Quarterly Report • Jun 30, 2019
Quarterly Report
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Half Yearly Financial Report 2019
PART OF THE BANCO SANTANDER GROUP
Santander UK plc and its subsidiaries (collectively called 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 Financial review section.
| Introduction | 2 |
|---|---|
| Financial review | 4 |
| Risk review | 12 |
| Financial statements | 33 |
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.
Santander UK plc (the Company) and its subsidiaries (collectively, Santander UK or the Santander UK group) is the ring-fenced bank of Santander UK Group Holdings plc group, serving all of its personal customers in the UK and the vast majority of its business customers. It offers a wide range of personal financial products and services.
Our purpose is to help people and businesses prosper. We aim to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities, with a culture that is Simple, Personal and Fair. Customer loyalty remains at the core of our strategy, while we transform the bank for improved returns.
We are focused on building stronger customer relationships and a seamless customer experience. On a net promoter score basis (NPS)(1), we are ranked first in our peer group for business and corporate and top three amongst our peers for retail. During the first half of 2019, we helped 15,000 first time buyers purchase a home and 169,000 customers finance their cars.
We are strengthening our mortgage franchise through innovative launches, such as an online mortgage overpayments tool, as well as the introduction of 40 year mortgages to help more people buy their first home. We launched a new advertising campaign, which resulted in the highest monthly uplift in Ad Awareness according to YouGov research in June 2019. This is helping to drive improved brand awareness as well as an increased mortgage application pipeline.
This year we are proud to have been awarded Best Business Current Account Provider again, for the 17th year running, and Business Bank of the Year again, for the 5th year running, by Moneyfacts(2). We have opened 31,000 1I2I3 Business Current Accounts since launch in October 2018, with strong switcher levels. The 1I2I3 Business World proposition has also been strengthened through the launch of a 1I2I3 Fixed Term Bond in June 2019.
Digital acquisition and adoption is driving change in the organisation. Since the start of the year, we retained 60% of refinanced mortgage loans online. We also opened 46% of current accounts and 66% of credit cards through digital channels. We are continuing to develop our international proposition, supported by the 13 trade corridors we have established to date. We continue to utilise our access to global best practice and market leading solutions through Banco Santander.
Earlier in the year, we outlined a significant restructure to make our branch network smaller and optimised for the future. We also announced plans to reshape our Corporate & Commercial Banking (CCB) business, with a continued focus on SME and mid-sized businesses, particularly those with international trade ambitions. Our multi-year transformation programme aims to simplify, digitise and automate the bank by focusing on our operating model, structures and productivity. We have already taken a number of decisive actions and plan to invest £400m by the end of 2021 with a 2-3 year payback. Over the medium-term, and subject to further strategic transformation opportunities, we expect to invest an additional £100m with a similar payback period.
We are prioritising growth in portfolios with attractive returns, such as mortgages and consumer (auto) finance as we aim to become a more focused and efficient bank. We will continue to leverage our relationship with our parent and to collaborate with the wider Banco Santander group on a number of initiatives including One Pay FX, Openbank and Asto. We have some exciting innovations in the pipeline, including improvements to customer service utilising Google Virtual Assistant, enhancing efficiency and customer experience.
Given market perception that there is an increased likelihood of a 'no deal' outcome in October 2019, we continue to prepare for all potential outcomes. We expect income pressure to continue to impact our results, with the significant cost savings from our transformation programme largely offsetting this over the medium-term.
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 2018 Annual Report.
(1) Net promoter score is defined in the 'Glossary' section of the Financial review.
(2) Business Moneyfacts Awards are run by MoneyfactsGroup, the independently owned and impartial provider of UK personal finance data. Business Moneyfacts Awards are highly coveted awards which are totally independent. The awards are presented annually for product excellence and outstanding service and cover products from across the range of financial services.
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. 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. As a result, key performance indicators are not set, monitored or managed at the Santander UK plc group level. 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 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 Guidance and Transparency Rules 4.2.7R and 4.2.8R, namely:
By Order of the Board
Chief Executive Officer 8 August 2019
| Income statement review | 5 |
|---|---|
| Summarised Consolidated | |
| Income Statement | 5 |
| Profit before tax by segment | 6 |
| Balance sheet review | 7 |
| Summarised Consolidated | |
| Balance Sheet | 7 |
| Customer balances | 9 |
| Capital | 10 |
| Liquidity | 10 |
| Forward-looking statements | 11 |
| Glossary | 11 |
| Half year to | Half year to | |
|---|---|---|
| 30 June 2019 | 30 June 2018(2) | |
| £m | £m | |
| Net interest income | 1,668 | 1,811 |
| Non-interest income(1) | 453 | 501 |
| Total operating income | 2,121 | 2,312 |
| Operating expenses before credit impairment losses, provisions and charges | (1,257) | (1,283) |
| Credit impairment losses | (69) | (91) |
| Provisions for other liabilities and charges | (206) | (33) |
| Total operating credit impairment losses, provisions and charges | (275) | (124) |
| Profit before tax | 589 | 905 |
| Tax on profit | (170) | (233) |
| Profit after tax for the period | 419 | 672 |
| Attributable to: |
| Profit after tax for the period | 419 | 672 |
|---|---|---|
| Non-controlling interests | 9 | 12 |
| Equity holders of the parent | 410 | 660 |
(1) Comprised of Net fee and commission income and Net trading and other income. (2) Adjusted to reflect the amendment to IAS 12, as described in Note 1 to the Condensed Consolidated Interim Financial Statements.
A more detailed Consolidated Income Statement is contained in the Condensed Consolidated Interim Financial Statements.
By income statement line item, the movements were:
We also incurred higher depreciation costs related to prior year investment projects and the change in accounting treatment of operating leases in consumer (auto) finance. These increases were partially offset by lower employee costs.
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.
| Half year to 30 June 2019 | Retail Banking £m |
Corporate & Commercial Banking £m |
Corporate & Investment Banking £m |
Corporate Centre £m |
Total £m |
|---|---|---|---|---|---|
| Net interest income/(expense) | 1,465 | 189 | 32 | (18) | 1,668 |
| Non-interest income(1) | 353 | 38 | 47 | 15 | 453 |
| Total operating income/(expense) | 1,818 | 227 | 79 | (3) | 2,121 |
| Operating expenses before credit impairment losses, provisions and charges | (1,011) | (138) | (83) | (25) | (1,257) |
| Credit impairment (losses)/releases | (63) | (9) | 4 | (1) | (69) |
| Provisions for other liabilities and charges | (95) | (1) | (11) | (99) | (206) |
| Total operating credit impairment losses, provisions and (charges)/releases | (158) | (10) | (7) | (100) | (275) |
| Profit/(loss) before tax | 649 | 79 | (11) | (128) | 589 |
| Half year to 30 June 2018(2) | |||||
|---|---|---|---|---|---|
| Net interest income | 1,565 | 202 | 33 | 11 | 1,811 |
| Non-interest income(1) | 304 | 40 | 115 | 42 | 501 |
| Total operating income | 1,869 | 242 | 148 | 53 | 2,312 |
| Operating expenses before credit impairment losses, provisions and charges | (957) | (134) | (145) | (47) | (1,283) |
| Credit impairment (losses)/releases | (52) | (22) | (18) | 1 | (91) |
| Provisions for other liabilities and (charges)/releases | (34) | 8 | (2) | (5) | (33) |
| Total operating credit impairment losses, provisions and charges | (86) | (14) | (20) | (4) | (124) |
| Profit/(loss) before tax | 826 | 94 | (17) | 2 | 905 |
(1) Comprised of Net fee and commission income and Net trading and other income.
(2) Restated to reflect the resegmentation of our short term markets business to Corporate Centre as described in Note 2 to the Condensed Consolidated Interim Financial Statements.
For Retail Banking, profit before tax was lower, largely impacted by pressure from the mortgage back book and £2.1bn of SVR attrition. Following a change in accounting treatment of operating leases, higher non-interest income was partially offset by higher operating expenses.
For Corporate & Commercial Banking, profit before tax was lower, largely due to the interest expense related to the 2018 SRT securitisations. Credit impairment losses decreased £13m, as a result of a release from the completion of the June 2019 SRT securitisation.
For Corporate & Investment Banking, profit before tax was lower largely reflecting the changes in the statutory perimeter, following the transfers of activities to Banco Santander London Branch as part of ring-fence implementation.
For Corporate Centre, loss before tax was largely due to transformation programme investment of £113m, as well as the impact of holding higher liquidity and lower yields on non-core assets. Following ring-fence implementation, some short-term markets activity is now accounted for in net interest income, rather than non-interest income.
| 30 June 2019 £bn |
31 December 2018 £bn |
|
|---|---|---|
| Assets | ||
| Cash and balances at central banks | 21,936 | 19,747 |
| Financial assets at fair value through profit or loss | 6,190 | 10,876 |
| Financial assets at amortised cost | 234,127 | 232,444 |
| Financial assets at fair value through other comprehensive income | 13,438 | 13,302 |
| Interest in other entities | 96 | 88 |
| Property, plant and equipment | 2,069 | 1,832 |
| Retirement benefit assets | 779 | 842 |
| Tax, intangibles and other assets | 5,892 | 4,241 |
| Total assets | 284,527 | 283,372 |
| Liabilities | ||
| Financial liabilities at fair value through profit or loss | 3,408 | 7,655 |
| Financial liabilities at amortised cost | 260,096 | 256,514 |
| Retirement benefit obligations | 252 | 114 |
| Tax, other liabilities and provisions | 4,707 | 3,180 |
| Total liabilities | 268,463 | 267,463 |
| Equity | ||
| Total shareholders' equity | 15,905 | 15,758 |
| Non-controlling interests | 159 | 151 |
| Total equity | 16,064 | 15,909 |
| Total liabilities and equity | 284,527 | 283,372 |
A more detailed Consolidated Balance Sheet is contained in the Condensed Consolidated Interim Financial Statements.
Cash and balances at central banks increased by 11% to £21,936m at 30 June 2019 (2018: £19,747m) due to higher balances with the Bank of England, partially offset by lower cash balances in the retail branches.
Financial assets at fair value through profit or loss decreased by 43% to £6,190m at 30 June 2019 (2018: £10,876m), mainly due to:
Financial assets at amortised cost increased by 1% to £234,127m at 30 June 2019 (2018: £232,444m), mainly due to:
These increases were partially offset by a decrease of £0.7bn in loans and advances to banks.
Property, plant and equipment increased by 13% to £2,069m at 30 June 2019 (2018: £1,832m) mainly due to the application of IFRS 16 with effect from 1 January 2019.
Retirement benefit assets decreased by 7% to £779m at 30 June 2019 (2018: £842m). This was mainly due to actuarial losses in the period driven by a fall in gilt yields and a narrowing of credit spreads, partially offset by asset growth mainly driven by the increase in gilt values.
Tax, intangibles and other assets increased by 39% to £5,892m at 30 June 2019 (2018: £4,241m), mainly due to the settlement timings of financial transactions with payment agents in the normal course of business.
Financial liabilities at fair value through profit or loss decreased by 55% to £3,408m at 30 June 2019 (2018: £7,655m), mainly due to:
These decreases were partially offset by a small increase in the carrying value of derivative liabilities.
Financial liabilities at amortised cost increased by 1% to £260,096m at 30 June 2019 (2018: £256,514m). This was mainly due to the following:
Retirement benefit obligations increased by £138m to £252m at 30 June 2019 (2018: £114m). This was mainly due to actuarial losses in the period driven by a fall in gilt yields and a narrowing of credit spreads, partially offset by asset growth mainly driven by the increase in gilt values.
Tax, other liabilities and provisions increased by 48% to £4,707m at 30 June 2019 (2018: £3,180m) mainly due to the settlement timings of financial transactions with payment agents in the normal course of business.
Total shareholders' equity increased slightly by 1% to £15,905m at 30 June 2019 (2018: £15,758m). This net increase was principally due to retained profits for the period and increases in the fair value of effective cash flow hedges, partially offset by reductions in the defined benefit surplus and own credit adjustments.
