058 Equity Total shareholders' equity 16,719 15,934 Non-controlling interests 162 150 Total equity 16,881 16,084 Total liabilities and equity 304,921 303,142 A more detailed consolidated balance sheet is contained in the Condensed Consolidated Interim Financial Statements. 30 June 2017 compared to 31 December 2016 Assets Cash and balances at central banks Cash and balances at central banks increased by 7% to £18,255m at 30 June 2017 (2016: £17,107m). The increase was mainly due to an increase in balances at central banks. Trading assets Trading assets increased by 15% to £34,423m at 30 June 2017 (2016: £30,035m). This is mainly attributable to higher levels of securities purchased under resale agreements and equities offset by decreased holdings of debt securities. Derivative financial instruments - assets Derivative assets decreased by 15% to £21,611m at 30 June 2017 (2016: £25,471m). The decrease was mainly due to volatility in the fair value of interest rate and cross currency derivative assets principally driven by movements in yield curves and foreign exchange rates. Loans and advances to customers Loans and advances to customers were broadly flat at £199,799m at 30 June 2017 (2016: £199,738m), mainly driven by an increase in loans to UK companies, partially offset by a decrease in residential mortgages. Liabilities Deposits by customers Deposits by customers increased by 2% to £181,189m at 30 June 2017 (2016: £177,172m) as we focused on retaining and originating accounts held by more loyal customers, with continued net positive inflows to 1I2I3 Current Account, everyday bank accounts as well as corporate accounts. Trading liabilities Trading liabilities increased by 38% to £21,490m at 30 June 2017 (2016: £15,560m) mainly as a result of an increase in securities purchased under resale agreements, as part of normal trading activity. Derivative financial instruments - liabilities Derivative liabilities decreased by 20% to £18,488m at 30 June 2017 (2016: £23,103m). The decrease was mainly due to volatility in the fair value of interest rate and cross currency derivative liabilities mainly driven by movements in yield curves and foreign exchange rates. Debt securities in issue Debt securities in issue decreased by 13% to £43,997m at 30 June 2017 (2016: £50,346m) driven by maturities across the covered bonds, securitisation and Medium Term Notes programmes, partially offset by issuances under the US-SEC registered debt shelf. Equity Total shareholders' equity Total shareholders' equity increased by 5% to £16,719m at 30 June 2017 (2016: £15,934m). The increase was attributable to the issuance of AT1 capital, the profit for the period, actuarial gains on the defined benefit pension funds and the valuation of available for sale securities, partially offset by dividends approved, valuation of cash flow hedges and own credit adjustments. Risk review 15 Risk governance 16 Credit risk 16 Santander UK group level 17 Retail Banking 20 Other segments 24 Market risk 24 Trading market risk 24 Banking market risk 25 Liquidity risk 28 Capital risk 30 Other key risks Risk governance 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 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. 30 June 2017 compared to 31 December 2016 There were no significant changes in our risk governance as described in the 2016 Annual Report. Credit risk Overview Credit risk management In H117, there were no significant changes in the way we manage credit risk as described in the 2016 Annual Report. Credit risk review In this section we analyse our credit risk profile and performance. We begin by discussing credit risk at a Santander UK group level and then cover Retail Banking separately from our other segments: Commercial Banking, Global Corporate Banking and Corporate Centre. Key metric - NPL ratio was 1.32% (2016: 1.50%) santander uk group level - Credit risk review Credit performance Customer loans £bn NPLs(1)(2) £m NPL ratio % NPL coverage(3) % Gross write-offs(4) £m Impairment loss allowances £m 30 June 2017 Retail Banking: 168.2 2,177 1.29 25 106 553 - Residential mortgages 154.1 1,936 1.26 13 11 251 - Business banking 2.0 121 6.05 48 13 58 - Consumer finance 6.9 33 0.48 239 21 79 - Other unsecured lending 5.2 87 1.67 190 61 165 Commercial Banking 19.6 358 1.83 57 12 204 Global Corporate Banking 6.5 80 1.23 81 - 65 Corporate Centre 6.0 26 0.43 162 17 42 200.3 2,641 1.32 33 135 864 31 December 2016 Retail Banking: 168.6 2,340 1.39 25(5) 210 583(5) - Residential mortgages 154.3 2,110 1.37 13 33 279 - Business banking 2.3 108 4.70 53 24 57 - Consumer finance 6.8 32 0.47 244(5) 30 78(5) - Other unsecured lending 5.2 90 1.73 188 123 169 Commercial Banking 19.4 518 2.67 42 10 220 Global Corporate Banking 5.7 63 1.11 90 - 57 Corporate Centre 6.5 73 1.12 84 51 61 200.2 2,994 1.50 31(5) 271 921(5) (1) We define NPLs in the 'Credit risk management' section in the 2016 Annual Report. (2) All NPLs continue accruing interest. (3) Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e. the incurred but not observed provision) as well as NPLs, so the ratio can exceed 100%. (4) 30 June 2017 reflects 6 months of gross write-offs and 31 December 2016 reflects 12 months of gross write-offs. (5) In H117, we reclassified our provisions for residual value and voluntary termination from the consumer finance impairment loss allowance. To facilitate comparison with the current period, the 31 December 2016 consumer finance impairment loss allowance of £146m and NPL coverage ratio of 456% were amended to £78m and 244% respectively. This reclassification was also reflected in the Retail Banking and total impairment loss allowance and NPL coverage ratios. At 30 June 2017 total corporate lending, comprising business banking, Commercial Banking and Global Corporate Banking, was £28.1bn (2016: £27.4bn). The NPL ratio for corporate lending was 1.99% (2016: 2.51%), the NPL coverage ratio was 58% (2016: 48%), gross write-offs were £25m (2016: £34m) and impairment loss allowances were £327m (2016: £334m). 30 June 2017 compared to 31 December 2016 The NPL ratio improved by 18bps to 1.32% (2016: 1.50%) and continued to perform well, supported by our prudent lending criteria and proactive management actions: - The improvement in the Retail Banking NPL ratio to 1.29% (2016: 1.39%) was driven by the strong credit quality of our portfolio and the ongoing resilience of the UK economy. The loan loss rate remained low at 0.02% (2016: 0.01%). - The NPL ratio for Commercial Banking decreased to 1.83% from 2.67% primarily due to the full repayment of three impaired loans and the write-off of some pre-2009 vintages. The loan loss rate in Commercial Banking improved to 0.10% (2016: 0.15%). - In Global Corporate Banking, the NPL ratio of 1.23% (2016: 1.11%) was impacted by a single loan of £20m that moved to non-performance. - The NPL ratio for the Corporate Centre decreased to 0.43% (2016: 1.12%), reflecting the ongoing sale and run-off of the non-core corporate and legacy portfolios. For more on the credit performance of our key portfolios by business segment, see the 'Retail Banking - credit risk review' and 'Other segments - credit risk review' sections. RETAIL BANKING - CREDIT RISK REVIEW Residential mortgages Borrower profile In this table, 'home movers' include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house. 'Remortgagers' are external customers who are remortgaging with us. We have not included internal remortgages, further advances and any flexible mortgage drawdowns in the new business figures. Stock New business 30 June 2017 31 December 2016 Half year to 30 June 2017 Half year to 30 June 2016 £m % £m % £m % £m % First-time buyers 28,812 19 29,143 19 1,840 17 1,970 16 Home movers 68,214 44 68,158 44 4,954 45 5,487 45 Remortgagers 50,190 33 50,325 33 3,673 34 3,361 28 Buy-to-let 6,923 4 6,648 4 447 4 1,268 11 154,139 100 154,274 100 10,914 100 12,086 100 30 June 2017 compared to 31 December 2016 Mortgage lending balances decreased £135m, reflecting management pricing actions in late 2016 that impacted new mortgage completions in H117. We retained c. 75% of mortgages reaching the end of their incentive period. We continued to focus our buy-to-let book on non-professional landlords, as this segment is closely aligned with residential mortgages and accounts for the majority of the volume in the buy-to-let market. In H117, we completed 2,728 buy-to-let mortgages, representing 4% of the value of our new business flow, at an average LTV of 62%. In addition to the new business included in the table above, there were £11.6bn (H116: £9.1bn) of internal remortgages where we kept existing customers on new mortgages. We also provided £0.7bn (H116: £0.6bn) of further advances and flexible mortgage drawdowns. Interest rate profile The interest rate profile of our mortgage asset stock was: 30 June 2017 31 December 2016 £m % £m % Fixed rate 96,132 62 91,817 59 Variable rate 31,714 21 33,627 22 Standard Variable Rate (SVR) 26,293 17 28,830 19 154,139 100 154,274 100 30 June 2017 compared to 31 December 2016 The SVR attrition of £2,537m in H117 was lower than the £3,464m in H116. Geographical distribution The Santander UK new business data in these tables cover H117 compared with FY16. The Council of Mortgage Lenders (CML) new business data for H117 covers the three months ended 31 March 2017. The percentages are calculated on a value-weighted basis. UK region 30 June 2017 31 December 2016 Santander UK CML Santander UK CML Stock % New business % New business % Stock % New business % New business % London 24 25 18 24 27 18 Midlands and East Anglia 13 14 17 13 13 17 North 15 12 17 15 12 17 Northern Ireland 2 1 1 2 1 1 Scotland 4 4 6 5 3 7 South East excluding London 31 34 29 30 34 28 South West, Wales and other 11 10 12 11 10 12 100 100 100 100 100 100 30 June 2017 compared to 31 December 2016 The average loan size for new business was broadly in line with 2016, at £198,000 (FY16: £198,000) for the UK overall, £263,000 (FY16: £264,000) for the South East including London and £146,000 (2016: £144,000) for the rest of the UK. The loan-to-income multiple of mortgage lending in H117 also increased slightly to 3.18 (FY16: 3.16). Loan-to-value analysis This table shows the LTV distribution for new business and mortgage asset stock. We used our estimate of the property's value at the balance sheet date. We have included fees added to the loan in the calculation. If the product is on flexible terms, the calculation only includes the drawn loan amount, not undrawn limits. LTV 30 June 2017 31 December 2016 New business % Stock % New business % Stock % Up to 50% 18 46 17 46 >50-75% 43 41 43 41 >75-85% 19 8 23 8 >85-100% 20 4 17 4 >100% - 1 - 1 Simple average(1) LTV (indexed) 63 43 65 43 (1) Unweighted average of LTV of all accounts. 30 June 2017 compared to 31 December 2016 In H117 the proportion of lending with an LTV of over 85% increased to 20% (2016: 17%) mainly due to the lower proportion of buy-to-let new business typically written at lower LTVs. At 30 June 2017, the parts of the loans in negative equity which were effectively uncollateralised before taking account of impairment loss allowances reduced to £259m (2016: £285m). Credit performance 30 June 2017 £m 31 December 2016 £m Mortgage loans and advances to customers of which: 154,139 154,274 Performing(1) 151,039 150,895 Early arrears: 1,164 1,269 - 31 to 60 days 721 793 - 61 to 90 days 443 476 NPLs: (2)(3) 1,936 2,110 - By arrears 1,464 1,578 - By bankruptcy 17 21 - By maturity default 296 316 - By forbearance 127 160 - By properties in possession (PIPs) 32 35 (1) Excludes mortgages where the customer did not pay for between 31 and 90 days, arrears, bankruptcy, maturity default, forbearance and PIPs NPLs. Includes £2,745m of mortgages (2016: £2,959m) where the customer did not pay for 30 days or less. (2) We define NPLs in the 'Credit risk management' section of the 2016 Annual Report. (3) All NPLs are in the UK and continue accruing interest. Forbearance(1) The balances at 30 June 2017 and 31 December 2016, analysed by their payment status at the period-end and the forbearance we applied, were: Capitalisation £m Term extension £m Interest-only £m Total £m Impairment loss allowances £m 30 June 2017 In arrears 266 71 187 524 21 Performing 424 208 453 1,085 6 690 279 640 1,609 27 Proportion of portfolio 0.4% 0.2% 0.4% 1.0% 31 December 2016 In arrears 293 78 226 597 24 Performing 466 222 481 1,169 7 759 300 707 1,766 31 Proportion of portfolio 0.5% 0.2% 0.4% 1.1% (1) We base forbearance type on the first forbearance on the accounts. Tables only show accounts that were open at the period-end. 30 June 2017 compared to 31 December 2016 At 30 June 2017, the total stock of forbearance reduced by 9% as a result of a continued improvement in arrears performance and favourable market conditions. Other changes in contract terms At 30 June 2017, there were £4.8bn (2016: £5.1bn) of other mortgages on the balance sheet that we have modified since January 2008. We agreed these modifications in order to maintain a good relationship with the customer. The customers were not showing any signs of financial difficulty at the time, so did not classify these changes as forbearance. We keep the performance and profile of the accounts under review. At 30 June 2017: - The average LTV was 34% (2016: 35%) and 95% (2016: 94%) of accounts had made their last six months' contractual payments - The proportion of accounts that were 90 days or more in arrears was 1.50% (2016: 1.57%). Portfolios of particular interest For a description of the types of mortgage that have higher risk or stand out for different reasons, see the 'Credit risk' section of the Risk review of the 2016 Annual Report. Portfolios of particular interest loans - credit performance Portfolio of particular interest(1) Total £m Interest-only £m Part interest-only, part repayment £m Flexible(2) £m LTV >100% £m Buy-to-let £m Other portfolio(3) £m 30 June 2017 Mortgage portfolio 154,139 40,174 14,160 15,851 1,690 6,923 92,834 Performing 151,039 38,771 13,734 15,504 1,500 6,891 91,820 Early arrears: - 31 to 60 days 721 320 96 56 26 8 295 - 61 to 90 days 443 202 59 41 20 6 177 NPLs 1,936 881 271 250 144 18 542 NPL ratio 1.26% 2.19% 1.91% 1.58% 8.52% 0.26% 0.58% PIPs 32 17 6 4 12 1 7 31 December 2016 Mortgage portfolio 154,274 41,707 14,535 16,853 1,873 6,648 90,570 Performing 150,895 40,185 14,066 16,472 1,661 6,621 89,483 Early arrears: - 31 to 60 days 793 360 111 71 33 7 314 - 61 to 90 days 476 224 70 45 22 2 191 NPLs 2,110 938 288 265 157 18 582 NPL ratio 1.37% 2.25% 1.98% 1.57% 8.38% 0.27% 0.64% PIPs 35 15 7 4 13 1 9 (1) Where a loan falls into more than one category, we have included it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the total mortgage portfolio. (2) Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product. (3) Includes other loans that are not in any segment of particular interest. 30 June 2017 compared to 31 December 2016 In H117, the value and proportion of interest-only loans together with part interest-only, part repayment loans reduced, reflecting our strategy to manage down the overall exposure to this lending profile. In addition the value and proportion of flexible mortgages also reduced as they are no longer offered on new mortgages. Portfolios of particular interest loans - forbearance The forbearance started in H117 was £161m (H116: £192m), which is in line with the overall reduction seen in flows into forbearance in H117. We keep the performance and profile of the accounts under review. BUSINESS BANKING, CONSUMER FINANCE AND OTHER UNSECURED LENDING In H117 business banking lending reduced slightly to £2.0bn (2016: £2.3bn), mainly due to the transfer of a number of business banking customers (associated balances of £0.2bn) to Commercial Banking, where their ongoing needs can be better served. This followed a periodic review in H117 and the year-end position has not been amended. The reduction contributed to an increase in the NPL ratio to 6.05% (2016: 4.70%). Consumer finance and other unsecured lending balances were broadly flat at £6.9bn (2016: £6.8bn) and £5.2bn (2016: £5.2bn) respectively, in part as a result of controlled management actions in an increasingly competitive environment. The NPL ratios for consumer finance and other unsecured lending balances were 0.48% (2016: 0.47%) and 1.67% (2016: 1.73%) respectively. In H117, we reclassified our provisions for residual value and voluntary termination from the consumer finance impairment loss allowance. The 31 December 2016 consumer finance impairment loss allowance of £146m and NPL coverage ratio of 456% were amended to £78m and 244% respectively. At 30 June 2017 forbearance across business banking, consumer finance and other unsecured lending increased by 6% to £179m (2016: £169m). OTHER SEGMENTS - CREDIT RISK REVIEW Other segments credit risk - committed exposures Rating distribution These tables show our credit risk exposure according to our internal rating scale (see 'Credit quality' in the 'Santander UK group level - credit risk review' section of the 2016 Annual Report) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty. 9 (AAA to AA-) 8 (A+ to A) 7 (A- to BBB+) 6 (BBB to BBB-) 5 (BB+ to BB-) 4 (B+ to B) 1 to 3 (B- to D) Other(1) Total £m £m £m £m £m £m £m £m £m 30 June 2017 Commercial Banking 1,301 1,782 492 9,254 6,862 3,800 594 87 24,172 Global Corporate Banking 1,968 6,092 10,203 9,906 4,824 70 66 - 33,129 Corporate Centre 36,389 3,607 1,059 452 194 63 21 451 42,236 31 December 2016 Commercial Banking 1,377 1,611 861 8,678 6,973 3,640 651 131 23,922 Global Corporate Banking 1,668 9,016 9,237 10,090 4,345 56 75 1 34,488 Corporate Centre 39,386 4,638 1,519 583 215 69 63 480 46,953 (1) Consists of smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model. Geographical distribution We classify geographical location according to country of risk - in other words, the country where each counterparty has its main business activity or assets unless there is a full risk transfer guarantee in place, in which case we use the guarantor's country of domicile instead. If our clients have operations in many countries, we use their country of incorporation. UK £m Peripheral eurozone £m Rest of Europe £m US £m Rest of World £m Total £m 30 June 2017 Commercial Banking 24,053 24 93 1 1 24,172 Global Corporate Banking 22,108 2,190 5,007 1,032 2,792 33,129 Corporate Centre 31,718 12 2,899 5,145 2,462 42,236 31 December 2016 Commercial Banking 23,782 18 65 57 - 23,922 Global Corporate Banking 22,407 2,374 4,254 1,248 4,205 34,488 Corporate Centre 36,173 5 3,105 4,933 2,737 46,953 Portfolio changes 30 June 2017 compared to 31 December 2016 Commercial Banking In H117, our committed exposures increased, with increased demand from medium sized corporate customers partially offset by active management of Commercial Real Estate exposures amid economic uncertainty: - Our SME and mid corporate exposures increased to £11.8bn (2016: £11.3bn) with growth seen across all portfolios. - Our Commercial Real Estate portfolio decreased to £9.3bn (2016: £9.5bn) reflecting the impact of our proactive management of exposures to certain segments, as well as slower market activity. - Our Social Housing portfolio remained stable at £3.1bn (2016: £3.1bn) as repayments offset new business and refinancing of longer-dated loans previously managed in Corporate Centre. Global Corporate Banking In H117, our committed exposures decreased, with growth in our Large Corporate portfolio more than offset by reductions in our Sovereign and Supranational and Financial Institutions portfolios: - Sovereign and Supranational exposures decreased to £4.2bn (2016: £5.1bn) driven by reduced holdings in Japanese Government securities as part of normal liquid asset portfolio management and short-term markets trading activity. The portfolio profile stayed mainly short-term (up to one year), reflecting the purpose of the holdings. As in 2016, our rest of world exposures principally comprised of Japan. - Large Corporate exposures increased to £22.0bn (2016: £21.5bn) driven by lending and origination activities relating to project and acquisition finance and transactional services, as well as new lending to a number of our trading corporate customers. At 30 June 2017, our direct lending committed exposure to oil and gas customers was £1.2bn (2016: £1.8bn) and to mining customers was £1.0bn (2016: £1.4bn). At 30 June 2017 credit quality remained broadly stable but reflected the downgrading of two customers with exposures of £0.6bn from rating band 8 to rating band 7. The portfolio profile stayed mainly short to medium-term (up to five years), reflecting the type of finance we typically provide to support our clients' needs. - Exposures in our Financial Institutions portfolio decreased to £6.9bn (2016: £7.9bn) due to a reduction in counterparty credit risk. Corporate Centre In H117, committed exposures decreased to £42.2bn (2016: £47.0bn), driven by our Sovereign and Supranational portfolio. Exposures in our Sovereign and Supranational portfolio are mainly cash at central banks and highly-rated liquid assets we hold as part of normal liquid asset portfolio management. The decrease in the overall exposure to £30.0bn (2016: £34.5bn) was driven by a reduction in UK deposits. Other segments - credit performance We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in 'Risk monitoring' in the 'Credit risk management' section of the 2016 Annual Report). The table below shows the exposures we monitor, and those we classify as non-performing by portfolio at 30 June 2017 and 31 December 2016: Committed exposure Observed impairment loss allowances £m Watchlist Performing £m Enhanced Monitoring £m Proactive Management £m Non-performing exposure(1) £m Total(2) £m 30 June 2017 Commercial Banking 22,215 1,077 509 371 24,172 165 Global Corporate Banking 31,775 1,209 59 86 33,129 41 Corporate Centre 42,174 23 13 26 42,236 16 Total observed impairment loss allowances 222 Allowance for IBNO(3) 89 Total impairment loss allowances 311 31 December 2016 Commercial Banking 21,810 1,192 380 540 23,922 183 Global Corporate Banking 33,486 861 72 69 34,488 33 Corporate Centre 46,687 184 9 73 46,953 31 Total observed impairment loss allowances 247 Allowance for IBNO(3) 91 Total impairment loss allowances 338 (1) Non-performing exposure includes committed facilities and derivative exposures. (2) Includes committed facilities and derivatives. We define 'Enhanced Monitoring' and 'Proactive Management' in the 'Risk monitoring' section of the 2016 Annual Report. (3) Allowance for IBNO losses as described in Note 1 to the Consolidated Financial Statements of the 2016 Annual Report. 30 June 2017 compared to 31 December 2016 Commercial Banking In our SME and mid corporate portfolio, exposures subject to enhanced monitoring reduced to £712m (2016: £892m), whilst exposures subject to proactive management increased to £425m (2016: £331m), primarily driven by the addition of a large trading customer. Non-performing exposures reduced to £286m (2016: £361m) due to successful exits on two larger cases. In our Commercial Real Estate portfolio, exposures subject to enhanced monitoring increased to £257m (2016: £161m) primarily due to our prudent policy for facilities approaching maturity where refinance is being finalised and exposures subject to proactive management increased to £84m (2016: £49m). Non-performing exposures reduced to £85m (2016: £179m) primarily driven by the full repayment of a loan of £50m that moved to non-performance in 2016. The portfolio remains well covered with an NPL coverage ratio of 63% and low write-offs of £7m. In our Social Housing portfolio, exposures subject to enhanced monitoring reduced to £108m (2016: £139m). Global Corporate Banking In our Large Corporate portfolio, exposures subject to enhanced monitoring remained stable at £656m (2016: £659m). Exposures subject to proactive management decreased to £58m (2016: £70m). Non-performing exposures increased to £86m (2016: £69m) due to the movement of a single exposure to non-performing. In our Financial Institutions portfolio, exposures subject to enhanced monitoring increased to £553m (2016: £202m) due to the redrawing of a secured loan transaction by an existing Watchlist customer. This loan is over-collateralised with high quality assets and is puttable on a quarterly basis. Corporate Centre In our Legacy Portfolios in run-off portfolio, non-performing exposures reduced to £26m (2016: £73m) driven by the sale of a shipping asset. In our Social Housing portfolio, there were no exposures subject to enhanced monitoring (2016: £164m) due to the resolution of governance issues that had impacted two customers. Other segments - forbearance We only make forbearance arrangements for lending to customers. Commercial Banking £m Global Corporate Banking £m Corporate Centre £m 30 June 2017 Stock(1) - Term extension 131 58 - - Interest-only 145 - 17 - Other payment rescheduling 146 10 14 422 68 31 Of which: - Non-performing 281 60 14 - Performing 141 8 17 422 68 31 Proportion of portfolio 1.7% 0.2% 2.8% 31 December 2016 Stock(1) - Term extension 168 11 1 - Interest-only 158 - 20 - Other payment rescheduling 208 10 16 534 21 37 Of which: - Non-performing 344 10 15 - Performing 190 11 22 534 21 37 Proportion of portfolio 2.2% 0.1% 2.7% (1) We base forbearance type on the first forbearance we applied. Tables only show accounts open at the period end. 30 June 2017 compared to 31 December 2016 Commercial Banking At 30 June 2017, the cumulative forbearance stock reduced to £422m (2016: £534m). This decrease was mainly due to the successful resolution of NPL cases in the period and one performing case exiting forbearance according to defined criteria. The accounts in forbearance as a percentage of the portfolio reduced to 1.7% (2016: 2.2%). At 30 June 2017, 78% (2016: 78%) of the cumulative forbearance stock had entered forbearance before default. Global Corporate Banking At 30 June 2017, there were three forborne cases totalling £68m (2016: two cases totalling £21m), of which £60m (2016: £10m) was classified as NPL. This increase in forbearance was driven from one deal that was classified as NPL in 2016. Corporate Centre At 30 June 2017 and 2016, we had only made forbearance arrangements for the Legacy Portfolios in run-off. At 30 June 2017, the cumulative forbearance stock in our Legacy Portfolios in run-off decreased slightly to £31m (2016: £37m). PORTFOLIOS OF PARTICULAR INTEREST Commercial Real Estate Commercial Real Estate - credit performance The table below shows the main Commercial Real Estate credit performance metrics at 30 June 2017 and 31 December 2016: Customer loans(1) NPLs(2) NPL ratio NPL coverage(3) Gross write-offs Impairment loss allowances £bn £m % % £m £m 30 June 2017 8.7 92 1.06 63 7 58 31 December 2016 9.0 180 2.00 32 1 58 (1) Comprises commercial real estate drawn loans in the business banking portfolio of our Retail Banking segment of £284m (2016: £365m) and in the Commercial Real Estate portfolio of our Commercial Banking segment of £8,457m (2016: £8,678m). (2) All NPLs continue accruing interest. (3) Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio can exceed 100%. 