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £bn | £bn | |
| Customer loans | 200.3 | 199.6 |
| Other assets | 84.2 | 83.8 |
| Total assets | 284.5 | 283.4 |
| Customer deposits | 169.7 | 167.3 |
| Medium Term Funding (MTF) | 46.9 | 48.9 |
| Other liabilities | 51.8 | 51.2 |
| Total liabilities | 268.4 | 267.4 |
| Shareholders' equity | 15.9 | 15.8 |
| Non-controlling interest | 0.2 | 0.2 |
| Total liabilities and equity | 284.5 | 283.4 |
Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.
| 30 June 2019 £bn |
31 December 2018 £bn |
|
|---|---|---|
| Mortgages | 159.4 | 158.0 |
| Business banking | 1.8 | 1.8 |
| Consumer (auto) finance | 7.8 | 7.3 |
| Other unsecured lending | 5.6 | 5.7 |
| Customer loans | 174.6 | 172.8 |
| Current accounts | 67.8 | 68.4 |
| Savings | 57.0 | 56.0 |
| Business banking accounts | 12.1 | 11.9 |
| Other retail products | 5.9 | 5.8 |
| Customer deposits | 142.8 | 142.1 |
| 30 June 2019 £bn |
31 December 2018 £bn |
|
|---|---|---|
| Trading businesses | 11.6 | 11.5 |
| Commercial Real Estate | 5.8 | 6.2 |
| Customer loans | 17.4 | 17.7 |
| Customer deposits | 18.0 | 17.6 |
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £bn | £bn | |
| Customer loans | 4.1 | 4.6 |
| Customer deposits | 6.1 | 4.8 |
| 30 June 2019 £bn |
31 December 2018 £bn |
|
|---|---|---|
| Customer loans | 4.2 | 4.5 |
| – of which Social Housing | 3.6 | 3.8 |
| – of which non-core | 0.6 | 0.7 |
| Customer deposits | 2.8 | 2.8 |
| 30 June 2019 £bn |
31 December 2018 £bn |
|
|---|---|---|
| Capital and leverage | ||
| Total qualifying regulatory capital | 15.8 | 15.9 |
| Total capital ratio | 21.1% | 20.3% |
| RWAs | 74.7 | 78.5 |
(1) Segmental RWAs for 2018 have been restated to reflect the transfer of our short term markets activity from CIB to Corporate Centre and the reallocation of an equity stake in a joint venture from Corporate Centre to Retail Banking.
Analysis of capital is included in the Capital risk section of the Risk review.
| 30 June 2019 £bn |
31 December 2018 £bn |
|
|---|---|---|
| Santander UK Domestic Liquidity Sub Group (RFB DoLSub) | ||
| Liquidity Coverage Ratio (LCR) | 155% | 164% |
| LCR eligible liquidity pool | 49.0 | 54.1 |
Analysis of liquidity is included in the Liquidity risk section of the Risk review.
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 forwardlooking 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 2018 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 2018) 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 2018 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.
Our glossary of industry and other main terms is available on our website: www.santander.co.uk/uk/about-santander-uk/investor-relations-glossary.
The definition of Net Promoter Score is as follows:
| Term | Definition |
|---|---|
| Net Promoter Score (NPS) | NPS measures customer experience and predicts business growth. This proven metric provides the core measurement for customer experience management programs and the loyalty of customers to a company. |
| Business and corporate NPS is measured by the MarketVue Business Banking from Savanta. This is an ongoing telephone based survey designed to monitor usage and attitude of UK businesses towards banks. 15,000 structured telephone interviews are conducted each year among businesses of all sizes from new start-ups to large corporates. The data is based upon 9,925 interviews made in twelve months ended 30 June 2019 with businesses turning over from £0 - £500m per annum and are weighted by region and turnover to be representative of businesses in Great Britain. NPS - recommendation score is based on an 11 point scale (%Top 2 - %Bottom 7). The competitor set included |
|
| in this analysis is Barclays, RBS, HSBC, Lloyds Bank, TSB and NatWest. | |
| The Financial Research Survey (FRS) is a monthly personal finance survey of around 5,000 consumers prepared by the independent market research agency, IPSOS MORI. The NPS is based on a 11-point scale (%Top2 - %Bottom 7) across mortgages, savings, main current accounts, home insurance, UPLs and credit cards, based on a weighting of those products calculated to reflect the average product distribution across Santander UK and competitor brands. Data shown is for the twelve months ended 30 June 2019, based on 13,803 interviews and compared against twelve months ended data for the period as indicated. The competitor set used to calculate the product weights is Barclays, Halifax, HSBC, Lloyds Bank, Nationwide, NatWest, TSB and RBS. The competitor set included in this analysis for the ranking and highest performing peers is Barclays, Halifax, HSBC, Lloyds Bank, Nationwide, NatWest, TSB and RBS. |
| Risk overview | 13 |
|---|---|
| Risk governance | 13 |
| Credit risk | 14 |
| Santander UK group level | 14 |
| Retail Banking | 20 |
| Other business segments | 24 |
| Market risk | 26 |
| Banking market risk | 26 |
| Trading market risk | 26 |
| Liquidity risk | 27 |
| Capital risk | 30 |
| Other key risks | 31 |
All our activities involve identifying, assessing, managing and reporting risks. Sound risk management is at the centre of our day-to-day activities. It benefits our business and our customers by helping to ensure balanced and responsible growth.
Our key risk types help us define the risks to which we are exposed. For key risk type definitions, see 'How we define risk' on page 53 of the 2018 Annual Report.
In H119, our top risks remained largely the same. The more notable movements in the top risks across the period related to the following:
In H119, our emerging risks remained largely unchanged, with the exceptions of climate change, which we already recognise is a significant global issue and have been tracking through various emerging regulatory developments; and also developments in both the UK economy and the global geopolitical environment:
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.
There were no significant changes in our risk governance, including how we define risk and our key risk types, as described in the 2018 Annual Report. In H119, we also renamed 'Strategic risk' as 'Strategic and Business risk' to reflect that its scope includes the risk of underperformance against planned objectives.
Credit risk is the risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for which we assumed a financial obligation.
In this section we begin by reviewing the latest forward-looking information used in our Expected Credit Loss (ECL) assessments. We then analyse our credit risk profile and performance at a Santander UK group level followed by Retail Banking, which is covered separately from our other business segments: Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre.
Stage 3 ratio was broadly stable at 1.28% (2018: 1.29%).
Loss allowances increased to £817m (2018: £807m).
Average LTV of 64% (2018: 63%) on new mortgage lending.
We manage credit risk across all our business segments in line with the credit risk lifecycle. We tailor the way we manage risk across the lifecycle to the type of customer. There have been no significant changes in the way we manage credit risk as described in the 2018 Annual Report.
The segmental basis of presentation in this Half Yearly Financial Report has been changed, and the prior period restated, to report our short term markets business in Corporate Centre rather than in Corporate & Investment Banking. This reflects the run down or transfer to Banco Santander London Branch of the prohibited part of the business in 2018, as part of the transition to our ring-fenced model, with the remaining permitted business forming part of our liquidity risk management function. See Note 2 to the Condensed Consolidated Interim Financial Statements for more information.
We provide an update on the key changes to the inputs to our ECL model below.
Following the introduction of IFRS 9 in 2018, the Stage 3 ratio became the main indicator of credit quality performance and replaces the NPL ratio which is no longer reported. The Stage 3 ratio is total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a significant increase in credit risk (SICR) since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the likelihood of a loss being incurred even when it is considered unlikely.
For all our portfolios, except CIB, we use five forward-looking economic scenarios. They consist of a central base case, two upside scenarios and two downside scenarios. We use five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy. For example, the Downside 2 scenario reflects the possibility of a recession occurring. We believe that our five scenarios, in particular Downside 1 and Downside 2, reflect the range of outcomes that Brexit may take, including a deal with a transition period or a no-deal Brexit. Our scenarios are also in line with a number of scenarios that have been produced by, for example, the Bank of England and its disruptive scenario, and other economic forecasters' no deal scenarios. As such our scenarios and weights reflect the range of possible outcomes that the UK may face in H219 and beyond.
The key changes to the base case from 2018 to H119 are that GDP for 2019 is now 1.2% compared to 1.5%; unemployment is lower across all years of the forecast (on average 4.0% compared to 4.3%); house prices growth is lower for 2019 at 1% compared to 2%; and there are no interest rate increases planned over the period compared to increases of 0.25% in 2019, 2020 and 2022.
For details on our methodology to derive the scenarios we use in our ECL model and the weights we apply to them, see the 'Multiple economic scenarios and probability weights' section in the 2018 Annual Report.
The annual growth rates over the five year forecast for each of our scenarios at 30 June 2019 and 31 December 2018 were:
| Upside 2 % |
Upside 1 % |
Base case % |
Downside 1 % |
Downside 2 % |
|
|---|---|---|---|---|---|
| 30 June 2019 House price index(1) |
4.80 | 3.40 | 1.70 | (2.20) | (8.70) |
| GDP(1) | 2.60 | 2.20 | 1.80 | 0.70 | 1.00 |
| Unemployment rate | 1.90 | 3.00 | 4.00 | 6.50 | 7.80 |
| Interest rate | 0.75 | 0.75 | 0.75 | 2.00 | 2.25 |
| 31 December 2018 | |||||
| House price index(1) | 3.40 | 2.30 | 2.00 | (2.00) | (9.50) |
| GDP(1) | 2.50 | 2.10 | 1.60 | 0.70 | 0.30 |
| Unemployment rate | 2.80 | 3.80 | 4.30 | 6.90 | 8.60 |
| Interest rate | 1.00 | 1.25 | 1.50 | 2.50 | 2.25 |
(1) Compound annual growth rate
The probability weights we applied to the scenarios at 30 June 2019 and 31 December 2018 were:
| Upside 2 | Upside 1 | Base case | Downside 1 | Downside 2 | |
|---|---|---|---|---|---|
| Probability weights | % | % | % | % | % |
| 30 June 2019 | 5 | 15 | 40 | 30 | 10 |
| 31 December 2018 | 5 | 15 | 40 | 30 | 10 |
The average global annual growth rates over the four year forecast for each of the scenarios for our CIB portfolio at 30 June 2019 and 31 December 2018 were:
| Upside | Base case | Downside | |
|---|---|---|---|
| GDP assumption | % | % | % |
| 30 June 2019 | 3.8 | 3.5 | 3.0 |
| 31 December 2018 | 4.2 | 3.6 | 2.7 |
The probability weights we applied to the scenarios for our CIB portfolio at 30 June 2019 and 31 December 2018 were:
| Upside | Base case | Downside | |
|---|---|---|---|
| Probability weights | % | % | % |
| 30 June 2019 | 30 | 40 | 30 |
| 31 December 2018 | 20 | 60 | 20 |
There have been no changes to the way that we measure SICR as described in the 2018 Annual Report, except that we changed the absolute thresholds for unsecured personal loans and Corporate & Commercial Banking exposures to be calculated on an annualised basis to bring them into line with our other portfolios.
IFRS 9 recognises that expert management judgement is an essential part of calculating ECL. Specifically, where the historical information that we use in our models does not reflect current or future expected conditions or the data we have does not cover a sufficient period or is not robust enough. We discussed what we consider to be the significant management judgements in calculating ECL in the 2018 Annual Report, which are:
The most significant PMAs that we applied at 30 June 2019 and 31 December 2018 were:
| 30 June | 31 December | |
|---|---|---|
| 2019 | 2018 | |
| PMAs | £m | £m |
| Interest-only maturity default risk | 51 | 69 |
| Buy-to-Let (BTL) | 18 | 20 |
| Long-term indeterminate arrears | 20 | 23 |
| Temporary economics | 22 | - |
In addition to updating the PMAs we applied in 2018, in H119 we applied a temporary economics PMA of £22m. In June 2019, management updated the economic scenarios for Q2 2019, which resulted in a release of ECL, mainly arising from changes to Base Rate/Libor, unemployment and HPI. While the risks facing the UK macro economy are materially unchanged and our scenarios capture a plausible range of possible loss distributions under alternative economic conditions, uncertainty around the outcome of Brexit and its effect on the UK macro environment continues. Management therefore applied a temporary PMA of £22m to defer the impacts in full for the Q2 2019 changes in assumptions on Base Rate/Libor and unemployment, and partially for HPI.
The customer loans in the tables below and in the rest of the 'Credit risk' section are presented differently from the balances in the Consolidated Balance Sheet. The main difference is that customer loans exclude interest we have accrued but not charged to customers' accounts yet.
| Stage 3 | Stage 3 | |||||
|---|---|---|---|---|---|---|
| Customer | drawn | undrawn | Stage 3 | Gross write– | Loss | |
| loans | exposure(1)(2) | exposure | ratio(3) | offs | allowances | |
| 30 June 2019 | £bn | £m | £m | % | £m | £m |
| Retail Banking: | 174.6 | 2,156 | 42 | 1.26 | 96 | 584 |
| of which mortgages | 159.4 | 1,922 | 15 | 1.22 | 6 | 214 |
| Corporate & Commercial Banking | 17.4 | 300 | 26 | 1.87 | 4 | 205 |
| Corporate & Investment Banking | 4.1 | – | 26 | 0.63 | – | 16 |
| Corporate Centre | 4.2 | 14 | – | 0.33 | 1 | 12 |
| 200.3 | 2,470 | 94 | 1.28 | 101 | 817 | |
| 31 December 2018 | ||||||
| Retail Banking: | 172.8 | 2,211 | 43 | 1.30 | 182 | 594 |
| – of which mortgages | 158.0 | 1,982 | 17 | 1.27 | 18 | 237 |
| Corporate & Commercial Banking | 17.7 | 264 | 12 | 1.56 | 97 | 182 |
| Corporate & Investment Banking | 4.6 | – | 26 | 0.56 | 252 | 18 |
| Corporate Centre | 4.5 | 16 | – | 0.36 | 3 | 13 |
| 199.6 | 2,491 | 81 | 1.29 | 534 | 807 | |
| Of which: Corporate lending | ||||||
| 30 June 2019 | 23.3 | 394 | 53 | 1.92 | 13 | 274 |
| 31 December 2018 | 24.1 | 353 | 38 | 1.62 | 364 | 253 |
(1) We define Stage 3 in the 'Credit risk – Santander UK group level' section.