30 June 2017 compared to 31 December 2016 At 30 June 2017, our NPL ratio was 1.06% (2016: 2.00%) reflecting our conservative credit risk policy. The reduction in the ratio was driven by the full repayment of a £50m loan that had moved to non-performance in 2016, alongside other repayments and the write off of some smaller pre-2009 vintage cases. Commercial Real Estate loans written before 2009 totalled £468m (2016: £543m). The pre-2009 loans were written on market terms which, compared with more recent times and following a significant tightening in our lending criteria, included higher original LTVs, lower interest coverage and exposure to development risk. Commercial Real Estate - LTV analysis The tables below show LTVs (based on the drawn balance and our latest estimate of the property's current value) at 30 June 2017 and 31 December 2016: Loans and advances to customers 30 June 2017 31 December 2016 £m % £m % <=70% 7,702 88 7,886 88 >70-100% 89 1 194 2 >100% i.e. negative equity 41 - 88 1 Standardised portfolio(1) 687 8 652 7 Total with collateral 8,519 97 8,820 98 Development loans 222 3 223 2 8,741 100 9,043 100 (1) Consists of smaller value transactions, mainly commercial mortgages. Commercial Real Estate - sector analysis The table below shows the sector analysis of the portfolio at 30 June 2017 and 31 December 2016: Sector 30 June 2017 31 December 2016 £m % £m % Office 2,164 25 2,359 26 Retail 1,668 19 1,739 19 Industrial 1,276 15 1,274 14 Residential 1,012 11 1,016 11 Mixed use 1,196 14 1,184 13 Student accommodation 216 2 224 3 Hotels and leisure 353 4 389 5 Other 169 2 206 2 Standardised portfolio(1) 687 8 652 7 8,741 100 9,043 100 (1) Consists of smaller value transactions, mainly commercial mortgages. 30 June 2017 compared to 31 December 2016 The Commercial Real Estate portfolio of £8,741m (2016: £9,043m) is well diversified across sectors, with no significant regional or single name concentration, representing 31% (2016: 33%) of our total lending to corporates and 4% (2016: 4%) of total customer loans. At 30 June 2017, the LTV profile of the portfolio remained conservative with £7,702m (2016: £7,886m) of the non-standardised portfolio assets at or below 70% LTV. Loans with development risk were only 3% (2016: 2%) of the total Commercial Real Estate portfolio. Development lending is typically on a non-speculative basis with significant pre-lets in place and/or pre-sales in place. In H117, no new business was written above 70% LTV (H116: nil), and 83% (H116: 96%) was written at or below 60% LTV. At 30 June 2017, the average LTV of the non-standardised portfolio, weighted by exposure, was 49% (2016: 50%). The weighted average LTV of new deals, which excludes the standardised portfolio, in H117 was 50% (2016: 48%). The average loan balance at 30 June 2017 remains at £4.8m (2016: £4.8m). Commercial Real Estate - refinancing risk For Commercial Real Estate loans approaching maturity, we look at the prospects of refinancing the loan on current market terms and applicable credit policy. Where this seems unlikely we put the case on our Watchlist. At 30 June 2017, Commercial Real Estate loans of £1,340m (2016: £1,408m) were due to mature within 12 months. Of these, £51m, i.e. 4% (2016: £161m, i.e. 11%), had an LTV ratio higher than is acceptable under our current credit policy. At 30 June 2017, all of this (2016: £149m) had been put on our Watchlist or recorded as NPL and had an impairment loss allowance of £24m (2016: £31m). Market risk Overview Market risk management In H117, there were no significant changes in the way we manage market risk as described in the 2016 Annual Report. Market risk review In this section we analyse our key trading and banking market risk metrics. Key metrics - NIM sensitivity to +50bps was £241m and to -50bps was £(114)m (2016: £240m and £(82)m) - Economic Value of Equity (EVE) sensitivity to +50bps was £159m and to -50bps was £(270)m (2016: £54m and £(30)m) Trading market risk review VaR This table shows our Internal VaR for exposure to each of the main classes of risk at 30 June 2017 and 31 December 2016. The VaR figures show how much the fair values of all our tradeable instruments could have changed. Since trading instruments are recorded at fair value, these are also the amounts by which they could have increased or reduced our net income. Trading instruments Period-end exposure Average exposure Highest exposure Lowest exposure 30 June 2017 £m 31 December 2016 £m 30 June 2017 £m 31 December 2016 £m 30 June 2017 £m 31 December 2016 £m 30 June 2017 £m 31 December 2016 £m Interest rate risks(1) 3.4 2.9 2.3 2.5 3.4 3.6 1.8 1.7 Equity risks(2) 0.4 1.4 1.0 0.9 2.0 1.5 0.2 0.6 Credit (spread) risks(3) - - - - - - - - Foreign exchange risks 0.2 1.5 0.6 1.4 1.6 2.2 - 0.1 Correlation offsets(4) (0.7) (2.3) (1.2) (2.0) - - - - Total correlated one-day VaR 3.3 3.5 2.7 2.8 3.7 3.6 2.0 1.7 (1) This measures the effect of changes in interest rates and how volatile they are. The effects are on cash instruments, securities and derivatives. This includes swap spread risk (the difference between swap rates and government bond rates), basis risk (changes in interest rate tenor basis) and inflation risk (changes in inflation rates). (2) This measures the effect of changes in equity prices, volatility and dividends on stock and derivatives. (3) This measures the effect of changes in the credit spread of corporate bonds and credit derivatives. (4) The highest and lowest exposures for each risk type did not necessarily happen on the same day as the highest and lowest total correlated one-day VaR. It is impossible to calculate a corresponding correlation offset effect, so we have not included it in the table. BANKING market risk review Interest rate risk Yield curve risk The table below shows how our base case income and valuation would be affected by a 50 basis point parallel shift (both upwards and downwards) applied instantaneously to the yield curve at 30 June 2017 and 31 December 2016. 30 June 2017 31 December 2016 +50bps £m -50bps £m +50bps £m -50bps £m NIM sensitivity 241 (114) 240 (82) EVE sensitivity 159 (270) 54 (30) 30 June 2017 compared to 31 December 2016 There was no significant change in the underlying risk position in H117. The movement in NIM and EVE sensitivities in H117 was largely due to changes in our underlying models used for risk measurement purposes. The models have been updated to better reflect the risks inherent in the current low interest rate environment, including the possibility of negative interest rates in the UK. Liquidity risk Overview Liquidity risk management In H117, there were no significant changes in the way we manage liquidity risk as described in the 2016 Annual Report. Liquidity risk review In this section we analyse our Liquidity Coverage Ratio (LCR) and our wholesale funding profile. We also provide details on asset encumbrance. Key metrics - LCR was 133% (2016: 139%) - LCR eligible liquidity pool was £50.1bn (2016: £50.7bn) on a carrying value basis liquidity risk review Liquidity Coverage Ratio and eligible liquidity pool This table shows our LCR, and Liquidity Risk Appetite (LRA) reflecting the stress testing methodology in place at that time. LCR LRA(1) 30 June 2017 £bn 31 December 2016 £bn 30 June 2017 £bn 31 December 2016 £bn Eligible liquidity pool (liquidity value) 48.5 50.1 44.4 45.2 Net stress outflows (36.5) (36.0) (27.4) (27.3) Surplus 12.0 14.1 17.0 17.9 Eligible liquidity pool as a percentage of anticipated net cash flows 133% 139% 162% 166% (1) The LRA is a two-month Santander UK specific requirement. At 30 June 2017, the value of the assets in our LCR eligible liquidity pool was £50.1bn (2016: £50.7bn) on a carrying value and £48.5bn (2016: £50.1bn) on a liquidity value. 30 June 2017 compared to 31 December 2016 Our LCR was 133% (2016: 139%), reflecting prudent liquidity planning, partially offset by the EU adoption of Regulatory Technical Standards for assessing additional collateral outflows on derivative contracts. Our LCR eligible liquidity pool significantly exceeded wholesale funding of less than one year, with a coverage ratio of 269% at 30 June 2017 (2016: 237%). Under our current interpretation, the NSFR stayed above 100% throughout H117 and FY16. OUR Funding strategy and structure Deposit funding Our Retail Banking and Commercial Banking activities are mostly funded by customer deposits. The rest is funded through wholesale markets. Wholesale funding Maturity profile of wholesale funding This table shows our main sources of wholesale funding. It does not include securities financing repurchase and reverse repurchase agreements. The table is based on exchange rates at issue and scheduled repayments. It does not reflect the final contractual maturity of the funding. <=1 month >1 and <=3 months >3 and <= 6 months >6 and <=9 months >9 and <=12 months Sub-total <=1 year >1 and <=2 years >2 and <=5 years >5 years Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn 30 June 2017 Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1) Senior unsecured - public benchmark - - - - - - - 3.8 1.5 5.3 Senior unsecured - privately placed - - - - - - - - 0.1 0.1 Subordinated liabilities and equity (inc. AT1) - - - - - - 0.5 1.1 1.5 3.1 - - - - - - 0.5 4.9 3.1 8.5 Other Santander UK plc Deposits by banks - 0.1 0.2 - - 0.3 - - - 0.3 Senior unsecured - public benchmark - 0.9 - 0.8 - 1.7 3.7 4.8 1.4 11.6 Senior unsecured - privately placed - 0.4 0.2 0.6 - 1.2 0.9 0.5 0.2 2.8 Covered bonds - - 1.5 0.9 0.9 3.3 - 7.8 3.3 14.4 Securitisation and structured issuance(2) 1.4 - 0.9 - 0.4 2.7 1.3 1.0 - 5.0 Term Funding Scheme - - - - - - - 7.5 - 7.5 Subordinated liabilities - - - 0.1 - 0.1 0.1 - 2.4 2.6 1.4 1.4 2.8 2.4 1.3 9.3 6.0 21.6 7.3 44.2 Other group entities Deposits by banks 0.7 0.4 - - - 1.1 - - - 1.1 Certificates of deposit and commercial paper 2.2 3.0 1.5 0.6 0.3 7.6 - - - 7.6 Senior unsecured - privately placed - - - - - - 0.1 0.5 0.4 1.0 Securitisation and structured issuance(3) 0.1 0.1 0.2 0.1 0.1 0.6 0.7 0.3 - 1.6 3.0 3.5 1.7 0.7 0.4 9.3 0.8 0.8 0.4 11.3 Total at 30 June 2017 4.4 4.9 4.5 3.1 1.7 18.6 7.3 27.3 10.8 64.0 Of which: - secured 1.5 0.1 2.6 1.0 1.4 6.6 2.0 16.6 3.3 28.5 Of which: - unsecured 2.9 4.8 1.9 2.1 0.3 12.0 5.3 10.7 7.5 35.5 Total at 31 December 2016 6.5 4.6 3.4 3.8 3.1 21.4 7.0 24.0 12.8 65.2 Of which: - secured 2.1 0.6 2.1 1.6 2.5 8.9 4.0 11.7 4.7 29.3 Of which: - unsecured 4.4 4.0 1.3 2.2 0.6 12.5 3.0 12.3 8.1 35.9 (1) Currently all our senior debt issued out of Santander UK Group Holdings plc is downstreamed into Santander UK plc on an equivalent rankings basis (e.g. senior unsecured is downstreamed as senior unsecured, subordinated capital instruments are downstreamed as subordinated capital instruments, etc.). However, under the end-state MREL / TLAC regime, senior unsecured debt issued out of Santander UK Group Holdings plc will be downstreamed in a form that is subordinated to senior unsecured debt, but senior to subordinated capital instruments issued out of Santander UK plc. (2) This includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator. (3) This includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator. Term issuance In H117, our external term issuance (sterling equivalent) was: Sterling £bn US Dollar £bn Euro £bn Other £bn Total H117 £bn Total H116 £bn Downstreamed from Santander UK Group Holdings plc to Santander UK plc Senior unsecured - public benchmark - 0.8 0.4 - 1.2 1.2 Senior unsecured - privately placed - - - 0.1 0.1 - Subordinated debt and equity (including AT1 issuance) 0.5 - - - 0.5 - 0.5 0.8 0.4 0.1 1.8 1.2 Other Santander UK plc Securitisations - - - - - 0.6 Covered bonds 1.0 - - - 1.0 - Term Funding Scheme 3.0 - - - 3.0 - 4.0 - - - 4.0 0.6 Other group entities Securitisations - - - - - 0.5 Covered bonds - - - - - 0.8 Senior unsecured - public benchmark - - - - - 1.4 Senior unsecured - privately placed 0.1 - - - 0.1 1.0 0.1 - - - 0.1 3.7 Total gross issuances 4.6 0.8 0.4 0.1 5.9 5.5 H117 presented a positive market environment for issuance despite the continuing backdrop of global geo-political tensions and other political issues causing intermittent volatility. Any concerns around events such as the French and UK elections and Brexit negotiations were quickly shrugged off by the market. Equities proved resilient and remained high, the Bank of England and the European Central Bank kept their broader monetary policy unchanged and we continued to see robust performance of credit markets across the capital structure. In April 2017 we took advantage of the strong market appetite for higher risk products and issued £500m of Perpetual Capital Securities to our immediate parent. In H117, our total term funding was £5.9bn (H116: £5.5bn), of which £2.4bn (H116: £5.5bn) was medium-term issuance, and maturities were £6.3bn (H116: £5.5bn). We drew down a further £3.0bn from the Term Funding Scheme in the period, with a total drawdown outstanding of £7.5bn (2016: £4.5bn). At 30 June 2017 the total drawdowns of UK Treasury Bills under the Funding for Lending Scheme remained at £3.2bn (2016: £3.2bn). At 30 June 2017, 71% (2016: 67%) of wholesale funding had a maturity over one year, with an overall residual duration of 42 months (2016: 41 months). Encumbrance Encumbrance of customer loans and advances We have issued prime retail mortgage-backed and other asset-backed securitised products to a diverse investor base through our mortgage-backed and other asset-backed funding programmes. For more on this, see Notes 11 and 19 to the Condensed Consolidated Interim Financial Statements. We have raised funding with mortgage-backed notes, both issued to third parties and retained (the latter being central bank eligible collateral for funding purposes in other Bank of England facilities), and other asset-backed notes. We also have a covered bond programme. Under this, we issue securities to investors secured by a pool of residential mortgages. 