(2) Interest on Stage 3 exposures is derecognised in line with the requirements of IFRS 9.
(3) Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
Corporate lending comprises the business banking portfolio in our Retail Banking segment, and our Corporate & Commercial Banking and Corporate & Investment Banking segments.
For more on the credit performance of our key portfolios by business segment, see the 'Retail Banking – credit risk review' and 'Other business segments – credit risk review' sections.
Total on-balance sheet exposures at 30 June 2019 comprised £200.3bn of customer loans, L&A to banks of £2.1bn, £29.6bn of sovereign assets measured at amortised cost, £13.4bn of assets measured at FVOCI and £22.0bn of cash and balances at central banks.
| Stage 2 | |||||||
|---|---|---|---|---|---|---|---|
| Average PD(1) | Stage 1 | ≤ 30 DPD | >30 DPD | Sub total | Stage 3 | Total | |
| 30 June 2019 | % | £m | £m | £m | £m | £m | £m |
| Exposures | |||||||
| On-balance sheet | |||||||
| Retail Banking | 0.50 | 162,180 | 9,383 | 871 | 10,254 | 2,156 | 174,590 |
| – of which mortgages | 0.44 | 148,203 | 8,450 | 814 | 9,264 | 1,922 | 159,389 |
| Corporate & Commercial Banking | 1.06 | 15,622 | 1,333 | 110 | 1,443 | 300 | 17,365 |
| Corporate & Investment Banking | 0.29 | 3,868 | 192 | – | 192 | – | 4,060 |
| Corporate Centre | 0.13 | 71,263 | 117 | 14 | 131 | 14 | 71,408 |
| Total on-balance sheet | 252,933 | 11,025 | 995 | 12,020 | 2,470 | 267,423 | |
| Off–balance sheet | |||||||
| Retail Banking(2) | 25,283 | 173 | – | 173 | 42 | 25,498 | |
| – of which mortgages(2) | 13,054 | 65 | – | 65 | 15 | 13,134 | |
| Corporate & Commercial Banking | 5,333 | 184 | – | 184 | 26 | 5,543 | |
| Corporate & Investment Banking | 10,451 | 202 | – | 202 | 26 | 10,679 | |
| Corporate Centre | 1,186 | – | – | – | – | 1,186 | |
| Total off–balance sheet(3) | 42,253 | 559 | – | 559 | 94 | 42,906 | |
| Total exposures | 295,186 | 11,584 | 995 | 12,579 | 2,564 | 310,329 | |
| ECL | |||||||
| On-balance sheet | |||||||
| Retail Banking | 86 | 212 | 34 | 246 | 224 | 556 | |
| – of which mortgages | 9 | 90 | 13 | 103 | 98 | 210 | |
| Corporate & Commercial Banking | 32 | 26 | 4 | 30 | 130 | 192 | |
| Corporate & Investment Banking | 2 | – | – | – | – | 2 | |
| Corporate Centre | 4 | 3 | 1 | 4 | 4 | 12 | |
| Total on-balance sheet | 124 | 241 | 39 | 280 | 358 | 762 | |
| Off–balance sheet | |||||||
| Retail Banking | 14 | 13 | – | 13 | 1 | 28 | |
| – of which mortgages | 3 | 1 | – | 1 | – | 4 | |
| Corporate & Commercial Banking | 6 | 5 | – | 5 | 2 | 13 | |
| Corporate & Investment Banking | 3 | 2 | – | 2 | 9 | 14 | |
| Total off–balance sheet | 23 | 20 | – | 20 | 12 | 55 | |
| Total ECL | 147 | 261 | 39 | 300 | 370 | 817 | |
| Coverage ratio(4) | % | % | % | % | % | % | |
| On-balance sheet | |||||||
| Retail Banking | 0.1 | 2.3 | 3.9 | 2.4 | 10.4 | 0.3 | |
| – of which mortgages | – | 1.1 | 1.6 | 1.1 | 5.1 | 0.1 | |
| Corporate & Commercial Banking | 0.2 | 2.0 | 3.6 | 2.1 | 43.3 | 1.1 | |
| Corporate & Investment Banking | 0.1 | – | – | – | – | – | |
| Corporate Centre | – | 2.6 | 7.1 | 3.1 | 28.6 | – | |
| Total on-balance sheet | – | 2.2 | 3.9 | 2.3 | 14.5 | 0.3 | |
| Off–balance sheet | |||||||
| Retail Banking | 0.1 | 7.5 | – | 7.5 | 2.4 | 0.1 | |
| – of which mortgages | – | 1.5 | – | 1.5 | – | – | |
| Corporate & Commercial Banking | 0.1 | 2.7 | – | 2.7 | 7.7 | 0.2 | |
| Corporate & Investment Banking | – | 1.0 | – | 1.0 | 34.6 | 0.1 | |
| Total off-balance sheet | 0.1 | 3.6 | – | 3.6 | 12.8 | 0.1 | |
| Total coverage | – | 2.3 | 3.9 | 2.4 | 14.4 | 0.3 |
(1) Average PDs are 12-month, scenario-weighted PDs. Financial assets in default are excluded from the calculation, as they are allocated a 100% PD. (2) Off-balance sheet exposures include £7.2bn of retail mortgage offers in the pipeline.
(3) Off-balance sheet amounts consist of contingent liabilities and commitments.
(4) ECL as a percentage of the related exposure.
| 30 June | 31 December | |
|---|---|---|
| 2019 | 2018 | |
| £m | £m | |
| Currently in arrears | 995 | 960 |
| Currently up–to–date: | ||
| – PD deterioration | 7,929 | 8,509 |
| –Other(1) | 3,655 | 2,542 |
| Total Stage 2 | 12,579 | 12,011 |
(1) Mainly due to forbearance.
Total on-balance sheet exposures at 31 December 2018 comprised £199.6bn of customer loans, L&A to banks of £2.8bn, £28.4bn of sovereign assets measured at amortised cost, £13.3bn of assets measured at FVOCI and £19.7bn cash and balances at central banks.
| Stage 2 | |||||||
|---|---|---|---|---|---|---|---|
| Average PD(1) | |||||||
| 31 December 2018 | % | Stage 1 £m |
≤ 30 DPD £m |
>30 DPD £m |
Sub total £m |
Stage 3 £m |
Total £m |
| Exposures | |||||||
| On-balance sheet | |||||||
| Retail Banking | 0.53 | 160,212 | 9,375 | 949 | 10,324 | 2,211 | 172,747 |
| – of which mortgages | 0.48 | 146,619 | 8,466 | 890 | 9,356 | 1,982 | 157,957 |
| Corporate & Commercial Banking | 0.92 | 16,394 | 1,044 | – | 1,044 | 264 | 17,702 |
| Corporate & Investment Banking | 0.36 | 4,535 | 78 | – | 78 | – | 4,613 |
| Corporate Centre | 0.14 | 68,535 | 120 | 11 | 131 | 15 | 68,681 |
| Total on-balance sheet | 249,676 | 10,617 | 960 | 11,577 | 2,490 | 263,743 | |
| Off–balance sheet | |||||||
| Retail Banking(2) | 22,819 | 196 | – | 196 | 43 | 23,058 | |
| – of which mortgages(2) | 11,120 | 76 | – | 76 | 17 | 11,213 | |
| Corporate & Commercial Banking | 4,939 | 182 | – | 182 | 12 | 5,133 | |
| Corporate & Investment Banking | 12,923 | 56 | – | 56 | 26 | 13,005 | |
| Corporate Centre | 525 | – | – | – | – | 525 | |
| Total off–balance sheet(3) | 41,206 | 434 | – | 434 | 81 | 41,721 | |
| Total exposures | 290,882 | 11,051 | 960 | 12,011 | 2,571 | 305,464 | |
| ECL | |||||||
| On-balance sheet | |||||||
| Retail Banking | 84 | 217 | 39 | 256 | 228 | 568 | |
| – of which mortgages | 10 | 98 | 20 | 118 | 106 | 234 | |
| Corporate & Commercial Banking | 31 | 26 | – | 26 | 111 | 168 | |
| Corporate & Investment Banking | 1 | 1 | – | 1 | – | 2 | |
| Corporate Centre | 5 | 3 | – | 3 | 5 | 13 | |
| Total on-balance sheet | 121 | 247 | 39 | 286 | 344 | 751 | |
| Off–balance sheet | |||||||
| Retail Banking | 12 | 13 | – | 13 | 1 | 26 | |
| – of which mortgages | 2 | 1 | – | 1 | – | 3 | |
| Corporate & Commercial Banking | 6 | 6 | – | 6 | 2 | 14 | |
| Corporate & Investment Banking | 4 | 2 | – | 2 | 10 | 16 | |
| Total off–balance sheet | 22 | 21 | – | 21 | 13 | 56 | |
| Total ECL | 143 | 268 | 39 | 307 | 357 | 807 | |
| Coverage ratio(4) | % | % | % | % | % | % | |
| On-balance sheet | |||||||
| Retail Banking | 0.1 | 2.3 | 4.1 | 2.5 | 10.3 | 0.3 | |
| – of which mortgages | – | 1.2 | 2.2 | 1.3 | 5.3 | 0.1 | |
| Corporate & Commercial Banking | 0.2 | 2.5 | – | 2.5 | 42.0 | 0.9 | |
| Corporate & Investment Banking | – | 1.3 | – | 1.3 | – | – | |
| Corporate Centre | – | 2.5 | – | 2.3 | 33.3 | – | |
| Total on-balance sheet | – | 2.3 | 4.1 | 2.5 | 13.8 | 0.3 | |
| Off–balance sheet | |||||||
| Retail Banking | 0.1 | 6.6 | – | 6.6 | 2.3 | 0.1 | |
| – of which mortgages | – | 1.3 | – | 1.3 | – | – | |
| Corporate & Commercial Banking | 0.1 | 3.3 | – | 3.3 | 16.7 | 0.3 | |
| Corporate & Investment Banking | – | 3.6 | – | 3.6 | 38.5 | 0.1 | |
| Total off–balance sheet | 0.1 | 4.8 | – | 4.8 | 16.0 | 0.1 | |
| Total coverage | – | 2.4 | 4.1 | 2.6 | 13.9 | 0.3 | |
(1) Average PDs are 12-month, scenario-weighted PDs. Weighted averages were determined using EAD for the first year. Financial assets in default are excluded from the calculation, as they are allocated a 100% PD. (2) Off-balance sheet exposures include £5.2bn of retail mortgage offers in the pipeline.
(3) Off-balance sheet amounts consist of contingent liabilities and commitments.
(4) ECL as a percentage of the related exposure.
Key movements in exposures and ECL in the period by Stage were:
The table below shows the relationships between disclosures in this Credit risk review section which refer to drawn exposures and the associated ECL, and the total assets as presented in the Consolidated Balance Sheet.
| On-balance sheet | Off-balance sheet | ||||
|---|---|---|---|---|---|
| 30 June 2019 | Exposures £m |
Loss allowance £m |
Net carrying amount £m |
Exposures £m |
Loss allowance £m |
| Retail Banking | 174,590 | 556 | 174,034 | 25,498 | 28 |
| – of which mortgages | 159,389 | 210 | 159,179 | 13,134 | 4 |
| Corporate & Commercial Banking | 17,365 | 192 | 17,173 | 5,543 | 13 |
| Corporate & Investment Banking | 4,060 | 2 | 4,058 | 10,679 | 14 |
| Corporate Centre | 71,408 | 12 | 71,396 | 1,186 | – |
| Total exposures presented in Credit Quality tables | 267,423 | 762 | 266,661 | 42,906 | 55 |
| Other items(1) | 2,840 | ||||
| Adjusted net carrying amount | 269,501 | ||||
| Assets classified at FVTPL | 6,190 | ||||
| Non–financial assets | 8,836 | ||||
| Total assets per the Consolidated Balance Sheet at 30 June 2019 | 284,527 |
| 31 December 2018 | |||||
|---|---|---|---|---|---|
| Retail Banking | 172,747 | 568 | 172,179 | 23,058 | 26 |
| – of which mortgages | 157,957 | 234 | 157,723 | 11,213 | 3 |
| Corporate & Commercial Banking | 17,702 | 168 | 17,534 | 5,133 | 14 |
| Corporate & Investment Banking | 4,613 | 2 | 4,611 | 13,005 | 16 |
| Corporate Centre | 68,681 | 13 | 68,668 | 525 | – |
| Total exposures presented in Credit Quality tables | 263,743 | 751 | 262,992 | 41,721 | 56 |
| Other items(1) | 2,501 | ||||
| Adjusted net carrying amount | 265,493 | ||||
| Assets classified at FVTPL | 10,876 | ||||
| Non–financial assets | 7,003 | ||||
| Total assets per the Consolidated Balance Sheet at 31 December 2018 | 283,372 | ||||
(1) These assets carry low credit risk and therefore have an immaterial ECL.