30 June 2017 compared to 31 December 2016 Our level of encumbrance from external and internal issuance of securitisations and covered bonds decreased in H117 as planned. This reflected greater maturities than new issues in the period. We expect our overall level of encumbrance to continue to decrease in H217. Credit ratings Independent credit rating agencies review our creditworthiness. They base their work on a wide range of business and financial attributes. These include risk management, capital strength, earnings, funding, liquidity, accounting and governance. Senior unsecured Outlook Short-term Stand alone 30 June 2017 Standard & Poor's A Negative A-1 bbb+ Moody's Aa3 Negative P-1 a3 Fitch A Stable F-1 baa1 30 June 2017 compared to 31 December 2016 Standard & Poor's affirmed our long and short-term ratings and maintained a negative outlook for various UK banks due to continued economic uncertainty. Fitch also affirmed our long-term credit rating, with the outlook changed to stable from positive, as a result of the weaker prospects for the banking sector following the results of the UK referendum on EU membership. There was no rating agency action by Moody's in H117. Capital risk Overview Capital risk management In H117, there were no significant changes in the way we manage capital risk as described in the 2016 Annual Report. The scope of our capital adequacy We set out below a brief update on emerging regulation. Capital risk review We then analyse our capital resources and key capital ratios. Key metrics - CET1 capital ratio was 12.1% (2016: 11.6%) - Total capital resources were £ 17.1bn (2016: £16.2bn) THE SCOPE OF OUR CAPITAL ADEQUACY Regulatory supervision 30 June 2017 compared to 31 December 2016 In March 2017, the Bank of England confirmed Santander UK's non-binding Minimum Requirements for Eligible Liabilities (MREL). The indicative requirements (excluding any CET1 combined buffer requirements) equate to 6% of leverage exposures from 1 January 2019, 20.9% of RWAs from 1 January 2020 and 25.9% of RWAs from 1 January 2022. These requirements are in line with our expectations, and may change at the end of the transitional period. We plan to meet the MREL largely through the issuance of senior unsecured debt from our holding company. This debt will then be downstreamed to the operating company in a compliant form. We have made good progress, with £5.6bn of senior unsecured debt issued from our holding company to date (H117: £1.3bn). In June 2017, the FPC increased the UK countercyclical capital buffer from 0% to 0.5%, with binding effect from 27 June 2018. The FPC also expects to increase the buffer to 1% at its meeting in November 2017, with a 12 month implementation period absent any material change in the macroeconomic outlook. CAPITAL RISK REVIEW Capital resources Key capital ratios The tables below are consistent with our regulatory filings for 30 June 2017 and 31 December 2016. Our key capital ratios were: 30 June 2017 % 31 December 2016 % CET1 capital ratio 12.1 11.6 AT1 2.3 1.8 Grandfathered Tier 1 0.9 0.8 Tier 2 4.3 4.3 Total capital ratio 19.6 18.5 The total subordination available to Santander UK plc bondholders was 19.6% (2016: 18.5%) of RWAs. 30 June 2017 compared to 31 December 2016 We complied with the PRA's capital adequacy rules throughout H117 and FY16. The CET1 capital ratio of 12.1% (2016: 11.6%) improved by 50bps in H117, with stable profit and lower RWAs, which fell by £0.4bn to £87.2bn (2016: £87.6bn). The UK leverage ratio increased by 30bps to 4.4% (2016: 4.1%), with higher CET1 capital and the issuance of £500m of Perpetual Capital Securities that were priced in March 2017 with the transaction settling in April 2017. Our total capital ratio increased to 19.6% at 30 June 2017 (2016: 18.5%), which also reflected the impact of higher CET1 capital and the Perpetual Capital Securities issuance. These were partially offset by the transitional reduction in the recognition of Tier 1 and Tier 2 capital instruments issued by Santander UK plc under the CRD IV Minority Interest rules, which are being phased in at 20% increments over a five year period. Regulatory capital resources The table below is consistent with our regulatory filings for 30 June 2017 and 31 December 2016. We manage our capital on a CRD IV basis. During H117 and FY16, we held capital over and above our regulatory requirements, and managed internal capital allocations and targets in accordance with our capital and risk management policies. Analysis of regulatory capital This table provides an analysis of our regulatory capital. 30 June 2017 31 December 2016 £m £m CET1 capital before regulatory adjustments 14,586 14,285 Total regulatory adjustments to CET1 (3,999) (4,084) CET1 capital 10,587 10,201 AT1 capital 2,744 2,271 Tier 1 capital 13,331 12,472 Tier 2 capital 3,741 3,772 Total regulatory capital 17,072 16,244 Other key risks Overview Other key risks In H117, there were no significant changes in the way we manage and monitor other key risks, as described in the 2016 Annual Report, except as set out below. In this section, we discuss pension risk, conduct risk, operational risk and financial crime risk. Key metrics - Pension Deficit at Risk was £1,460m (2016: £1,688m) - - PPI provision was £405m (2016: £457m) Operational risk losses were £40m in H117 (H116: £40m) PENSION RISK 30 June 2017 compared to 31 December 2016 Risk monitoring and measurement The funding Deficit at Risk decreased to £1,460m (2016: £1,688m). In H117 the Scheme implemented additional equity hedging as a part of a review of the corporate trustee investment strategy. At 30 June 2017, the interest rate hedging ratio on a funding basis was 55% (2016: 56%) and on an accounting basis was 70% (2016: 72%). The inflation rate hedging ratio of the Scheme on a funding basis was 61% (2016: 62%) and on an accounting basis was 93% (2016: 94%). We continue to focus on achieving the right balance between risk and reward. In H117, overall asset returns were marginally positive. Our long-term objective is to reduce the risk of the Scheme and eliminate the deficit on a funding valuation basis. Triennial funding valuation The 31 March 2016 triennial funding valuation was concluded in early 2017. Santander UK plc has committed to continue to fund the Scheme at the current rate with the recovery plan extended for a further three years. In addition Santander UK plc has committed to make contingent contributions if the investment performance is lower than expected. Accounting position During H117, the accounting surplus of the Scheme and other funded arrangements increased to £319m (2016: £175m). In addition, there were unfunded defined benefit scheme liabilities of £39m at 30 June 2017 (2016: £39m). The improvement in the overall position was due to a decrease in liabilities caused mainly by a fall in implied inflation which reduced the value of future pension payments, together with ongoing deficit contributions and positive asset performance. This was partially offset by a fall in corporate bond yields, reducing the rate used to discount future pension obligations. For more on our pension obligations, including the current asset allocation, see Note 16 to the Condensed Consolidated Interim Financial Statements. CONDUCT RISK 30 June 2017 compared to 31 December 2016 In H117 we continued to build on progress made in 2016. This included: - Assessing views and new policy areas set out in the FCA's Business Plan and Mission Statement and building these into our business planning, controls and oversight activities - Improving our framework and guidance for how we support vulnerable customers, including ageing customers - Enhancing management information to help us identify forward-looking risks earlier and analysing internal and external developments to capture lessons learnt - Carrying out face to face training in addition to mandatory modules to aid colleagues on topical areas of conduct risk - Creating a new conduct and compliance centre of excellence within our legal and regulatory division - Refining and improving our product approval process. On an ongoing basis, our conduct risk dashboards provide a granular view of how our products and services are performing for customers. They continue to help senior management oversee and measure conduct risk across the business and to take action where necessary. Our business units continue to assess the potential customer, client and market impacts of structural reform as part of our ring-fencing programme. PPI provisions The remaining provision for PPI redress and related costs amounted to £405m (2016: £457m). In Q117, we made an additional provision of £32m relating to the final FCA rules and guidance published in March 2017. We also provided a net charge of £37m in Q217, following a review of claims handling procedures in relation to a specific PPI portfolio including the impact of a past business review. In line with our assumptions, monthly utilisation increased from the 2016 average following the confirmation of a deadline for customer complaints. We will continue to monitor our provision levels in respect of recent claims experience. Other conduct provisions The remaining non-PPI related conduct provisions amounted to £51m including an additional provision of £35m in Q217, relating to the sale of interest rate derivatives. This charge follows an ongoing review regarding regulatory classification of certain customers eligible for redress. For more on our provision for conduct remediation, including sensitivities, see Note 15 to the Condensed Consolidated Interim Financial Statements. We explain more about these sensitivities in 'Critical accounting policies and areas of significant management judgement' in Note 1 to the Consolidated Financial Statements in the 2016 Annual Report. OPERATIONAL RISK 30 June 2017 compared to 31 December 2016 Operational losses In H117 operational losses for reportable events with an impact greater than £10,000, and excluding conduct risk events, totalled £40m (H116: £40m). Losses relating to 'Execution, delivery, and process management' include historic systems functionality and process issues. Consistent with industry experience, we continued to see a high volume of low value events in the 'External fraud' category which primarily related to card and online payment fraud. Operational Risk Transformation Programme We have made a number of operational risk enhancements as part of a final year of investment to embed the programme into business as usual. Our focus in H217 is to demonstrate effective operational risk management to the regulators. Cyber security In H117, in common with other large UK financial institutions and other organisations, we continued to be subject to cyber-attacks but have suffered no significant events. We are continually improving our systems, processes, controls and staff training to reduce cyber risk and to help protect our customers, systems and information. Our Cyber Resilience Programme operates with a layered defence approach, continually evolving and adapting to cyber threats. We have increased our resources and are leveraging connections with Banco Santander's Cyber Security Operations Centre. Together with our world-class data centres, this provides us with a solid foundation to enable our digital transformation and support future growth within an environment of improved cyber resilience and with a reduction in legacy technology issues. For more on this, see the case study on cyber security in the 'Risk review' section within the 2016 Annual Report. Scams We are very sympathetic to customers who are victims of fraud and welcome all initiatives by the industry and the media to help raise awareness of this important issue. We invest substantial resources to protect customers and in trying to prevent fraud. Our dedicated fraud experts work to identify, prevent and detect scams, warn and notify customers, and use robust technology in our customer protection systems. We continually invest in the fight to counter increasingly sophisticated scams, we run an ongoing customer education campaign and we offer tips and advice on our online security centre - www.santander.co.uk/securitycentre. Our efforts are successful in preventing the vast majority of fraud and protecting customers' money. FINANCIAL CRIME risk 30 June 2017 compared to 31 December 2016 In H117, we continued to implement our Financial Crime Transformation Programme and to address the requirements of new regulation, including the fourth money laundering directive. This was specifically around the following: - Governance: we simplified governance by consolidating the financial crime forums for Commercial Banking and Global Corporate Banking. We also