The following table shows changes in total exposures subject to ECL assessment, and the corresponding ECL, in the period. The table presents total gross carrying amounts and ECLs at a Santander UK group level.
| Non–credit impaired | Credit impaired | |||||||
|---|---|---|---|---|---|---|---|---|
| Stage 1 Subject to 12m ECL |
Stage 2 Subject to lifetime ECL |
Stage 3 Subject to lifetime ECL |
Total | |||||
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | |
| £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2019 | 290,882 | 143 | 12,011 | 307 | 2,571 | 357 | 305,464 | 807 |
| Change in economic scenarios(2) | – | 2 | – | (6) | – | (4) | – | (8) |
| Transfer to lifetime ECL (Stage 2)(3) | (3,290) | (10) | 3,290 | 10 | – | – | – | – |
| Transfer to credit impaired (Stage 3)(3) | (224) | (3) | (504) | (26) | 728 | 29 | – | – |
| Transfer to 12–month ECL (Stage 1)(3) | 2,959 | 69 | (2,959) | (69) | – | – | – | – |
| Transfer from credit impaired(3) | 3 | 1 | 348 | 16 | (351) | (17) | – | – |
| Transfers of financial instruments | (552) | 57 | 175 | (69) | 377 | 12 | – | – |
| Net ECL remeasurement on stage transfer(4) | – | (61) | – | 75 | – | 66 | – | 80 |
| New assets originated or purchased(5) | 21,868 | 18 | 544 | 11 | 3 | – | 22,415 | 29 |
| Other(6) | 1,561 | (1) | 362 | (9) | (73) | 47 | 1,850 | 37 |
| Assets derecognised – closed good(7) | (18,573) | (11) | (513) | (9) | (195) | (7) | (19,281) | (27) |
| (7) Assets derecognised – written off |
– | – | – | – | (119) | (101) | (119) | (101) |
| At 30 June 2019 | 295,186 | 147 | 12,579 | 300 | 2,564 | 370 | 310,329 | 817 |
| Net movement in the period | 4,304 | 4 | 568 | (7) | (7) | 13 | 4,865 | 10 |
| ECL charge/(release)to the Income Statement | 4 | (7) | 114 | 111 | ||||
| Less: ECL relating to derecognised income | – | – | (4) | (4) | ||||
| Less: Recoveries net of collection costs | – | – | (38) | (38) | ||||
| Total ECL charge/(release) to the Income Statement | 4 | (7) | 72 | 69 |
(1) Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2) Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, changes to the scenarios themselves as well as changes in the probability weights from all other movements. The impact of changes in economics on exposure Stage allocations are shown within Transfers of financial instruments.
(3) Total impact of facilities that moved Stage(s) in the period. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected
here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the period. Transfers between Stages are based on opening balances and ECL at the start of the period. (4) Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.
(5) Exposures and ECL of facilities that did not exist at the start of the period, but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6) Residual movements on facilities that did not change Stage in the period, and which were neither acquired nor purchased in the period. Includes the impact of changes in risk parameters in the period, repayments, draw downs on accounts open at the start and end of the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the period.
(7) Exposures and ECL for facilities that existed at the start of the period, but not at the end.
We offer mortgages to people who want to buy a property, and offer additional borrowing (known as further advances) to existing mortgage customers.
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.
| Stock | New business | |||||||
|---|---|---|---|---|---|---|---|---|
| 30 June 2019 | 31 December 2018 Half year to 30 June 2019 |
Half year to 30 June 2018 | ||||||
| £m | % | £m | % | £m | % | £m | % | |
| Home movers | 69,153 | 43 | 69,198 | 44 | 4,666 | 38 | 5,161 | 37 |
| Remortgagers | 51,259 | 32 | 51,272 | 32 | 3,940 | 32 | 5,351 | 38 |
| First-time buyers | 30,005 | 19 | 29,235 | 19 | 2,751 | 22 | 2,028 | 15 |
| Buy-to-let | 8,972 | 6 | 8,252 | 5 | 1,055 | 8 | 1,318 | 10 |
| 159,389 | 100 | 157,957 | 100 | 12,412 | 100 | 13,858 | 100 |
As well as the new business in the table above, there were £15.0bn (H118: £14.2bn) of internal remortgages where we kept existing customers with maturing products on new mortgages. We also provided £0.7bn (H118: £0.7bn) of further advances and flexible mortgage drawdowns.
The borrower profile of stock remained broadly unchanged. The change in borrower profile of new business reflected product initiatives designed to help first-time buyers and changes to credit policy in H119 to increase the maximum loan term from 35 to 40 years. In H119, we helped 15,000 (H118: 11,700) first-time buyers purchase their new home with £2.8bn of gross lending (H118: £2.0bn).
The interest rate profile of our mortgage asset stock was:
| 30 June 2019 | 31 December 2018 | |||
|---|---|---|---|---|
| £m % |
£m | % | ||
| Fixed rate | 119,880 | 75 | 115,178 | 73 |
| Variable rate | 23,241 | 15 | 24,396 | 15 |
| Standard Variable Rate (SVR) | 16,268 | 10 | 18,383 | 12 |
| 159,389 | 100 | 157,957 | 100 |
In H119, we continued to see customer refinancing from SVR products into fixed rate products influenced by low mortgage rates and the competitive mortgage market.
The geographical distribution of our mortgage asset stock was:
| Stock | New business | ||||
|---|---|---|---|---|---|
| 30 June | 31 December | 30 June | 31 December | ||
| 2019 | 2018 | 2019 | 2018 | ||
| Region | £bn | £bn | £bn | £bn | |
| London | 39.8 | 39.0 | 3.3 | 7.1 | |
| Midlands and East Anglia | 21.2 | 21.1 | 1.7 | 3.8 | |
| North | 22.1 | 22.2 | 1.5 | 3.4 | |
| Northern Ireland | 3.3 | 3.4 | 0.1 | 0.2 | |
| Scotland | 6.7 | 6.7 | 0.5 | 1.0 | |
| South East excluding London | 49.5 | 48.7 | 4.1 | 9.0 | |
| South West, Wales and other | 16.8 | 16.9 | 1.2 | 2.8 | |
| 159.4 | 158.0 | 12.4 | 27.3 | ||
| Average loan size for new business | £'000 | £'000 | |||
| South East including London | 274 | 270 | |||
| Rest of the UK | 151 | 150 | |||
| UK as a whole | 206 | 203 |
The geographical distribution of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East, in line with the distribution of the population across the UK. The loan-to-income multiple of mortgage lending during the period, representing average earnings of new business at inception, was 3.31 (2018: 3.24).
This table shows the LTV distribution for our mortgage stock, Stage 3 stock and new business. We use our estimate of the property value at the balance sheet date. We include fees that have been added to the loan in the LTV calculation. For flexible products, we only include the drawn amount, not undrawn limits.
| 30 June 2019 | 31 December 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Of which: | Of which: | |||||||
| LTV | Stock % |
Stage 3 stock % |
New business % |
Stock % |
Stage 3 stock % |
New business % |
||
| Up to 50% | 45 | 44 | 17 | 45 | 43 | 20 | ||
| >50-75% | 41 | 35 | 40 | 41 | 35 | 41 | ||
| >75- 85% | 9 | 8 | 22 | 9 | 8 | 22 | ||
| >85-100% | 4 | 6 | 21 | 4 | 7 | 17 | ||
| >100% | 1 | 7 | – | 1 | 7 | – | ||
| 100 | 100 | 100 | 100 | 100 | 100 | |||
| Collateral value of residential properties(1) | £159,242m | £1,850m | £12,411m | £157,787m | £1,904m | £27,274m | ||
| % | % | % | % | % | % |
Simple average(2) LTV (indexed) 42 43 64 42 43 63 Valuation weighted average(3) LTV (indexed) 40 38 60 39 38 59
(1) Collateral value shown is limited to the balance of each related loan. Excludes the impact of over-collateralisation (where the collateral is higher than the loan). Includes collateral against loans in negative equity of £864m (2018: £969m). (2) Total of all LTV% divided by the total of all accounts.
(3) Total of all loan values divided by the total of all valuations.
At 30 June 2019, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances reduced to £147m (2018: £170m).
In H119, the simple average LTV of mortgage total new lending in London was 60% (2018: 58%).
| 30 June 2019 £m |
31 December 2018 £m |
|
|---|---|---|
| Mortgage loans and advances to customers of which: | 159,389 | 157,957 |
| – Stage 1 | 148,203 | 146,619 |
| – Stage 2 | 9,264 | 9,356 |
| – Stage 3 | 1,922 | 1,982 |
| Loss allowances(3) | 214 | 237 |
| Stage 2 ratio(1) | 5.81% | 5.92% |
| Stage 3 ratio(2) | 1.22% | 1.25% |
(1) Stage 2 exposures as a percentage of customer loans.
(2) Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures. (3) The ECL allowance is for both on and off–balance sheet exposures.
The following table shows changes in total exposures subject to ECL assessment, and the corresponding ECL, for residential mortgages in the period. The footnotes to the Santander UK group level analysis on page 19 are also applicable to this table.
| Non-credit impaired | Credit impaired | |||||||
|---|---|---|---|---|---|---|---|---|
| Stage 1 | Stage 2 | Stage 3 | ||||||
| Subject to 12-month ECL | Subject to lifetime ECL | Subject to lifetime ECL | ||||||
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | |
| Mortgages | £m | £m | £m | £m | £m | £m | £m | £m |
| At 1 January 2019 | 157,739 | 12 | 9,432 | 119 | 1,999 | 106 | 169,170 | 237 |
| Change in economic scenarios(2) | – | (5) | – | (8) | – | (4) | – | (17) |
| Transfer to lifetime ECL (Stage 2)(3) | (1,932) | (1) | 1,932 | 1 | – | – | – | – |
| Transfer to credit impaired (Stage 3)(3) | (111) | (1) | (382) | (8) | 493 | 9 | – | – |
| Transfer to 12-month ECL (Stage 1)(3) | 2,237 | 21 | (2,237) | (21) | – | – | – | – |
| Transfer from credit impaired(3) | 1 | – | 322 | 10 | (323) | (10) | – | – |
| Transfers of financial instruments | 195 | 19 | (365) | (18) | 170 | (1) | – | – |
| Net ECL remeasurement on stage transfer(4) | – | (20) | – | 14 | – | 4 | – | (2) |
| New assets originated or purchased (5) | 12,733 | 3 | 417 | 4 | – | – | 13,150 | 7 |
| Other(6) | (1,591) | 4 | 198 | (4) | (38) | 5 | (1,431) | 5 |
| Assets derecognised – closed good (7) | (7,819) | (1) | (353) | (3) | (184) | (6) | (8,356) | (10) |
| Assets derecognised – written off (7) | – | – | – | – | (10) | (6) | (10) | (6) |
| At 30 June 2019 | 161,257 | 12 | 9,329 | 104 | 1,937 | 98 | 172,523 | 214 |
| Net movement in the period | 3,518 | – | (103) | (15) | (62) | (8) | 3,353 | (23) |
| Charge/(release) to the Income Statement | – | (15) | (2) | (17) | ||||
| Less: Recoveries/ECL on derecognised income | – | (1) | (3) | (4) | ||||
| Income statement charge/(release) for period | – | (16) | (5) | (21) |
At 30 June 2019, there were £1.4bn (2018: £1.3bn) of mortgages on the balance sheet that we had forborne. At 30 June 2019, there were £4.5bn (2018: £4.5bn) of other mortgages on the balance sheet that we had modified since January 2008.
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 2018 Annual Report.
| Portfolio of particular interest(1) | |||||||
|---|---|---|---|---|---|---|---|
| Part interest | |||||||
| only, part | Other | ||||||
| Total | Interest-only | repayment(2) (3) | Flexible(3) | LTV >100% | Buy-to-let | portfolio | |
| 30 June 2019 | £m | £m | £m | £m | £m | £m | £m |
| Mortgage portfolio | 159,389 | 37,891 | 13,041 | 12,111 | 1,012 | 8,972 | 103,296 |
| – Stage 1 | 148,203 | 33,037 | 11,749 | 10,951 | 669 | 8,334 | 98,738 |
| – Stage 2 | 9,264 | 3,905 | 1,032 | 886 | 221 | 609 | 3,962 |
| – Stage 3 | 1,922 | 949 | 260 | 274 | 122 | 29 | 596 |
| Stage 3 ratio | 1.22% | 2.50% | 1.99% | 2.26% | 12.06% | 0.32% | 0.58% |
| PIPs | 34 | 14 | 7 | 3 | 15 | 1 | 8 |
| 31 December 2018 | |||||||
| Mortgage portfolio | 157,957 | 38,035 | 13,201 | 12,926 | 1,140 | 8,252 | 101,158 |
| – Stage 1 | 146,619 | 33,001 | 11,824 | 11,558 | 740 | 7,906 | 96,767 |
| – Stage 2 | 9,356 | 4,029 | 1,115 | 1,082 | 273 | 317 | 3,802 |
| – Stage 3 | 1,982 | 1,005 | 262 | 286 | 127 | 29 | 589 |
| Stage 3 ratio | 1.27% | 2.64% | 1.98% | 2.21% | 11.14% | 0.35% | 0.58% |
| PIPs | 25 | 12 | 5 | 3 | 8 | – | 7 |
(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 ofthe mortgages in the segments of particularinterest and the other portfolio does not agree to the total mortgage
portfolio. (2) Mortgage balance includes both the interest-only part of £9,674m (2018: £9,756m) and the non-interest-only part of the loan.