continued to raise the profile of financial crime through continued briefings to management and Board committees - Systems and controls: we enhanced our payment screening to align it to the new EU Funds Transfer Regulation 2, and we introduced an Executive Committee sponsored programme to accelerate key control improvements across Commercial Banking and Global Corporate Banking - Policies: we introduced new AML and sanctions policies and standards, reflecting new laws and regulations, and we began to implement the changes. We also launched an updated anti-bribery and corruption action plan - Training, culture and awareness: we developed and approved an enhanced financial crime training strategy, with a strong focus on anti-financial crime culture, improved management information and anti-bribery and corruption. It contains modules to address the needs of high priority financial crime functions and specific business areas (anti-bribery and corruption, trade finance and sanctions compliance). We have also designed financial crime awareness events for implementation in early H217. - Operations: we continued to enhance our intelligence and risk assessment capabilities including further investment in our Financial Intelligence Unit and improved country risk assessment. We also continued to improve our partnership with public authorities such as through the Joint Money Laundering Intelligence Task Force. - Resources: we remain focused on ensuring we have the right number and quality of resources supporting our financial crime initiatives. Financial statements 33 Independent review report 34 Primary financial statements 34 Consolidated Income Statement 34 Consolidated Statement of Comprehensive Income 35 Consolidated Balance Sheet 36 Consolidated Cash Flow Statement 37 Consolidated Statement of Changes in Equity 38 Notes to the financial statements Independent review report to Santander UK plc Report on the Condensed Consolidated Interim Financial Statements Our conclusion We have reviewed Santander UK plc's condensed consolidated interim financial statements (the "interim financial statements") in the Half Yearly Financial Report of Santander UK plc for the 6 month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. What we have reviewed The interim financial statements comprise: - · the consolidated balance sheet as at 30 June 2017; - · the consolidated income statement and consolidated statement of comprehensive income for the period then ended; - · the consolidated cash flow statement for the period then ended; - · the consolidated statement of changes in equity for the period then ended; and - · the explanatory notes to the interim financial statements. The interim financial statements included in the Half Yearly Financial Report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Responsibilities for the Condensed Consolidated Interim Financial Statements and the review Our responsibilities and those of the directors The Half Yearly Financial Report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half Yearly Financial Report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. Our responsibility is to express a conclusion on the interim financial statements in the Half Yearly Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What a review of the Condensed Consolidated Interim Financial Statements involves We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. We have read the other information contained in the Half Yearly Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements. PricewaterhouseCoopers LLP Chartered Accountants London 13 September 2017 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT (unaudited) For the half year to 30 June 2017 and the half year to 30 June 2016 Notes Half year to 30 June 2017 £m Half year to 30 June 2016 £m Interest and similar income 2,977 3,301 Interest expense and similar charges (1,055) (1,528) Net interest income 1,922 1,773 Fee and commission income 609 578 Fee and commission expense (200) (197) Net fee and commission income 409 381 Net trading and other income 3 182 290 Total operating income 2,513 2,444 Operating expenses before impairment losses, provisions and charges 4 (1,215) (1,205) Impairment losses on loans and advances 5 (48) (63) Provisions for other liabilities and charges 5 (186) (97) Total operating impairment losses, provisions and charges (234) (160) Profit before tax 1,064 1,079 Tax on profit 6 (323) (307) Profit after tax for the period 741 772 Attributable to: Equity holders of the parent 730 756 Non-controlling interests 11 16 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited) For the half year to 30 June 2017 and the half year to 30 June 2016 Half year to 30 June 2017 £m Half year to 30 June 2016 £m Profit for the period 741 772 Other comprehensive income: Other comprehensive income that may be reclassified to profit or loss subsequently: Available-for-sale securities: - Change in fair value 72 (3) - Income statement transfers (48) (115) - Taxation (5) 17 19 (101) Cash flow hedges: - Effective portion of changes in fair value (48) 3,761 - Income statement transfers (124) (2,994) - Taxation 48 (205) (124) 562 Currency translation on foreign operations - (3) Net other comprehensive income that may be reclassified to profit or loss subsequently (105) 458 Other comprehensive income that will not be reclassified to profit or loss subsequently: Pension remeasurement 79 (489) Taxation (20) 126 59 (363) Own credit adjustment: - Transfers (23) - - Taxation 6 - (17) - Net other comprehensive income that will not be reclassified to profit or loss subsequently 42 (363) Total other comprehensive income for the period net of tax (63) 95 Total comprehensive income for the period 678 867 Attributable to: Equity holders of the parent 666 856 Non-controlling interests 12 11 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (unaudited) At 30 June 2017 and 31 December 2016 Notes 30 June 2017 £m 31 December 2016 £m Assets Cash and balances at central banks 18,255 17,107 Trading assets 8 34,423 30,035 Derivative financial instruments 9 21,611 25,471 Financial assets designated at fair value 2,161 2,140 Loans and advances to banks 4,404 4,348 Loans and advances to customers 10 199,799 199,738 Loans and receivables securities 1,424 257 Available-for-sale securities 9,574 10,561 Held-to-maturity investments 6,613 6,648 Macro hedge of interest rate risk 914 1,098 Interests in other entities 12 66 61 Intangible assets 2,334 2,316 Property, plant and equipment 1,508 1,491 Retirement benefit assets 16 500 398 Other assets 1,335 1,473 Total assets 304,921 303,142 Liabilities Deposits by banks 11,890 9,769 Deposits by customers 181,189 177,172 Trading liabilities 13 21,490 15,560 Derivative financial instruments 9 18,488 23,103 Financial liabilities designated at fair value 2,976 2,440 Debt securities in issue 14 43,997 50,346 Subordinated liabilities 4,109 4,303 Macro hedge of interest rate risk 281 350 Other liabilities 2,590 2,871 Provisions 15 595 700 Current tax liabilities 72 54 Deferred tax liabilities 143 128 Retirement benefit obligations 220 262 Total liabilities 288,040 287,058 Equity Share capital and other equity instruments 18 5,400 4,904 Share premium 5,620 5,620 Retained earnings 5,280 4,886 Other reserves 419 524 Total shareholders' equity 16,719 15,934 Non-controlling interests 162 150 Total equity 16,881 16,084 Total liabilities and equity 304,921 303,142 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS CONSOLIDATED CASH FLOW STATEMENT (unaudited) For the half year to 30 June 2017 and the half year to 30 June 2016 Notes Half year to 30 June 2017 £m Half year to 30 June 2016 £m Cash flows from operating activities Profit for the period 741 772 Adjustments for: Non-cash items included in profit 678 (31) Change in operating assets (1,445) (15,075) Change in operating liabilities 5,442 14,099 Corporation taxes paid (233) (165) Effects of exchange rate differences (132) 2,211 Net cash flows from operating activities 5,051 1,811 Cash flows from investing activities Purchase of property, plant and equipment and intangible assets (217) (128) Proceeds from sale of property, plant and equipment and intangible assets 24 44 Purchase of available-for-sale securities (419) (1,664) Proceeds from sale and redemption of available-for-sale securities 1,186 1,634 Net cash flows from investing activities 574 (114) Cash flows from financing activities Issue of AT1 capital securities 18 500 - Issuance costs of AT1 capital securities (4) - Issue of debt securities 2,237 4,585 Issuance costs of debt securities (9) (9) Repayment of debt securities (6,418) (5,082) Repurchase of other equity instruments - (7) Dividends paid on ordinary shares 7 (276) (102) Dividends paid on other equity instruments 7 (80) (73) Net cash flows from financing activities (4,050) (688) Change in cash and cash equivalents 1,575 1,009 Cash and cash equivalents at beginning of the period 25,705 20,351 Effects of exchange rate changes on cash and cash equivalents (254) 994 Cash and cash equivalents at the end of the period 27,026 22,354 Cash and cash equivalents consist of: 30 June 2017 £m 30 June 2016 £m Cash and balances at central banks 18,255 14,862 Less: regulatory minimum cash balances (380) (344) 17,875 14,518 Net trading other cash equivalents 6,775 5,440 Net non-trading other cash equivalents 2,376 2,396 Cash and cash equivalents 27,026 22,354 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited) For the half year to 30 June 2017 and the half year to 30 June 2016 Share capital & Other reserves Non- Notes other equity instruments £m Share premium £m Available-for-sale £m Cash flow hedging £m Currency translation £m Retained earnings £m Total £m controlling interests £m Total £m 1 January 2017 4,904 5,620 48 471 5 4,886(1) 15,934 150 16,084 Profit for the period - - - - - 730 730 11 741 Other comprehensive income, net of tax: - Available-for-sale securities - - 19 - - - 19 - 19 - Cash flow hedges - - - (124) - - (124) - (124) - Pension remeasurement 16 - - - - - 58 58 1 59 - Own credit adjustment - - - - - (17) (17) - (17) Total comprehensive income for the period - - 19 (124) - 771 666 12 678 Issue of AT1 capital securities 18 496 - - - - - 496 - 496 Dividends on ordinary shares 7 - - - - - (323) (323) - (323) Dividends on other equity instruments 7 - - - - - (80) (80) - (80) Tax on other equity instruments 18 - - - - - 26 26 - 26 30 June 2017 5,400 5,620 67 347 5 5,280 16,719 162 16,881 1 January 2016 4,911 5,620 52 254 8 4,679 15,524 135 15,659 Profit for the period - - - - - 756 756 16 772 Other comprehensive income, net of tax: - Available-for-sale securities - - (101) - - - (101) - (101) - Cash flow hedges - - - 562 - - 562 - 562 - Pension remeasurement 16 - - - - - (358) (358) (5) (363) - Currency translation on foreign operations - - - - (3) - (3) - (3) Total comprehensive income for the period - - (101) 562 (3) 398 856 11 867 Repurchase of other equity instruments 18 (7) - - - - - (7) - (7) Dividends on ordinary shares 7 - - - - - (317) (317) - (317) Dividends on other equity instruments 7 - - - - - (73) (73) - (73) Tax on other equity instruments 18 - - - - - 15 15 - 15 30 June 2016 4,904 5,620 (49) 816 5 4,702 15,998 146 16,144 (1) The impact of the early adoption of IFRS 9 requirements for the presentation of gains and losses on such financial liabilities relating to own credit in other comprehensive income as described in Note 1, was £18m (net of tax). 1. ACCOUNTING POLICIES Basis of preparation The financial information in these Condensed Consolidated Interim Financial Statements does not constitute statutory accounts as defined in section 434 of the UK Companies Act 2006. Statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) of the UK Companies Act 2006. The Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting', as issued by the International Accounting Standards Board (IASB) and adopted by the European Union, and the Disclosure Guidance and Transparency Rules of the 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 the Santander UK group for the year ended 31 December 2016 which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union. Those Consolidated Financial Statements were also prepared in accordance with International Financial Reporting Standards as issued by the IASB including interpretations issued by the IFRS Interpretations Committee (IFRIC) of the IASB (together IFRS). The Santander UK group has also complied with its legal obligation to comply with International Financial Reporting Standards as adopted by the European Union as there are no applicable differences between the two frameworks for the periods presented. In preparing the Condensed Consolidated Interim Financial Statements management makes judgements, estimates and assumptions which impact the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Because of the inherent uncertainty in making estimates, actual results reported in future periods may differ. Management continually evaluates the judgements, estimates and assumptions applied, including expectations of future events that are believed to be reasonable under the circumstances. 