(3) Includes legacy Alliance & Leicesterflexible loans that work in a more limited way than our current Flexi loan product.
– In H119, the value of interest-only loans together with part interest-only, part repayment and flexible loans reduced,reflecting our strategy to manage down the overall exposure to these lending profiles.
BTL mortgage balances increased £0.7bn to £9.0bn (2018: £8.3bn). We continue to focus our BTL book on non-professional landlords, as this segment is closely aligned with mortgages and accounts for the majority of the volume in the BTL market. In 2019, we completed 5,607 BTL mortgages (2018: 11,400), representing 8% of the value of our new business flow (2018: 9%), at an average LTV of 65% (2018: 62%).
| Other unsecured | ||||||
|---|---|---|---|---|---|---|
| 30 June 2019 | Consumer (auto) finance £m |
Personal loans £m |
Credit cards £m |
Overdrafts £m |
Total other unsecured £m |
Total £m |
| Loans and advances to customers of which: | 7,777 | 2,177 | 2,901 | 544 | 5,622 | 13,399 |
| – Stage 1 | 7,323 | 2,127 | 2,576 | 402 | 5,105 | 12,428 |
| – Stage 2 | 411 | 28 | 276 | 117 | 421 | 832 |
| – Stage 3 | 43 | 22 | 49 | 25 | 96 | 139 |
| Loss allowances(2) | 86 | 48 | 125 | 58 | 231 | 317 |
| Stage 3 ratio(1) | 0.55% | 2.18% | 1.23% | |||
| Gross write-offs in H119 | 17 | 65 | 82 | |||
| 31 December 2018 | ||||||
| Loans and advances to customers of which: | 7,347 | 2,182 | 2,865 | 593 | 5,640 | 12,987 |
| – Stage 1 | 6,950 | 2,113 | 2,560 | 422 | 5,095 | 12,045 |
| – Stage 2 | 354 | 48 | 256 | 144 | 448 | 802 |
| – Stage 3 | 43 | 21 | 49 | 27 | 97 | 140 |
| Loss allowances(2) | 85 | 47 | 112 | 61 | 220 | 305 |
| Stage 3 ratio(1) | 0.58% | 2.17% | 1.27% |
Gross write-offs in the year 24 125 149
(1) Total Stage 3 exposure as a percentage of loans and advances to customers plus undrawn Stage 3 exposures.
(2) The ECL allowance is for both on and off–balance sheet exposures.
– Business banking balances were flat and Stage 3 exposures increased slightly.
| 30 June | 31 December | |
|---|---|---|
| 2019 | 2018 | |
| £m | £m | |
| Loans and advances to customers of which: | 1,802 | 1,802 |
| – Stage 1 | 1,549 | 1,548 |
| – Stage 2 | 159 | 165 |
| – Stage 3 | 94 | 89 |
| Loss allowances(2) | 53 | 53 |
| Stage 3 ratio(1) | 5.27% | 4.99% |
| Gross write offs in H119/the year | 9 | 15 |
(1) Total Stage 3 exposure as a percentage of loans and advances to customers plus undrawn Stage 3 exposures. (2) The ECL allowance is for both on and off–balance sheet exposures.
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 in the 2018 Annual report) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.
| Santander UK risk grade | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 30 June 2019 | 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Corporate & Commercial Banking | 1,124 | 3,693 | 778 | 2,091 | 8,747 | 5,290 | 1,060 | 30 | 22,813 |
| Corporate & Investment Banking | – | 3,046 | 4,566 | 5,353 | 711 | 84 | 26 | – | 13,786 |
| Corporate Centre | 37,510 | 9,886 | 1,651 | 237 | 31 | 209 | 43 | 329 | 49,896 |
| Total | 38,634 | 16,625 | 6,995 | 7,681 | 9,489 | 5,583 | 1,129 | 359 | 86,495 |
| Of which: | |||||||||
| Stage 1 | 38,634 | 16,625 | 6,968 | 7,426 | 8,891 | 4,495 | 590 | 343 | 83,972 |
| Stage 2 | – | – | 27 | 255 | 590 | 1,046 | 220 | 16 | 2,154 |
| Stage 3 | – | – | – | – | 8 | 42 | 319 | – | 369 |
| 31 December 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Corporate & Commercial Banking | 680 | 3,899 | 204 | 2,047 | 10,313 | 5,274 | 941 | 36 | 23,394 |
| Corporate & Investment Banking | 12 | 3,187 | 5,535 | 6,361 | 888 | 3 | 78 | – | 16,064 |
| Corporate Centre | 35,111 | 10,301 | 1,873 | 347 | 35 | 137 | 126 | 357 | 48,287 |
| Total | 35,803 | 17,387 | 7,612 | 8,755 | 11,236 | 5,414 | 1,145 | 393 | 87,745 |
| Of which: | |||||||||
| Stage 1 | 35,803 | 17,387 | 7,612 | 8,682 | 10,788 | 4,772 | 521 | 377 | 85,942 |
| Stage 2 | – | – | – | 73 | 448 | 635 | 318 | 16 | 1,490 |
| Stage 3 | – | – | – | – | – | 7 | 306 | – | 313 |
(1) Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.
We typically classify geographical location according to the counterparty's country of domicile unless a full risk transfer guarantee is in place, in which case we use the guarantor's country of domicile instead.
| 30 June 2019 | 31 December 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Rest of | Rest of | ||||||||||
| UK | Europe | US | World | Total | UK | Europe | US | World | Total | ||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||
| Corporate & Commercial Banking | 22,743 | 69 | – | 1 | 22,813 | 23,319 | 74 | – | 1 | 23,394 | |
| Corporate & Investment Banking | 11,595 | 2,160 | 4 | 27 | 13,786 | 13,080 | 2,752 | 124 | 108 | 16,064 | |
| Corporate Centre | 36,984 | 4,593 | 1,074 | 7,245 | 49,896 | 35,023 | 4,819 | 1,281 | 7,164 | 48,287 |
In Corporate & Commercial Banking, committed exposures decreased slightly. Our CRE portfolio decreased by 6.6% as we continue to manage our exposure in line with proactive risk management policies. This was partially offset by a 3.5% increase in our Social Housing portfolio.
In CIB, committed exposures decreased by 14.2% mainly due to reductions in our Large Corporate portfolio driven by the transfer of exposures to Banco Santander London Branch. Credit quality remained stable. The portfolio profile remained short-term, reflecting the purpose of the holdings.
In Corporate Centre, committed exposures increased by 3.3% mainly driven by our Sovereign and Supranational portfolio as part of normal liquid asset portfolio management. Legacy Portfolios in run–off reduced by 13.5%. Social Housing exposures reduced by 3.7%.
We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in 'Monitoring' in the 'Credit risk management' section of the 2018 Annual Report). The table below shows the exposures we monitor, and those we classify as non–performing by portfolio at 30 June 2019 and 31 December 2018.
| Committed exposure | ||||||||
|---|---|---|---|---|---|---|---|---|
| Watchlist | ||||||||
| 30 June 2019 | Fully performing £m |
Enhanced monitoring £m |
Proactive management £m |
Stage 3 Exposure £m |
Total(1) £m |
Loss allowances £m |
||
| Corporate & Commercial Banking | 20,650 | 1,340 | 497 | 326 | 22,813 | 205 | ||
| Corporate & Investment Banking | 12,829 | 698 | 233 | 26 | 13,786 | 16 | ||
| Corporate Centre | 49,837 | 34 | 9 | 16 | 49,896 | 12 | ||
| Total loss allowances | 233 |
| 31 December 2018 | ||||||
|---|---|---|---|---|---|---|
| Corporate & Commercial Banking | 21,402 | 1,336 | 380 | 276 | 23,394 | 182 |
| Corporate & Investment Banking | 15,304 | 548 | 186 | 26 | 16,064 | 18 |
| Corporate Centre | 48,216 | 48 | 7 | 16 | 48,287 | 13 |
| Total loss allowances | 213 |
(1) Includes committed facilities and derivatives.
In Corporate & Commercial Banking, in the SME and mid corporate portfolio and our CRE portfolio, Stage 3 exposures increased, largely due to underlying structural changes impacting some sectors. Exposures subject to enhanced monitoring were broadly unchanged.
In CIB, Large Corporate exposures subject to enhanced monitoring increased due to a small number of cases that were experiencing performance issues. However, Stage 3 exposures remained unchanged. Financial Institutions exposures are fully performing.
In Corporate Centre, Legacy Portfolios in run–off exposures subject to enhanced monitoring and proactive management remained stable, and Social Housing exposures subject to enhanced monitoring reduced. Stage 3 exposures were broadly unchanged.
In H119, there was a managed reduction in CRE lending of £0.4bn, with a focus on risk-weighted returns.
Market risk comprises banking market risk and trading market risk.
Market risk management In H119, there were no significant changes in the way we manage market risk as described in the 2018 Annual Report.
Market risk review In this section, we analyse our key banking and trading market risk metrics.
Net Interest Margin (NIM) sensitivity to +50bps decreased to £187m and to -50bps decreased to £1m (2018: £207m and £(23)m)
Economic Value of Equity (EVE) sensitivity to +50bps decreased to £160m and to -50bps increased to £(216)m (2018: £162m and £(124)m)
The table below shows how our base case income and valuation would be affected by a 50 basis point parallel shift (both up and down) applied instantaneously to the yield curve at 30 June 2019 and 31 December 2018.
| 30 June 2019 | 31 December 2018 | ||||
|---|---|---|---|---|---|
| +50bps £m |
-50bps £m |
+50bps £m |
-50bps £m |
||
| NIM sensitivity | 187 | 1 | 207 | (23) | |
| EVE sensitivity | 160 | (216) | 162 | (124) |
The movement in NIM sensitivities in H119 reflected the removal of ANTS exposures from the sensitivities following the implementation of our ring-fencing plans. The movement in EVE sensitivities in H119 was driven by more margin compression as a result of lower levels of the yield curve.
This table and graph shows our Internal VaR for exposure to each of the main classes of risk for 30 June 2019 and 31 December 2018.
| Period-end exposure | Average exposure | Highest exposure | Lowest exposure | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Trading instruments | 30 June | 31 December | 30 June | 31 December | 30 June | 31 December | 30 June | 31 December | |
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||
| £m | £m | £m | £m | £m | £m | £m | £m | ||
| Interest rate risks | 0.2 | 0.5 | 0.5 | 1.4 | 0.6 | 3.9 | 0.1 | 0.2 | |
| Equity risks | – | – | – | 0.2 | 0.1 | 0.6 | – | – | |
| Foreign exchange risks | 0.2 | 0.1 | 0.2 | 0.3 | 0.3 | 0.9 | – | – | |
| Diversification offsets(1) | (0.2) | (0.2) | (0.3) | (0.5) | (0.4) | – | 0.1 | – | |
| Total correlated one-day VaR | 0.2 | 0.4 | 0.4 | 1.4 | 0.6 | 3.8 | 0.2 | 0.3 |
(1) 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.
At 30 June 2019, only a small amount of trading market risk from permitted products and permitted customers remained.
Liquidity risk is the risk that, while still being solvent, we do not have the liquid financial resources to meet our obligations when they fall due, or we can only obtain them at high cost.
In H119, there were no significant changes in the way we manage liquidity risk as described in the 2018 Annual Report.
In this section, we analyse our key liquidity metrics, including our Liquidity Coverage Ratio (LCR), our Liquidity Risk Appetite (LRA) and our wholesale funding. We also provide details on asset encumbrance.
RFB DoLSub LCR of 155% (2018: 164%)
Wholesale funding with maturity <1 year £17.0bn (2018: £16.5bn)
RFB DoLSub LCR eligible liquidity pool of £49.0bn (2018: £54.1bn)
Prior to 1 January 2019, for the purpose of managing liquidity risk, Santander UK plc, ANTS and Cater Allen Limited formed the Domestic Liquidity Sub-group (DoLSub), which allowed the entities to collectively meet regulatory liquidity requirements. Each member of the DoLSub would support the others by transferring surplus liquidity in times of stress. With effect from 1 January 2019, and in accordance with our ring-fence structure, Santander UK plc was granted a new DoLSub permission (the RFB DoLSub), withdrawing ANTS from the previous DoLSub.
The tables below show our LCR and LRA at 30 June 2019 and 31 December 2018. The LCR at 30 June 2019 reflects the RFB DoLSub, and at 31 December 2018 reflects the previous DoLSub. The LRA data reflect the stress testing methodology in place at that time.
| LCR RFB DoLSub / LRA RFB | ||||||
|---|---|---|---|---|---|---|
| LCR(1) | LRA(2) | |||||
| 30 June 2019 £bn |
31 December 2018 £bn |
30 June 2019 £bn |
31 December 2018 £bn |
|||
| Eligible liquidity pool (liquidity value) Net stress outflows |
47.7 (30.7) |
53.0 (32.4) |
47.1 (31.8) |
52.2 (32.1) |
||
| Surplus | 17.0 | 20.6 | 15.3 | 20.1 | ||
| Eligible liquidity pool as a percentage of anticipated net cash flows | 155% | 164% | 148% | 163% |
(1) For 30 June 2019, in accordance with our ring-fence structure, data is for the RFB DoLSub. For 31 December 2018, i.e. before the implementation of ring-fencing, data is forthe previous DoLSub. (2) The LRA is calculated for the Santander UK plc group (RFB Group) and is a three-month Santander UK specific requirement.
We continue to maintain high levels of liquidity to ensure we are well prepared for further Brexit uncertainty later in the year. The RFB DolSub LCR and LCR eligible liquidity pool both decreased following the transfer of our Isle of Man and Jersey businesses (Crown Dependencies) into ANTS in 2018, and ANTS' removal from the DoLSub on 1 January 2019, as part of ring-fencing implementation.
Our overall funding strategy remains to develop and sustain a diversified funding base. We also need to fulfil regulatory requirements as well as support our credit ratings.
This table shows our main sources of wholesale funding. It does not include securities financing repurchase agreements. The table is based on exchange rates at issue and scheduled repayments and call dates. It does not reflect the final contractual maturity of the funding.
| 30 June 2019 | ≤ 1 | >1 and ≤3 | >3 and ≤6 | >6 and ≤9 | >9 and ≤12 | Sub-total | >1 and | >2 and | >5 years | Total |
|---|---|---|---|---|---|---|---|---|---|---|
| month | months | months | months | months | ≤1 year | ≤2 years | ≤5 years | £bn | £bn | |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||
| Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1) | ||||||||||
| Senior unsecured – public benchmark | - | - | - | - | - | - | 1.5 | 5.4 | 1.7 | 8.6 |
| Senior unsecured – privately placed | - | - | - | - | - | - | - | - | 0.1 | 0.1 |
| Subordinated liabilities and equity (incl. AT1) | - | 0.2 | 0.3 | - | - | 0.5 | - | 1.3 | 1.0 | 2.8 |
| - | 0.2 | 0.3 | - | - | 0.5 | 1.5 | 6.7 | 2.8 | 11.5 | |
| Other Santander UK plc | ||||||||||
| Deposits by banks | 0.1 | 0.3 | 0.2 | - | - | 0.6 | - | - | - | 0.6 |
| Certificates of deposit and commercial paper | 1.3 | 2.5 | 2.3 | 0.3 | 0.1 | 6.5 | - | - | - | 6.5 |
| Senior unsecured – public benchmark | - | 0.6 | - | 2.2 | - | 2.8 | 4.7 | 2.8 | 0.8 | 11.1 |
| Senior unsecured – privately placed | - | 0.3 | - | 0.9 | - | 1.2 | 1.2 | 0.2 | 0.4 | 3.0 |
| Covered bonds | 0.5 | 0.9 | - | - | 1.8 | 3.2 | 4.7 | 6.5 | 4.0 | 18.4 |
| Securitisation and structured issuance(2) | 0.3 | 0.5 | 0.6 | 0.2 | 0.2 | 1.8 | 0.8 | 2.3 | - | 4.9 |
| Term Funding Scheme | - | - | - | - | - | - | 7.5 | 3.3 | - | 10.8 |
| Subordinated liabilities | - | - | - | - | - | - | - | 0.9 | 1.3 | 2.2 |
| 2.2 | 5.1 | 3.1 | 3.6 | 2.1 | 16.1 | 18.9 | 16.0 | 6.5 | 57.5 | |
| Other group entities | ||||||||||
| Securitisation and structured issuance(3) | - | 0.1 | 0.1 | 0.1 | 0.1 | 0.4 | 0.4 | 0.7 | - | 1.5 |
| Total at 30 June 2019 | 2.2 | 5.4 | 3.5 | 3.7 | 2.2 | 17.0 | 20.8 | 23.4 | 9.3 | 70.5 |
| Of which: | ||||||||||
| – Secured | 0.9 | 1.5 | 0.8 | 0.3 | 2.1 | 5.6 | 13.4 | 12.8 | 4.0 | 35.8 |
| – Unsecured | 1.3 | 3.9 | 2.7 | 3.4 | 0.1 | 11.4 | 7.4 | 10.6 | 5.3 | 34.7 |
| 2.2 | 5.4 | 3.5 | 3.7 | 2.2 | 17.0 | 20.8 | 23.4 | 9.3 | 70.5 | |
| Total at 31 December 2018 | 3.1 | 6.8 | 3.0 | 2.7 | 0.9 | 16.5 | 15.9 | 30.1 | 10.3 | 72.8 |
| Of which: | ||||||||||
| – Secured | 0.8 | 0.7 | 0.7 | 1.7 | 0.5 | 4.4 | 8.5 | 18.3 | 4.0 | 35.2 |
| – Unsecured | 2.3 | 6.1 | 2.3 | 1.0 | 0.4 | 12.1 | 7.4 | 11.8 | 6.3 | 37.6 |
(1) 94% of Senior Unsecured debt issued from Santander UK Group Holdings plc has been downstreamed to Santander UK plc as 'secondary non-preferential debt' in line with the guidelines from the Bank of England for Internal MREL. (2) Includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator.
(3) Includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator.
In H119, our external term issuance (sterling equivalent) was:
| Sterling £bn |
US Dollar £bn |
Euro £bn |
Total H119 £bn |
Total H118 £bn |
|
|---|---|---|---|---|---|
| Downstreamed from Santander UK Group Holdings plc to Santander UK plc | |||||
| Senior unsecured – public benchmark | - | - | - | - | 1.9 |
| - | - | - | - | 1.9 | |
| Other Santander UK plc | |||||
| Securitisations and other secured funding | - | - | - | - | 1.0 |
| Covered bonds | 1.0 | - | 0.9 | 1.9 | 2.4 |
| Senior unsecured – public benchmark | - | 0.8 | - | 0.8 | 2.0 |
| Senior unsecured – privately placed | - | - | - | - | 0.9 |
| Term Funding Scheme (TFS) | - | - | - | - | 2.3 |
| 1.0 | 0.8 | 0.9 | 2.7 | 8.6 | |
| Total gross issuances | 1.0 | 0.8 | 0.9 | 2.7 | 10.5 |
In H119, our total term funding was £2.7bn (H118: £10.5bn), all of which was medium-term issuance (H118: £8.2bn). The total consisted of £0.8bn of senior unsecured notes, and £1.9bn of covered bonds from Santander UK plc. Maturities in H119 were £5.4bn (H118: £4.0bn).
At 30 June 2019, 77% (2018: 77%) of wholesale funding had a maturity of greater than one year, with an overall residual duration of 36 months (2018: 37 months). The total drawdown outstanding from the TFS was £10.8bn (2018: £10.8bn) and the total drawdowns of UK Treasury Bills under the Funding for Lending Scheme were at £1.0bn (2018: £1.0bn).
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.
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. We also have a covered bond programme, under which we issue securities to investors secured by a pool of residential mortgages.
For more on how we have issued notes from our secured programmes externally and also retained them, and what we have used them for, see Notes 11 and 24 to the Condensed Consolidated Interim Financial Statements.
Our level of encumbrance from external and internal issuance of mortgage securitisations and covered bonds increased slightly in H119 to £34.3bn (2018: £33.7bn), as planned. For more, see Note 11 to the Condensed Consolidated Interim Financial Statements.
Capital risk is the risk that we do not have an adequate amount or quality of capital to meet our internal business needs, regulatory requirements and market expectations, including dividend and AT1 distributions.
In H119, there were no significant changes in the way we manage capital risk as described in the 2018 Annual Report.
In this section, we analyse our capital resources and key capital ratios including our RWAs.
For capital purposes, we are subject to prudential supervision by the PRA, as a UK banking group, and by the European Central Bank (ECB) as a member of the Banco Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM). Although we are part of the Banco Santander group, we do not have a guarantee from our ultimate parent Banco Santander SA and we operate as an autonomous subsidiary. As we are part of the UK sub-group that is regulated by the PRA, we have to meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the support of our parent. Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior management appointments. Santander UK Group Holdings plc is the holding company of Santander UK plc and is the head of the Santander UK group for regulatory capital and leverage purposes. The basis of consolidation for our capital disclosures is substantially the same as for our Consolidated Financial Statements. Following the implementation of our ring-fencing plans, with effect from 1 January 2019 Santander UK plc is now the head of the ringfenced bank sub-group and is subject to regulatory capital and leverage rules.
| 30 June 2019 % |
31 December 2018 % |
|
|---|---|---|
| CET1 capital ratio | 13.9 | 13.2 |
| AT1 | 2.3 | 2.2 |
| Grandfathered Tier 1 | 0.7 | 0.8 |
| Tier 2 | 4.2 | 4.1 |
| Total capital ratio | 21.1 | 20.3 |
The total subordination available to Santander UK plc bondholders was 21.1% (2018: 20.3%) of RWAs.
This table shows our qualifying regulatory capital.
| 30 June 2019 £m |
31 December 2018 £m |
|
|---|---|---|
| CET1 capital | 10,394 | 10,374 |
| AT1 capital | 2,243 | 2,349 |
| Tier 1 capital | 12,637 | 12,723 |
| Tier 2 capital | 3,151 | 3,223 |
| Total qualifying regulatory capital(1) | 15,788 | 15,946 |
(1) Capital resources include a transitional IFRS 9 benefit at 30 June 2019 of £20m (2018: £21m).
The tables below are consistent with our regulatory filings for 30 June 2019 and 31 December 2018.
| 30 June | 31 December |
|---|---|
| 2019 | 2018 |
| £bn | £bn |
| Total RWAs 74.7 |
78.5 |
CET1 capital ratio of 13.9% (2018: 13.2%)
Total qualifying regulatory capital decreased to £15.8bn (2018: £15.9bn)
In H119, there were no significant changes in the way we manage and monitor other key risks, as described in the 2018 Annual Report.
In this section, we discuss pension risk, conduct and regulatory risk, operational risk and financial crime risk.
Pension Funding Deficit at Risk was £1,450m (2018: £1,410m)
Funded defined benefit pension scheme accounting surplus was £566m (2018: £767m)
Conduct provision was £277m (2018: £276m)
12% increase in operational risk losses (exc. PPI)
£65m investment in financial crime enhancements planned for 2019, of which £35m has been spent in H119
We continue to focus on achieving the right balance between risk and reward, while minimising the impact on our capital and financial position. In H119, overall asset returns were positive with positive performance from all major asset classes. The Funding Deficit at Risk increased to £1,450m (2018: £1,410m). Our longterm objective is to reduce the risk of the Santander (UK) Group Pension Scheme (the Scheme) and eliminate the deficit on the funding basis. In H119, the CF Trustee continued to move away from pro-cyclical assets and increasing the allocation to alternative strategies. In H119, interest rate and inflation hedging levels were maintained.
In H119, the accounting surplus of the Scheme and other funded arrangements decreased, with sections in surplus of £779m at 30 June 2019 (2018: £842m) and sections in deficit of £213m (2018: £75m). The overall position was £566m surplus (2018: £767m surplus). There were also unfunded scheme liabilities of £39m at 30 June 2019 (2018: £39m). The deterioration in the overall position was mainly driven by a decrease in the discount rate over the year resulting from falling corporate bond yields which increased the value placed on liabilities. This was partially offset by the rise in overall asset values over the year.
For more on our pension schemes, including the current asset allocation, see Note 22 to the Condensed Consolidated Interim Financial Statements.
In H119, to ensure we fully consider customer impacts across our business, we continued to maintain a strong focus on robust oversight and control of the full customer journey. We maintain Compliance teams across all our key business divisions, and conduct and regulatory risk frameworks are in place across all business divisions that operate alongside our wider risk framework to identify, assess, manage and report conduct and regulatory risk.
In H119, we continued to build on our progress in 2018 and remained vigilant in taking a customer-focused approach in developing strategy, products and policies that support fair customer outcomes and market integrity. As part of this, we:
Following the launch of the Contingent Reimbursement Model, a voluntary code of good practice for dealing with authorised push payment fraud, we agreed along with seven other banks to a funding loan for no-blame cases. We continue to engage with the industry and authorities in developing the code.
The remaining provision for PPI redress and related costs was £248m at 30 June 2019. This includes a provision for PPI redress as well as our best estimate of liability for a specific portfolio which was disclosed in our 2018 Annual Report. Payments are being made in respect of the portfolio of complaints which were on hold pending further regulatory clarification at the end of 2018. We made an additional provision of £70m in Q219 reflecting an increase of claims volumes, additional industry activities and having considered guidance provided by the FCA, in advance of the PPI claims deadline on 29 August 2019. We will continue to monitor our provision levels and take account of the impact of any further change in claims received and FCA guidance.