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 the Santander UK group's 2016 Annual Report. Copies of the Santander UK group's 2016 Annual Report are available on the Santander UK group's website or upon request from Investor Relations, Santander UK plc, 2 Triton Square, Regent's Place, London NW1 3AN. The Santander UK group designates certain financial liabilities at fair value through profit or loss where they contain embedded derivatives or where associated derivatives used to economically hedge the risk are held at fair value. Following the endorsement of IFRS 9 'Financial Instruments' by the EU in December 2016, the Santander UK group has elected to early apply from 1 January 2017 the requirements for the presentation of gains and losses on such financial liabilities relating to own credit in other comprehensive income without applying the other requirements in IFRS 9. The own credit component of the cumulative fair value adjustment on financial liabilities designated at fair value through profit or loss as at 1 January 2017 was £18m (net of tax) and is included in opening retained earnings. Comparatives have not been restated. Except as noted below, there have been no other significant changes arising from new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective for the Santander UK group as were set out in the 2016 Annual Report. Future accounting developments IFRS 9 Financial Instruments - In the 2016 Annual Report, Santander UK provided detailed descriptions and explanations on how key IFRS 9 concepts will be implemented and included details of our proposed approaches for classification and measurement of financial assets and liabilities and hedge accounting and, in respect of the expected credit loss (ECL) methodology, proposed modelling techniques, judgements, and proposals for the incorporation of forward-looking information and the determination of a significant increase in credit risk. Santander UK continues to make progress on developing and testing our ECL impairment models across the range of in-scope portfolios and formalising the governance framework to support the new operating model. A parallel-run will take place during H217 to provide assurances on the accuracy and completeness of the modelling process, whilst we implement the new operating model to ensure we can meet our range of disclosures relating to IFRS 9. We are also finalising the determination of the classification and measurement of financial assets. We expect to continue to apply IAS 39 hedge accounting until such time as further changes for macro hedge accounting rules are applicable. It is not yet practicable to quantify the effect of IFRS 9 on these Condensed Consolidated Interim Financial Statements. Santander UK group expects to quantify the effect of IFRS 9 during H217 and by no later than the end of the year. IFRS 15 Revenue from Contracts with Customers - In the 2016 Annual Report, Santander UK explained that revenue relating to lease contracts, insurance contracts and financial instruments is outside the scope of IFRS 15. In addition, a significant proportion of the recognition of Santander UK group's fee and commission income that is within the scope of the standard is not expected to change. Whilst the standard is not expected to have a significant impact on the Santander UK group's profitability, the impact of the standard is still being assessed. It is not yet practicable to quantify the effect of IFRS 15 on these Condensed Consolidated Interim Financial Statements. Going concern After making enquiries, the Directors have a reasonable expectation that the Santander UK group has adequate resources to continue in operational existence for at least twelve months from the date that the balance sheet is signed. Having reassessed the principal risks and uncertainties, the Directors consider it appropriate to adopt the 'going concern' basis of accounting in preparing the Condensed Consolidated Interim Financial Statements. CRITICAL ACCOUNTING POLICIES AND AREAS OF SIGNIFICANT MANAGEMENT JUDGEMENT The preparation of the Condensed Consolidated Interim Financial Statements requires management to make estimates and judgements 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 estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in the basis upon which estimates have been determined compared to that applied in the 2016 Annual Report. 2. SEGMENTS The Santander UK group's business is managed and reported on the basis of the following segments: Retail Banking, Commercial Banking, Global Corporate Banking and Corporate Centre. The Santander UK group's segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. There has been no change to the descriptions of these segments and segmental accounting as set out in Note 2 to the Consolidated Financial Statements in the 2016 Annual Report. Half year to 30 June 2017 Retail Banking £m Commercial Banking £m Global Corporate Banking £m Corporate Centre £m Total £m Net interest income/(expense) 1,730 198 40 (46) 1,922 Non-interest income(1) 314 44 206 27 591 Total operating income/(expense) 2,044 242 246 (19) 2,513 Operating expenses before impairment losses, provisions and charges (919) (109) (145) (42) (1,215) Impairment (losses)/releases on loans and advances (39) (3) (9) 3 (48) Provisions for other liabilities and charges (155) (29) - (2) (186) Total operating impairment (losses)/releases, provisions and charges (194) (32) (9) 1 (234) Profit/(loss) before tax 931 101 92 (60) 1,064 Revenue from external customers 2,272 318 279 (356) 2,513 Inter-segment revenue (228) (76) (33) 337 - Total operating income 2,044 242 246 (19) 2,513 Total assets(2) 175,246 19,570 45,827 64,278 304,921 Total liabilities 150,394 18,074 39,234 80,338 288,040 Half year to 30 June 2016(3) Net interest income 1,531 203 39 - 1,773 Non-interest income(1) 283 41 184 163 671 Total operating income 1,814 244 223 163 2,444 Operating expenses before impairment losses, provisions and charges (922) (113) (141) (29) (1,205) Impairment (losses)/releases on loans and advances (34) (11) (21) 3 (63) Provisions for other liabilities and charges (77) - - (20) (97) Total operating impairment losses, provisions and charges (111) (11) (21) (17) (160) Profit before tax 781 120 61 117 1,079 Revenue from external customers 2,173 313 254 (296) 2,444 Inter-segment revenue (359) (69) (31) 459 - Total operating income 1,814 244 223 163 2,444 31 December 2016 Total assets(2) 175,731 19,381 39,777 68,253 303,142 Total liabilities 149,793 17,203 36,506 83,556 287,058 (1) Comprised of Net fee and commission income and Net trading and other income. (2) Includes customer loans, net of impairment loss allowances. (3) Restated on the same basis as described in Note 2 to the Consolidated Financial Statements in the 2016 Annual Report. 3. NET TRADING AND OTHER INCOME Half year to 30 June 2017 £m Half year to 30 June 2016 £m Net trading and other income 182 290 'Net trading and other income' includes the gain of £48m sterling equivalent in respect of the sale of the Vocalink shares. Santander UK was part of the consortium of banks that sold Vocalink Holdings Limited to Mastercard. Santander UK's stake in Vocalink Holdings Limited was 7.75%. Under the terms of the sale agreement, Santander UK will retain a shareholding of 0.775% for at least three years. In H116, 'Net trading and other income' included the gain of £119m sterling equivalent in respect of the sale of Visa shares. In May 2016, as part of a liability management exercise, certain debt instruments were purchased pursuant to a tender offer. This had no significant impact on the income statement. 4. OPERATING EXPENSES BEFORE IMPAIRMENT LOSSES, PROVISIONS AND CHARGES Half year to 30 June 2017 £m Half year to 30 June 2016 £m Staff costs 566 545 Other administration expenses 493 522 Depreciation, amortisation and impairment 156 138 1,215 1,205 5. IMPAIRMENT LOSSES AND PROVISIONS Half year to 30 June 2017 £m Half year to 30 June 2016 £m Impairment losses on loans and advances to customers 76 108 Recoveries of loans and advances, net of collection costs (Note 10) (28) (45) 48 63 Provisions for other liabilities and charges (Note 15) 181 97 Provisions for residual value and voluntary termination 5 - 186 97 234 160 There were no impairment losses on loans and advances to banks, loans and receivables securities, available-for-sale securities and held-to-maturity investments. 6. TAXATION 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 30 June 2017 £m Half year to 30 June 2016 £m Profit before tax 1,064 1,079 Tax calculated at a tax rate of 19.25% (H116: 20%) 205 216 Bank surcharge on profits 77 77 Net disallowable items and non-taxable income 33 8 Non-deductible UK Bank Levy 18 17 Effect of change in tax rate on deferred tax provision - (1) Adjustment to prior period provisions (10) (10) Tax charge 323 307 Interim period corporation tax is accrued based on the estimated average annual effective corporation tax rate for the year of 30.4% (2016: 28.5%). The standard rate of UK corporation tax was 27.25% for banking entities and 19.25% for non-banking entities (2016: 28% for banking entities and 20% for non-banking entities) following the introduction of an 8% surcharge to be applied to banking companies from 1 January 2016. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. The Finance (No.2) Act 2015, introduced reductions in the corporation tax rate from 20% to 19% in 2017 and 18% by 2020. Finance Act 2016, which was substantively enacted on 6 September 2016, introduced a further reduction in the standard rate of corporation tax rate to 17% from 2020. The effects of the changes in tax rates are included in the deferred tax balances at 30 June 2017 and 31 December 2016. 7. DIVIDENDS a) Ordinary share capital Dividends of £276m (H116: £102m) were paid on the Company's ordinary shares in issue during the period. An interim dividend of £323m was declared on 26 June 2017 on the Company's ordinary shares in issue. b) Other equity instruments Half year to 30 June 2017 £m Half year to 30 June 2016 £m £300m fixed/floating rate non-cumulative callable preference shares 1 1 £300m Step-up Callable Perpetual Reserve Capital Instruments 17 17 AT1 securities: - £500m Perpetual Capital Securities 7 - - £750m Perpetual Capital Securities 28 28 - £300m Perpetual Capital Securities 11 12 - £500m Perpetual Capital Securities 16 15 80 73 8. TRADING ASSETS 30 June 2017 £m 31 December 2016 £m Loans and advances to banks - securities purchased under resale agreements 1,580 2,757 - other(1) 4,502 4,721 Loans and advances to customers - securities purchased under resale agreements 14,315 7,955 - other(1) 1,768 2,368 Debt securities 4,507 6,248 Equity securities 7,751 5,986 34,423 30,035 (1) Total 'other' comprises short-term loans of £1,279m (2016: £920m) and cash collateral of £4,991m (2016: £6,169m). A significant portion of the debt and equity securities are held in our eligible liquidity pool. They comprise mainly of government bonds and quoted stocks. 9. DERIVATIVE FINANCIAL INSTRUMENTS 30 June 2017 31 December 2016 Fair value Fair value Derivatives held for trading Notional amount £m Assets £m Liabilities £m Notional amount £m Assets £m Liabilities £m Exchange rate contracts 146,818 2,983 4,955 165,521 3,664 6,022 Interest rate contracts 969,928 11,883 11,379 942,798 14,117 14,341 Equity and credit contracts 18,287 1,179 543 15,325 1,321 860 Total derivatives held for trading 1,135,033 16,045 16,877 1,123,644 19,102 21,223 Derivatives held for hedging Derivatives designated as fair value hedges: Exchange rate contracts 2,693 471 - 3,819 751 - Interest rate contracts 57,882 1,321 1,499 70,849 1,578 1,790 Equity derivative contracts 81 - 3 74 4 - 60,656 1,792 1,502 74,742 2,333 1,790 Derivatives designated as cash flow hedges: Exchange rate contracts 23,894 3,639 8 23,786 3,907 8 Interest rate contracts 12,909 124 101 12,683 120 82 Equity derivative contracts 29 11 - 24 9 - 36,832 3,774 109 36,493 4,036 90 Total derivatives held for hedging 97,488 5,566 1,611 111,235 6,369 1,880 Total derivatives 1,232,521 21,611 18,488 1,234,879 25,471 23,103 10. LOANS AND ADVANCES TO CUSTOMERS 30 June 2017 £m 31 December 2016 £m Loans and advances to customers 199,559 199,610 Amounts due from fellow Banco Santander subsidiaries and joint ventures 1,172 1,112 Amounts due from Santander UK Group Holdings plc 7 5 Loans and advances to customers 200,738 200,727 Less: impairment loss allowances (864) (921) Less: residual value and voluntary termination provisions(1) (75) (68) Net loans and advances to customers 199,799 199,738 (1) In H117, we reclassified our provisions for residual value and voluntary termination classified within the Finance lease impairment loss allowances category. In order to facilitate comparison with the current period, prior year comparatives were amended. Movement in impairment loss allowances: Loans secured on residential property £m Corporate loans £m Finance leases £m Other unsecured advances £m Total £m At 1 January 2017 279 382 45 215 921 (Release)/charge to the income statement (18) 12 17 65 76 Write-offs and other items(2) (10) (38) (16) (69) (133) At 30 June 2017 251 356 46 211 864 At 1 January 2016 424 395 20 269 1,108 (Release)/charge to the income statement (54) 35 3 124 108 Write-offs and other items(2) (16) (15) (15) (115) (161) At 30 June 2016 354 415 8 278 1,055 (2) Mortgage write-offs exclude the effect of the unwind over time of the discounting in estimating losses, as described in the accounting policy 'Impairment of financial assets' in Note 1 to the Consolidated Financial Statements in the 2016 Annual Report. Mortgage write-offs including this effect were £11m (H116: £18m). Recoveries of loans and advances, net of collection costs: Loans secured on residential property £m Corporate loans £m Finance leases £m Other unsecured advances £m Total £m 30 June 2017 2 1 4 21 28 30 June 2016 2 2 1 40 45 11. SECURITISATIONS AND COVERED BONDS a) Securitisations The gross assets securitised at 30 June 2017 and 31 December 2016 under the structures described below were: 30 June 2017 £m 31 December 2016 £m Master Trust Structures: - Holmes 4,947 5,560 - Fosse 6,499 7,182 - Langton 4,595 5,211 Other securitisation structures: - Motor 851 1,117 - Auto ABS UK Loans 1,112 1,260 18,004 20,330 i) Master Trust Structures Holmes In H117, there were no issuances (H116: £1.2bn) from Holmes Master Issuer plc. Mortgage-backed notes totalling £0.7bn (H116: £2.9bn) equivalent were redeemed during the period. Fosse In H117 and H116 there were no issuances from Fosse Master Issuer plc. Mortgage-backed notes totalling £0.7bn (H116: £0.8bn) equivalent were redeemed during the period. Langton In H117 and H116 there were no issuances from any of the Langton issuing companies. No mortgage-backed notes (H116: £1.9bn) were redeemed during the period. ii) Other securitisation structures Motor In H117 and H116 there were no issuances from the Motor securitisation structures. Asset-backed notes totalling £0.2bn (H116: £0.3bn) equivalent were redeemed during the period. Auto ABS UK Loans In H117, £0.5bn of asset-backed notes (H116: £0.5bn) were issued from Auto ABS UK Loans. Additionally, £0.7bn of asset-backed notes (H116: £0.4bn) were redeemed during the period. b) Covered Bonds In H117, there were issuances of £1.0bn (H116: £0.8bn) from the covered bond programme. Mortgage-backed notes totalling £1.8bn (H116: £nil) equivalent were redeemed during the period. 