For more on our provisions, including sensitivities, see Note 21 to the Condensed Consolidated Interim Financial Statements.
Business, regulatory and legal change continues to gather pace and H119 saw a substantial review of our portfolio of change initiatives to re-focus, concentrate and re-prioritise scarce capital resources at the most pressing initiatives. The Open Banking Initiative and PSD2, both of which introduce further requirements during 2019, together bring significant opportunity for us to develop new products and services to enhance the ways customers use their data and pay for services. However, they also introduce a new layer of risk to both customers and Santander UK. We continued to carry out detailed operational risk assessments in relation to these initiatives, in order to identify, assess, manage and report the key risks involved. These regulatory requirements were added to by significant new initiatives such as the high cost of credit review and the migration of a certain segment of customers across to a new banking platform. As we must deliver new and innovative solutions to market faster than ever before, we recognise the need to manage the risks associated with change as a priority in our design processes. We have concentrated effort on further refining our Operational Risk Management identification and assessment methodologies to streamline, remove inefficiency, and focus on risk.
Change management also remains a key factor when we engage with our key outsourcing partners (Third Party Service Providers). The demand for innovative solutions and digital services brings additional risks, new technologies, widening spans of control across the supply chain, and cyber threats. To enable us to manage these challenges we continue to review our governance processes and introduce new systems solutions which provide data and focus on our supplier relationships and performance. This work will continue, develop and strengthen for the rest of 2019, aligned with the requirements of the EBA Outsourcing Guidelines due for implementation in September.
Cyber and information security also remains a top priority for us. We continue to invest to ensure we have the right skills and resources to manage cyber and information security risk effectively across all our lines of defence. Our comprehensive cyber transformation programme continues to enhance our capabilities and ensure we continue to deliver secure products and solutions for our customers and the communities that we serve. Whilst we continue to be subject to cyberattack, we did not suffer any material cyber or information security events in H119 and we continue to actively participate in the Cyber Defence Alliance with industry peers to share cyber threat intelligence, expertise and experience to help identify common features of cyber-attacks and effective mitigation strategies.
Data Management is an increasingly important risk factor for Santander UK. We enable our programme of Digital Transformation by managing risk across three main areas: the quality of primary data, the consistency of derived data and the ability to meet regulatory requirements. We manage and report data risk at a number of levels across the business. To mitigate data risk we invested in a Santander UK Data Management Strategy to develop and mature our core data management systems and capabilities. This includes a data domain view across the business to establish data ownership and accountability; operational risk tools to identify and manage data quality; and a governance model overseen by the Board Risk Committee and the Board Audit Committee. The maturity of our Data Management Strategy will continue to be a specific focus to enable us to deliver our goal of becoming the Best Digital Bank through 2019.
The Bank of England, PRA and FCA published a joint discussion paper in 2018 to help financial firms evolve their approach to operational resilience. They expect firms to assume disruptive operational incidents will occur, and be able to demonstrate that they can withstand, absorb, recover and manage these in a way which considers the needs of all affected parties. We will improve our operational resilience by enhancing our operational risk framework and implementing a Boardapproved strategy. This will be focused on defining our key business services; providing enriched management data; mapping our dependencies end-to-end; and setting, approving and testing the impact tolerances of our ability to provide those services to the absolute limit. In addition to regulatory compliance, this will achieve business and operational benefits through a programme of work in 2019 designed to embed operational resilience in our Digital Transformation programme as well as business-as-usual activities.
In H119, we saw a 12% increase in operational risk losses (excluding PPI). This was primarily driven by external fraud and reflects trends across the industry. We discuss developments with respect to PPI in the Conduct and regulatory risk section on the previous page.
We continue to enhance our anti-fraud measures to help protect our customers from fraud and scams. When compared with H118, the volume of Operational Risk Events has gradually risen, due mainly to the mandatory breach reporting requirements of PSD2 and GDPR. We have seen fewer events in relation to legacy system and processing issues. However, we have noted a rise in both events and losses prompted by the increasing level of change, driven in turn by regulation, industry developments and the need to digitalise the bank.
We have a £65m investment in financial crime enhancements planned for 2019 through our Transformation Programme, of which £35m has been spent in H119. The financial crime landscape continues to be difficult and complex, with geo-political factors and continually evolving criminal methods influencing the risks we face. In H119, we enhanced our strategic capabilities and supporting infrastructure, despite some of the challenges inherent in the control framework and external environment. We made good progress in embedding our three-year Anti-Financial Crime strategy, policies and training. In H119, we increased awareness of financial crime through culture focus programmes and encouraged our staff to use their judgement to do the right thing and make responsible decisions. Our financial crime control environment is evolving but still needs significant enhancement and investment. Our Financial Crime Transformation Programme delivered improvements across the control environment in H119 and the foundations of key strategic controls are now in place. Implementing strategic systems and enhancing our control framework in key focus areas such as Know Your Customer, Data Quality and Due Diligence are priorities with top-level commitment for investment in H219.
UK regulatory change after Brexit may add further complexity. The UK Government has published more than ten Statutory Instruments under the Sanctions and Anti-Money Laundering Act 2018, which would come into force should the UK leave the EU without a deal. Material changes to global sanctions regimes including Iran and Venezuela are also a key area of our focus.
We continued to actively collaborate with the public sector to address financial crime challenges. We actively collaborate with industry and the UK Government to combat financial crime which also helps us further develop our own capabilities. For example, in H119, we increased our collaboration with the industry and law enforcement. We have plans to further support 'Stop the Traffic' with wider scope to identify crime through targeted typology reviews and building on the joint branch visits conducted in Lincolnshire – purely focusing on protecting the victims of these crimes and identifying the suspects.
We also worked closely with law enforcement to deliver an education programme to all financial investigators, explaining the way banks identify and report financial crime, which will result in presenting at the UK's National Police Chiefs' conference. This is a first for a bank to deliver such training to a wide audience and has been significantly welcomed.
| Independent review report | 34 |
|---|---|
| Primary financial statements | 35 |
| Consolidated Income Statement Consolidated Statement |
35 |
| of Comprehensive Income | 36 |
| Consolidated Balance Sheet | 37 |
| Consolidated Cash Flow Statement Consolidated Statement |
38 |
| of Changes in Equity | 39 |
| Notes to the financial statements | 40 |
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 2019. 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.
The interim financial statements comprise of the:
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.
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.
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
8 August 2019
For the half year to 30 June 2019 and the half year to 30 June 2018
| Half year to 30 June 2019 |
Half year to 30 June 2018(1) |
||
|---|---|---|---|
| Notes | £m | £m | |
| Interest and similar income | 2,970 | 3,001 | |
| Interest expense and similar charges | (1,302) | (1,190) | |
| Net interest income | 1,668 | 1,811 | |
| Fee and commission income | 539 | 584 | |
| Fee and commission expense | (204) | (204) | |
| Net fee and commission income | 335 | 380 | |
| Net trading and other income | 3 | 118 | 121 |
| Total operating income | 2,121 | 2,312 | |
| Operating expenses before credit impairment losses, provisions and charges | 4 | (1,257) | (1,283) |
| Credit impairment losses | 5 | (69) | (91) |
| Provisions for other liabilities and charges | 5 | (206) | (33) |
| Total operating credit impairment losses, provisions and charges | (275) | (124) | |
| Profit before tax | 589 | 905 | |
| Tax on profit | 6 | (170) | (233) |
| Profit after tax for the period | 419 | 672 | |
| Attributable to: | |||
| Equity holders of the parent | 410 | 660 | |
| Non-controlling interests | 26 | 9 | 12 |
| Profit after tax for the period | 419 | 672 |
(1) Adjusted to reflect the amendment to IAS 12, as described in Note 1.
For the half year to 30 June 2019 and the half year to 30 June 2018
| Half year to 30 June 2019 £m |
Half year to 30 June 2018(1) £m |
|
|---|---|---|
| Profit after tax for the period | 419 | 672 |
| Other comprehensive income that may be reclassified to profit or loss subsequently: | ||
| Movement in fair value reserve (debt instruments): | ||
| – Change in fair value | 167 | (94) |
| – Income statement transfers | (152) | 67 |
| – Taxation | (4) | 6 |
| 11 | (21) | |
| Cash flow hedges: | ||
| – Effective portion of changes in fair value | 360 | 84 |
| – Income statement transfers | (42) | (190) |
| – Taxation | (82) | 21 |
| 236 | (85) | |
| Net other comprehensive income that may be reclassified to profit or loss subsequently | 247 | (106) |
| Other comprehensive income that will not be reclassified to profit or loss subsequently: | ||
| Pension remeasurement: | ||
| – Change in fair value | (280) | 529 |
| – Taxation | 70 | (132) |
| (210) | 397 | |
| Own credit adjustment: | ||
| – Change in fair value | (58) | (31) |
| – Taxation | 15 | 8 |
| (43) | (23) | |
| Net other comprehensive income that will not be reclassified to profit or loss subsequently | (253) | 374 |
| Total other comprehensive income for the period net of tax | (6) | 268 |
| Total comprehensive income for the period | 413 | 940 |
| Attributable to: | ||
| Equity holders of the parent | 405 | 927 |
| Non-controlling interests | 8 | 13 |
| Total comprehensive income for the period | 413 | 940 |
(1) Adjusted to reflect the amendment to IAS 12, as described in Note 1.
At 30 June 2019 and 31 December 2018
| 30 June 2019 | 31 December 2018 | ||
|---|---|---|---|
| Notes | £m | £m | |
| Assets | |||
| Cash and balances at central banks | 21,936 | 19,747 | |
| Financial assets at fair value through profit or loss: | |||
| – Derivative financial instruments | 8 | 5,445 | 5,259 |
| – Other financial assets at fair value through profit or loss | 9 | 745 | 5,617 |
| Financial assets at amortised cost: | |||
| – Loans and advances to customers | 10 | 202,516 | 201,289 |
| – Loans and advances to banks | 2,065 | 2,799 | |
| – Reverse repurchase agreements – non trading | 12 | 22,409 | 21,127 |
| – Other financial assets at amortised cost | 13 | 7,137 | 7,229 |
| Financial assets at fair value through other comprehensive income | 14 | 13,438 | 13,302 |
| Interests in other entities | 15 | 96 | 88 |
| Intangible assets | 1,793 | 1,808 | |
| Property, plant and equipment | 2,069 | 1,832 | |
| Current tax assets | 180 | 153 | |
| Retirement benefit assets | 22 | 779 | 842 |
| Other assets | 3,919 | 2,280 | |
| Total assets | 284,527 | 283,372 | |
| Liabilities | |||
| Financial liabilities at fair value through profit or loss: | |||
| – Derivative financial instruments | 8 | 1,775 | 1,369 |
| – Other financial liabilities at fair value through profit or loss | 16 | 1,633 | 6,286 |
| Financial liabilities at amortised cost: | |||
| – Deposits by customers | 17 | 180,617 | 178,090 |
| – Deposits by banks | 18 | 16,489 | 17,221 |
| – Repurchase agreements – non trading | 19 | 14,771 | 10,910 |
| – Debt securities in issue | 20 | 44,574 | 46,692 |
| – Subordinated liabilities | 3,645 | 3,601 | |
| Other liabilities | 3,904 | 2,448 | |
| Provisions | 21 | 547 | 509 |
| Deferred tax liabilities | 256 | 223 | |
| Retirement benefit obligations | 22 | 252 | 114 |
| Total liabilities | 268,463 | 267,463 | |
| Equity | |||
| Share capital | 3,105 | 3,119 | |
| Share premium | 5,620 | 5,620 | |
| Other equity instruments | 1,991 | 1,991 | |
| Retained earnings | 4,658 | 4,744 | |
| Other reserves | 531 | 284 | |
| Total shareholders' equity | 15,905 | 15,758 | |
| Non-controlling interests | 26 | 159 | 151 |
| Total equity | 16,064 | 15,909 | |
| Total liabilities and equity | 284,527 | 283,372 |
For the half year to 30 June 2019 and the half year to 30 June 2018
| Half year to | Half year to | ||
|---|---|---|---|
| Notes | 30 June 2019 £m |
30 June 2018(1) £m |
|
| Cash flows from operating activities | |||
| Profit after tax for the period | 419 | 672 | |
| Adjustments for: | |||
| Non-cash items included in profit | 86 | 187 | |
| Change in operating assets | 1,135 | (2,644) | |
| Change in operating liabilities | 1,328 | (1,176) | |
| Corporation taxes paid | (166) | (236) | |
| Effects of exchange rate differences | (334) | 583 | |
| Net cash flows from operating activities | 2,468 | (2,614) | |
| Cash flows from investing activities | |||
| Investments in other entities | 15 | – | (66) |
| Purchase of property, plant and equipment and intangible assets | (66) | (350) | |
| Proceeds from sale of property, plant and equipment and intangible assets | 32 | 13 | |
| Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive | |||
| income | (4,141) | (5,047) | |
| Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value | |||
| through other comprehensive income | 4,259 | 1,301 | |
| Net cash flows from investing activities | 84 | (4,149) | |
| Cash flows from financing activities | |||
| Issue of debt securities and subordinated notes | 2,770 | 6,452 | |
| Issuance costs of debt securities and subordinated notes | (9) | (13) | |
| Repayment of debt securities and subordinated notes | (4,693) | (4,601) | |
| Repurchase of preference shares and other equity instruments | (14) | – | |
| Dividends paid on ordinary shares | 7 | (164) | (250) |
| Dividends paid on preference shares and other equity instruments | (80) | (90) | |
| Dividends paid on non-controlling interests | – | – | |
| Net cash flows from financing activities | (2,190) | 1,498 | |
| Change in cash and cash equivalents | 362 | (5,265) | |
| Cash and cash equivalents at beginning of the period | 26,029 | 42,226 | |
| Effects of exchange rate changes on cash and cash equivalents | 3 | 206 | |
| Cash and cash equivalents at the end of the period | 26,394 | 37,167 | |
| Cash and cash equivalents consist of: | |||
| Cash and balances at central banks | 21,936 | 21,342 | |
| Less: regulatory minimum cash balances | (670) | (631) | |
| 21,266 | 20,711 | ||
| Net trading other cash equivalents | – | 2,591 | |
| Net non-trading other cash equivalents | 5,128 | 13,865 | |
| Cash and cash equivalents at the end of the period | 26,394 | 37,167 | |
(1) Adjusted to reflect the amendment to IAS 12, as described in Note 1.