12. INTERESTS IN OTHER ENTITIES The Santander UK group has interests in subsidiaries, associates, joint ventures and unconsolidated structured entities, as set out in Note 21 to the Consolidated Financial Statements in the 2016 Annual Report. The unconsolidated structured entities include Abbey National Capital Trust I and Abbey National Capital LP I, which are 100% owned finance subsidiaries (as defined in Regulation S-X under the US Securities Act 1933, as amended) of Santander UK plc. On 7 February 2000, Abbey National Capital Trust I issued US$1bn of 8.963% Non-cumulative Trust Preferred Securities, which have been registered under the US Securities Act of 1933, as amended. Abbey National Capital Trust I serves solely as a passive vehicle holding the partnership preferred securities issued by Abbey National Capital LP I and each has passed all the rights relating to such partnership preferred securities to the holders of trust preferred securities issued by Abbey National Capital Trust I. All of the trust preferred securities and the partnership preferred securities have been fully and unconditionally guaranteed on a subordinated basis by Santander UK plc. The terms of the securities do not include any significant restrictions on the ability of Santander UK plc to obtain funds, by dividend or loan, from any subsidiary. 13. TRADING LIABILITIES 30 June 2017 £m 31 December 2016 £m Deposits by banks: - securities sold under repurchase agreements 676 780 - other(1) 2,969 3,420 Deposits by customers: - securities sold under repurchase agreements 13,928 8,018 - other(1) 407 541 Short positions in securities and unsettled trades 3,510 2,801 21,490 15,560 (1) Comprises cash collateral of £3,371m (2016: £3,535m) and short-term deposits of £5m (2016: £426m). 14. DEBT SECURITIES IN ISSUE 30 June 2017 £m 31 December 2016 £m Medium-term notes 18,175 20,995 Covered bond programme 15,961 16,628 Certificates of deposit 4,401 5,217 Securitisation programmes 5,460 7,506 43,997 50,346 15. PROVISIONS Conduct remediation PPI £m Wealth and Investment £m Other products £m Regulatory-related £m Vacant property £m Other £m Total £m At 1 January 2017 457 22 14 96 47 64 700 Additional provisions 69 - 35 2 6 69 181 Used during the period (121) (27) (2) (53) (5) (87) (295) Transfers - 9 - - - - 9 At 30 June 2017 405 4 47 45 48 46 595 At 1 January 2016 465 146 26 93 68 72 870 Additional provisions - - - 36 1 60 97 Used during the period (61) (34) (10) (47) (7) (60) (219) At 30 June 2016 404 112 16 82 62 72 748 Conduct remediation The table below sets out the key drivers of the Payment Protection Insurance (PPI) provision balance and forecast assumptions used in calculating the provision, as well as the sensitivity of the provision to changes in the assumptions. Cumulative to 30 June 2017 Future expected Sensitivity analysis Increase/decrease in provision Inbound complaints(1) ('000) 1,402 412 25 = £9m Outbound contact ('000) 406 342 25 = £15m Response rate to outbound contact 35% 91% 1% = £2.2m Average uphold rate per claim(2) 58% 74% 1% = £3.5m Average redress per claim(3) £1,657 £643 £100 = £54m (1) Excludes invalid claims where the complainant has not held a PPI policy. (2) Claims include inbound and responses to outbound contact. (3) The average redress per claim reduced from the cumulative average value at 30 June 2017 of £1,657 to a future expected average value of £643 due to the inclusion of Plevin cases in the provision, as well as a shift in the complaint mix to a greater proportion of storecards, which typically held lower average balances. In November 2015, the FCA issued a Consultation Paper 15/39 (Rules and guidance on payment protection insurance complaints) which introduced the concept of unfair commission in relation to Plevin for customer redress plus a deadline by which customers would need to make their PPI complaints. On 2 August 2016, the FCA issued Consultation Paper 16/20 (Rules and Guidance on payment protection insurance complaints: Feedback on CP 15/39 and further consultation). The paper outlined the FCA's proposed approach to PPI in light of the 2014 decision of the Supreme Court in Plevin v Paragon Personal Finance Ltd (Plevin) and also recommended a two-year deadline period starting in June 2017, which was later than proposed in CP 15/39. The paper also included proposals in relation to how redress for Plevin-related claims should be calculated including consideration of how profit share arrangements should be reflected in commission levels. The final rules released on 2nd March 2017 in Policy Statement 17/3 (Payment Protection Insurance Complaints: Feedback on CP16/20 and final rules and guidance) confirmed that the two-year deadline period would start in August 2017. There is also now a requirement to proactively mail previously rejected complainants in scope of s140A of the Consumer Credit Act to explain they are eligible to complain again in light of Plevin. Lastly there are some clarifications to the profit share percentage calculations. These changes may impact on the future amounts expected to be paid. 30 June 2017 compared to 31 December 2016 The remaining provision for PPI redress and related costs amounted to £405m. In the first quarter of 2017, we made an additional provision of £32m relating to the final FCA rules and guidance published in Mar17. We also provided a net charge of £37m in the second quarter, following a review of claims handling procedures in relation to a specific PPI portfolio including the impact of a past business review. See Note 17. In line with our assumptions, monthly utilisation increased from the 2016 average following the confirmation of a deadline for customer complaints. We will continue to monitor our provision levels in respect of recent claims experience. The remaining non-PPI related conduct provisions amounted to £51m, including an additional provision of £35m in the second quarter, relating to the sale of interest rate derivatives. This charge follows an ongoing review regarding regulatory classification of certain customers eligible for redress. 16. RETIREMENT BENEFIT PLANS The amounts recognised in the balance sheet were as follows: 30 June 2017 £m 31 December 2016 £m Assets/(liabilities) Funded defined benefit pension scheme - surplus 500 398 Funded defined benefit pension scheme - deficit (181) (223) Unfunded defined benefit pension scheme (39) (39) Total net assets 280 136 a) Defined contribution pension plans An expense of £27m (H116: £26m) was recognised for defined contribution plans in the period, and is included in staff costs classified within operating expenses in the Income Statement. None of this amount was recognised in respect of key management personnel for H117 and H116. b) Defined benefit pension schemes The total amount charged to the income statement, including any amounts classified as redundancy costs was £23m (H116: £11m). Movements in the present value of defined benefit obligations and fair value of scheme assets were as follows: 30 June 2017 30 June 2016 Present value of defined benefit obligations Fair value of scheme assets Present value of defined benefit obligations Fair value of scheme assets £m £m £m £m Balance at 1 January (11,082) 11,218 (9,004) 9,450 Income statement charge (182) 247 (186) 232 Recognised in other comprehensive income - Return on plan assets (excluding amounts included in net interest expense) - 85 - 1,055 - Actuarial movements arising from experience adjustments 11 - 28 - - Actuarial movements arising from changes in financial assumptions (17) - (1,572) - Benefits paid 191 (191) 130 (130) Balance at 30 June (11,079) 11,359 (10,604) 10,607 The net assets recognised in the balance sheet was determined as follows: 30 June 2017 £m 31 December 2016 £m Present value of defined benefit obligations (11,079) (11,082) Fair value of scheme assets 11,359 11,218 Net defined benefit assets 280 136 Result of triennial valuation The 31 March 2016 triennial funding valuation was concluded in early 2017. Santander UK plc has committed to continue to fund the Scheme at the current rate with the recovery plan extended for a further three years. In addition Santander UK plc has committed to make contingent contributions if the investment performance is lower than expected. Actuarial assumptions There have been no significant changes to the method for setting the principal actuarial assumptions used as set out in Note 34 to the Consolidated Financial Statements in the 2016 Annual Report. 17. CONTINGENT LIABILITIES AND COMMITMENTS 30 June 2017 £m 31 December 2016 £m Guarantees given to third parties 1,435 1,859 Formal standby facilities, credit lines and other commitments 42,131 41,616 43,566 43,475 There have been no significant changes to the contingent liabilities as set out in Note 35 to the Consolidated Financial Statements in the 2016 Annual Report, except as follows: Guarantees given by Santander UK plc to its subsidiaries Santander UK plc has fully and unconditionally guaranteed the unsubordinated liabilities of each of Abbey National Treasury Services plc and Cater Allen Limited, both of which are wholly owned subsidiaries of the Santander UK group, that have been or will be incurred before 31 December 2018. Other legal actions and regulatory matters Note 15 details our provisions including those in relation to PPI. In relation to a specific PPI portfolio of complaints, following a review of legal and regulatory responsibilities, including consultation with external professional advisers, it is not currently considered that the likelihood of Santander UK group incurring a liability is probable and as such no provision is held. There are a number of factual and legal issues to be resolved in relation to this portfolio which may impact the amount or timing of any liability. These issues create uncertainties which mean that it is not currently possible to make a reliable estimate of the financial effect, if any, that may arise. 18. SHARE CAPITAL AND OTHER EQUITY INSTRUMENTS 30 June 2017 £m 31 December 2016 £m Ordinary share capital 3,105 3,105 £300m fixed/floating rate non-cumulative callable preference shares 14 14 £300m Step-up Callable Perpetual Reserve Capital Instruments 235 235 AT1 securities: - £500m Perpetual Capital Securities 496 - - £750m Perpetual Capital Securities 750 750 - £300m Perpetual Capital Securities 300 300 - £500m Perpetual Capital Securities 500 500 5,400 4,904 £500m Perpetual Capital Securities On 10 April 2017, the Company issued £500m Perpetual Capital Securities, all of which were subscribed by the Company's immediate parent, Santander UK Group Holdings plc. The securities are perpetual and pay a distribution rate on 24 March, June, September and December. At each distribution payment date, the Company can decide whether to pay the distribution rate, which is non-cumulative, in whole or in part. The distribution rate is 6.75% per annum until 24 June 2024; thereafter, the distribution rate resets every five years to a rate of 5.792% per annum above the then prevailing 5 year sterling mid swap rate. The Perpetual Capital Securities will be automatically written down should the Common Equity Tier 1 capital ratio of the Santander UK prudential consolidation group as defined in the PRA's rules fall below 7%. The Perpetual Capital Securities are redeemable at the option of the Company on 24 June 2024 or on any reset date thereafter. No such redemption may be made without the consent of the PRA. 19. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS SECURITY FOR ASSETS Securitisations and covered bonds As described in Note 16 to the Consolidated Financial Statements in the 2016 Annual Report, Santander UK plc and certain of its subsidiaries enter into securitisation transactions whereby portfolios of residential mortgage loans and other loans are purchased by or assigned to structured securitisation companies, and have been funded through the issue of mortgage-backed securities and other asset-backed securities. Holders of the securities are only entitled to obtain payments of principal and interest to the extent that the resources of the securitisation companies are sufficient to support such payments and the holders of the securities have agreed in writing not to seek recourse in any other form. At 30 June 2017, £1,450m (2016: £363m) of loans were so assigned by the Santander UK group. Santander UK plc also has a covered bond programme, whereby securities are issued to investors and are secured by a pool of residential mortgages. At 30 June 2017, the pool of residential mortgages for the covered bond programme was £19,989m (2016: £20,263m). At 30 June 2017, total notes issued externally from secured programmes (securitisations and covered bonds) decreased to £21,421m (2016: £24,134m), including gross issuance of £1,000m (H116: £1,147m) and redemptions of £3,538m (H116: £2,227m). At 30 June 2017, a total of £4,841m (2016: £4,998m) of notes issued under securitisation and covered bond programmes had also been retained internally, a proportion of which had been used as collateral for raising funds via third party bilateral secured funding transactions, which totalled £1,834m at 30 June 2017 (2016: £2,764m), or for creating collateral which could in the future be used for liquidity purposes. 20. FINANCIAL INSTRUMENTS a) Measurement basis of financial assets and liabilities The Santander UK group categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as described in Note 43(a) to the Consolidated Financial Statements in the 2016 Annual Report. b) Fair values of financial instruments carried at amortised cost The following table analyses the fair value of the financial instruments carried at amortised cost at 30 June 2017 and 31 December 2016. 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 43(c) to the Consolidated Financial Statements in the 2016 Annual Report. Balance sheet category 30 June 2017 31 December 2016 Fair value Carrying value Fair value Carrying value £m £m £m £m Assets Loans and advances to banks 4,351 4,404 4,215 4,348 Loans and advances to customers Advances secured on residential property 157,009 154,295 157,961 154,448 Corporate loans 31,281 31,302 31,590 31,596 Other advances 14,204 14,202 13,685 13,694 202,494 199,799 203,236 199,738 Loans and receivables securities 1,444 1,424 272 257 Held-to-maturity investments 6,433 6,613 6,436 6,648 Liabilities Deposits by banks Securities sold under agreements to repurchase 1,090 1,077 2,406 2,384 Other deposits 10,827 10,813 7,392 7,385 11,917 11,890 9,798 9,769 Deposits by customers Current and demand accounts 92,542 92,542 91,162 91,162 Savings accounts 62,831 62,698 58,461 58,305 Time deposits 25,481 25,447 27,260 27,203 Securities sold under agreements to repurchase 572 502 582 502 181,426 181,189 177,465 177,172 Debt securities in issue Bonds and medium-term notes 40,301 38,537 44,643 42,840 Securitisation programmes 5,507 5,460 7,606 7,506 45,808 43,997 52,249 50,346 Subordinated liabilities 4,491 4,109 4,562 4,303 c) Fair values of financial instruments measured at fair value on a recurring basis The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 30 June 2017 and 31 December 2016, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3. Transfers between levels of the fair value hierarchy Transfers between levels of the fair value hierarchy are reported at the beginning of the period in which they occur. During H117 there were no transfers of financial instruments between Levels 1, 2 and 3 in the fair value hierarchy. Transfers relating to 2016 are disclosed in Note 43(d) to the Consolidated Financial Statements in the 2016 Annual Report. Balance sheet category 30 June 2017 31 December 2016 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 Trading assets Loans and advances to banks - 6,082 - 6,082 - 7,478 - 7,478 A Loans and advances to customers 1,202 14,881 - 16,083 762 9,561 - 10,323 A Debt securities 4,507 - - 4,507 6,248 - - 6,248 - Equity securities 7,751 - - 7,751 5,986 - - 5,986 - Derivative assets Exchange rate contracts - 7,072 21 7,093 - 8,300 22 8,322 A Interest rate contracts - 13,313 15 13,328 1 15,795 19 15,815 A & C Equity and credit contracts - 1,131 59 1,190 - 1,272 62 1,334 B & D Financial assets designated at fair value Loans and advances to customers - 1,510 64 1,574 - 1,668 63 1,731 A Debt securities - 399 188 587 - 208 201 409 A & B Available-for-sale securities Equity securities 19 9 41 69 17 63 32 112 B Debt securities 9,503 2 - 9,505 10,449 - - 10,449 C Total assets at fair value 22,982 44,399 388 67,769 23,463 44,345 399 68,207 Liabilities Trading liabilities Deposits by banks - 3,645 - 3,645 - 4,200 - 4,200 A Deposits by customers - 14,335 - 14,335 - 8,559 - 8,559 A Short positions 3,510 - - 3,510 2,801 - - 2,801 - Derivative liabilities Exchange rate contracts - 4,943 20 4,963 - 6,009 21 6,030 A Interest rate contracts - 12,972 7 12,979 - 16,202 11 16,213 A & C Equity and credit contracts 1 503 42 546 1 817 42 860 B & D Financial liabilities designated at fair value Debt securities in issue - 2,161 6 2,167 - 1,908 6 1,914 A Structured deposits - 809 - 809 - 526 - 526 A Total liabilities at fair value 3,511 39,368 75 42,954 2,802 38,221 80 41,103 d) Valuation techniques The main valuation techniques employed in internal models to measure the fair value of the financial instruments are disclosed in Note 43(e) to the Consolidated Financial Statements in the 2016 Annual Report. The Santander UK group did not make any material changes to the valuation techniques and internal models it used during H117. e) Fair value adjustments The internal models incorporate assumptions that the Santander UK group believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when the Santander UK group considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model. The Santander UK group 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 majority of these adjustments relate to Global Corporate Banking. The magnitude and types of fair value adjustment adopted by Global Corporate Banking are listed in the following table: 30 June 2017 £m 31 December 2016 £m Risk-related: - Bid-offer and trade specific adjustments 42 37 - Uncertainty 43 49 - Credit risk adjustment 43 50 - Funding fair value adjustment 10 20 138 156 Model-related 2 1 Day One profit 1 4 141 161 Risk-related adjustments Risk-related adjustments are driven, in part, by the magnitude of the Santander UK group's market or credit risk exposure, and by external market factors, such as the size of market spreads. For further details, see the 'Risk-related adjustments' section in Note 43(f) to the Consolidated Financial Statements in the 2016 Annual Report. f) Internal models based on information other than market data (Level 3) Valuation techniques There have been no significant changes to the valuation techniques set out in Note 43(i) to the Consolidated Financial Statements in the 2016 Annual Report. Reconciliation of fair value measurements in Level 3 of the fair value hierarchy The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs: Assets Liabilities Derivatives Fair value through P&L Available-for-sale Total Derivatives Fair value through P&L Total £m £m £m £m £m £m £m At 1 January 2017 103 264 32 399 (74) (6) (80) Total gains/(losses) recognised in profit/(loss): - Fair value movements 6 (9) - (3) (7) - (7) - Foreign exchange and other movements (5) - - (5) 5 - 5 Gains recognised in other comprehensive income - - 9 9 - - - Sales - (3) - (3) - - - Settlements (9) - - (9) 7 - 7 At 30 June 2017 95 252 41 388 (69) (6) (75) Gains/(losses) recognised in profit/(loss) relating to assets and liabilities held at the end of the period 1 (9) - (8) (2) - (2) At 1 January 2016 188 267 100 555 (105) (5) (110) Total gains/(losses) recognised in profit/(loss): - Fair value movements (2) 36 - 34 8 (1) 7 - Foreign exchange and other movements 1 - - 1 - (1) (1) Gains recognised in other comprehensive income - - 19 19 - - - Additions - - 25 25 - - - Sales - - (119) (119) - - - Settlements (20) (15) - (35) 15 - 15 At 30 June 2016 167 288 25 480 (82) (7) (89) Gains/(losses) recognised in profit/(loss) relating to assets and liabilities held at the end of the period (1) 36 - 35 8 (2) 6 Effect of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3) As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data and, as such require the application of a degree of judgement. Changing one or more of the inputs to the valuation models to reasonably possible alternative assumptions would change the fair values significantly. There has been no significant change to the unobservable inputs and sensitivities used in Level 3 fair values as set out in Note 43(i) to the Consolidated Financial Statements in the 2016 Annual Report. 21. RELATED PARTY DISCLOSURES The financial position and performance of the Santander UK group have not been materially affected in H117 by any related party transactions, or changes to related party transactions. In addition, transactions with pension schemes operated by the Santander UK group are described in Note 34 to the Consolidated Financial Statements in the 2016 Annual Report. These transactions were made in the ordinary course of business and substantially on the same terms as for comparable transactions with third party counterparties and within limits acceptable to the PRA. Such transactions do not involve more than the normal risk of collectability or present any unfavourable features. 22. EVENTS AFTER THE BALANCE SHEET DATE There have been no significant events between 30 June 2017 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements. Shareholder information 51 Forward-looking statements 51 Selected financial data 51 Glossary Forward-looking statements The Company and its subsidiaries (together Santander UK) may from time to time make written or oral forward-looking statements. The Company makes written forward-looking statements in this Half Yearly Financial Report and may also make forward-looking statements in its periodic reports to the SEC on Forms 20-F and 6-K, in its offering circulars and prospectuses, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on its behalf. For more, see 'Forward-looking statements' in the Shareholder information section of the 2016 Annual Report. Please also refer to our latest filings with the SEC (including, without limitation, our Annual Report on Form 20-F for the year ended 31 December 2016) for a discussion of certain risk factors and forward-looking statements. Undue reliance should not be placed on forward-looking statements when making decisions with respect to any Santander UK member and/or its securities. Investors and others should take into account the inherent risks and uncertainties of forward-looking statements and should carefully consider the non-exhaustive list of important factors in the 2016 Annual Report. Forward-looking statements speak only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such knowledge, information and views may change at any time. Santander UK does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Selected financial data SELECTED STATISTICAL INFORMATION 30 June 2017(1) % 31 December 2016 % Capital ratios: CET1 capital ratio 12.1 11.6 Total capital ratio 19.6 18.5 Equity to assets ratio(2) 4.61 4.60 Ratio of earnings to fixed charges:(3) - Excluding interest on retail deposits 382 292 - Including interest on retail deposits 201 166 Profitability ratios: Return on assets(4) 0.48 0.44 Return on ordinary shareholders' equity(5) 10.3 9.3 Dividend payout ratio(6) n/a 46 (1) As described in Note 1 to the Condensed Consolidated Interim Financial Statements, Santander UK elected to early apply the IFRS 9 requirement for the presentation of gains and losses on financial liabilities relating to own credit in other comprehensive income from 1 January 2017. The cumulative own credit adjustment component of the cumulative fair value adjustment on financial liabilities designated at fair value through profit or loss has been included in opening retained earnings. Comparatives have not been restated. We have not adopted the other requirements in IFRS 9. (2) Average ordinary shareholders' equity divided by average total assets. Average balances are based on monthly data. (3) For the purpose of calculating the ratios of earnings to fixed charges, earnings consist of profit from continuing operations before tax and before adjustment for non-controlling interests plus fixed charges. Fixed charges consist of interest expense, including the amortisation of discounts and premiums on debt securities in issue and related capitalised expenses and including or excluding interest on retail deposit as appropriate. (4) Profit after tax divided by average total assets. Average balances are based on monthly data. (5) Profit after tax divided by average ordinary shareholders' equity. (6) Ordinary equity dividends approved divided by profit after tax attributable to equity holders of the parent. Glossary Our glossary of industry and other main terms is available on our website: www.santander.co.uk/uk/about-santander-uk/investor-relations-glossary. This information is provided by RNS The company news service from the London Stock Exchange END IR OKNDNDBKBKCD
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