For the half year to 30 June 2019 and the half year to 30 June 2018
| Other reserves | Non | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Share capital |
Share premium |
Other equity instruments |
Available | Fair | Cash flow | Currency | Retained earnings(2) |
Total | controlling interests |
Total | ||
| £m | £m | £m | for-sale(1) £m |
value(1) £m |
hedging £m |
translation £m |
£m | £m | £m | £m | ||
| At 1 January 2019 | 3,119 | 5,620 | 1,991 | 23 | 256 | 5 | 4,744 | 15,758 | 151 | 15,909 | ||
| Profit after tax | – | – | – | – | – | – | 410 | 410 | 9 | 419 | ||
| Other comprehensive income, net of tax: | ||||||||||||
| – Fair value reserve (debt instruments) | – | – | – | 11 | – | – | – | 11 | – | 11 | ||
| – Cash flow hedges | – | – | – | – | 236 | – | – | 236 | – | 236 | ||
| – Pension remeasurement | – | – | – | – | – | – | (209) | (209) | (1) | (210) | ||
| –Own credit adjustment | – | – | – | – | – | – | (43) | (43) | – | (43) | ||
| Total comprehensive income | – | – | – | 11 | 236 | – | 158 | 405 | 8 | 413 | ||
| Repurchase of preference shares and | ||||||||||||
| other equity instruments | (14) | – | – | – | – | – | – | (14) | – | (14) | ||
| Dividends on ordinary shares | – | – | – | – | – | – | (164) | (164) | – | (164) | ||
| Dividends on preference shares and | ||||||||||||
| other equity instruments | – | – | – | – | – | – | (80) | (80) | – | (80) | ||
| At 30 June 2019 | 3,105 | 5,620 | 1,991 | 34 | 492 | 5 | 4,658 | 15,905 | 159 | 16,064 | ||
| At 31 December 2017 | 3,119 | 5,620 | 2,281 | 68 | 228 | 5 | 4,732 | 16,053 | 152 | 16,205 | ||
| Adoption of IFRS 9 | – | – | – | (68) | 63 | – | – | (187) | (192) | – | (192) | |
| At 1 January 2018 | 3,119 | 5,620 | 2,281 | – | 63 | 228 | 5 | 4,545 | 15,861 | 152 | 16,013 | |
| Profit after tax | – | – | – | – | – | – | 660 | 660 | 12 | 672 | ||
| Other comprehensive income, net of tax: | ||||||||||||
| – Fair value reserve (debt instrument) | – | – | – | (21) | – | – | – | (21) | – | (21) | ||
| – Cash flow hedges | – | – | – | – | (85) | – | – | (85) | – | (85) | ||
| – Pension remeasurement | – | – | – | – | – | – | 396 | 396 | 1 | 397 | ||
| –Own credit adjustment | – | – | – | – | – | – | (23) | (23) | – | (23) | ||
| Total comprehensive income | – | – | – | (21) | (85) | – | 1,033 | 927 | 13 | 940 | ||
| Other | – | – | – | – | – | – | (45) | (45) | – | (45) | ||
| Dividends on ordinary shares | – | – | – | – | – | – | (250) | (250) | – | (250) | ||
| Dividends on preference shares and | ||||||||||||
| other equity instruments | – | – | – | – | – | – | (90) | (90) | – | (90) | ||
| At 30 June 2018 | 3,119 | 5,620 | 2,281 | 42 | 143 | 5 | 5,193 | 16,403 | 165 | 16,568 |
(1) Following the adoption of IFRS 9, a fair value reserve was introduced to replace the available-for-sale reserve, as described in Note 1 to the Consolidated Financial Statements in the 2018 Annual Report.
(2) Adjusted to reflect the amendment to IAS 12, as described in Note 1.
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 2018 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 reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of operations for the interim period. All such adjustments to the financial information are of a normal, recurring nature. Because the results from common banking activities are so closely related and responsive to changes in market conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the year.
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 sourcebook 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 Santander UK plc (the Santander UK group) for the year ended 31 December 2018 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.
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 2018 Annual Report.
On 1 January 2019 the Santander UK group adopted IFRS 16 'Leases' (IFRS 16) and the revised accounting policies as lessee which have been applied from 1 January 2019 are set out below. Comparatives have not been restated. The impact of applying IFRS 16 is disclosed in section (ii).
i) Accounting policy change
The Santander UK group assesses whether a contract is or contains a lease at the inception of the contract and recognises a right-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases, except for leases with a term of 12 months or less which are expensed in the income statement on a straight-line basis over the lease terms. Lease payments exclude irrecoverable VAT which is expensed in the income statement as lease payments are made.
The lease liability, which is included within Other liabilities on the balance sheet, is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate appropriate to the lease term. The lease liability is subsequently measured at amortised cost using the effective interest rate method. Remeasurement of the lease liability occurs if there is a change in the lease payments (when a corresponding adjustment is made to the ROU asset), the lease term or in the assessment of an option to purchase the underlying asset.
At inception, the ROU asset, which is included within Property, plant and equipment on the balance sheet, comprises the lease liability, initial direct costs and the obligations to restore the asset, less any incentives granted by the lessor. The ROU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset and is reviewed for indications of impairment as for owned assets. The obligation to restore the asset is included within Provisions on the balance sheet.
IFRS 16 became effective for periods beginning on or after 1 January 2019. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. For lessee accounting, IFRS 16 introduces a single lessee accounting model which requires the recognition of a ROU asset representing the lessee's right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. For lessor accounting, IFRS 16 substantially carries forward the requirements from the previous leasing standard (IAS 17) and a lessor continues to classify its leases as operating leases or finance leases and to account for those two types of leases differently.
The Santander UK group elected to apply the modified retrospective approach whereby the ROU asset at the date of initial application was measured at an amount equal to the lease liability. The ROU asset was adjusted for any prepaid lease payments and incentives relating to the relevant leases that were recognised on the balance sheet at 31 December 2018 and included an estimate of the costs of restoring the underlying assets to the condition required by the terms of the lease.
The application of IFRS 16 at 1 January 2019 increased property, plant and equipment by £211m (being the net increase in ROU assets referred to above), reduced other assets by £12m, increased other liabilities by £182m from recognising lease liabilities, and increased provisions by £17m (see Note 21). There was no impact on shareholders' equity. The amount of the lease liabilities above differed from the amount of operating lease commitments disclosed in Note 32 to the Consolidated Financial Statements in the 2018 Annual Report due to the effects of discounting the lease liabilities and excluding short-term leases that are outside the scope of IFRS 16.
In addition to the choice of transition approach, the determination of the discount rate is the most significant area of judgement. The Santander UK group applies an incremental borrowing rate (based on 3-month GBP LIBOR plus a credit spread to reflect the cost of raising unsecured funding in the wholesale markets) appropriate to the relevant remaining lease term.
The Santander UK group has also applied the amendment to IAS 12 'Income Taxes' (part of 'Annual Improvements to IFRS Standards 2015-2017 Cycle') in these Condensed Consolidated Interim Financial Statements. The amendment clarifies that the income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the past transactions or events that generated distributable profits were recognised. This means that, to the extent that profits from which dividends on equity instruments were recognised in the income statement, the income tax consequences would be similarly recognised in the same statement. The amendment, which has been applied retrospectively, reduces the effective tax rate where the tax relief on dividends in respect of other equity instruments is recognised in the income statement rather than in equity. There was no impact on shareholders' equity from applying the amendment to IAS 12 at 1 January 2019. The impact of the amendment to IAS 12 on the income statement for H119 was to reduce tax on profit by £21m (H118: £23m), increasing profit after tax by the same amount.
After making enquiries, the Directors have a reasonable expectation that Santander UK has adequate resources to continue in operational existence for at least twelve months from the date 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.
The preparation of the Condensed Consolidated Interim Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Condensed Consolidated Interim Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions.
In the course of preparing the Condensed Consolidated Interim Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, conduct remediation and pensions.
There have been no significant changes in the basis upon which judgements and accounting estimates have been determined compared to that applied in the 2018 Annual Report.
At 30 June 2019, the probability-weighted ECL allowance totalled £817m (2018: £807m), of which £801m (2018: £789m) related to exposures in Retail Banking, Corporate & Commercial Banking and Corporate Centre, and £16m (2018: £18m) related to exposures in Corporate & Investment Banking.
The amounts shown in the tables below illustrate the ECL allowances that would have arisen had management applied a 100% weighting to each economic scenario, and were calculated using the same methodology described in Note 1 to the Consolidated Financial Statements, and the Credit risk section of the Risk review, within the 2018 Annual Report.
| Upside 2 | Upside 1 | Base case | Downside 1 | Downside 2 | |
|---|---|---|---|---|---|
| ECL for Retail Banking, Corporate & Commercial Banking and Corporate Centre | £m | £m | £m | £m | £m |
| 30 June 2019 | 601 | 629 | 667 | 861 | 1,726 |
| 31 December 2018 | 554 | 596 | 648 | 843 | 1,930 |
| ECL for Corporate & Investment Banking(1) | Upside £m |
Base case £m |
Downside £m |
|---|---|---|---|
| 30 June 2019 | 7 | 14 | 23 |
| 31 December 2018 | 8 | 17 | 27 |
(1) As described in more detail in the 'Santander UK Group Level – Credit Risk Management' section in the 2018 Annual Report, our Corporate & Investment Banking segment uses three forward-looking economic scenarios, whereas our other segments use five scenarios. The results of the 100% weighting ECL for the Corporate & Investment Banking segment are therefore presented separately.
At 30 June 2019, the remaining provision for redress and related costs was £248m (2018: £246m). We made an additional provision of £70m in Q219 reflecting an increase in PPI claims volumes, additional industry activities and having considered guidance provided by the FCA, in advance of the PPI claims deadline on 29 August 2019.
Had management used different assumptions around future expected claims, a larger or smaller provision charge would have resulted that could have had a material impact on the Santander UK group's reported profit before tax. For more on the provision for PPI conduct remediation, including details on the future expected claims assumption, and the associated sensitivity, see Note 21.
The Santander UK group's business is managed and reported on the basis of the following segments: Retail Banking, Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre. The segments are strategic business units that offer different products and services. They are managed separately because each business has different customers and requires different technology and marketing strategies. The segmental basis of presentation in these Condensed Consolidated Interim Financial Statements has been changed, and the prior period has been restated, for the following:
| Half year to 30 June 2019 | Retail Banking £m |
Corporate & Commercial Banking £m |
Corporate & investment Banking £m |
Corporate Centre £m |
Total £m |
|---|---|---|---|---|---|
| Net interest income/(expense) | 1,465 | 189 | 32 | (18) | 1,668 |
| Non-interest income | 353 | 38 | 47 | 15 | 453 |
| Total operating income/(expense) | 1,818 | 227 | 79 | (3) | 2,121 |
| Operating expenses before credit impairment losses, provisions and | (1,011) | (138) | (83) | (25) | (1,257) |
| charges | |||||
| Credit impairment (losses)/releases | (63) | (9) | 4 | (1) | (69) |
| Provisions for other liabilities and charges | (95) | (1) | (11) | (99) | (206) |
| Total operating credit impairment losses, provisions and charges | (158) | (10) | (7) | (100) | (275) |
| Profit/(loss) before tax | 649 | 79 | (11) | (128) | 589 |
| Revenue from external customers Inter-segment revenue |
2,166 (348) |
281 (54) |
85 (6) |
(411) 408 |
2,121 – |
| Total operating income/(expense) | 1,818 | 227 | 79 | (3) | 2,121 |
| Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) |
|||||
| – Current account and debit card fees | 345 | 15 | 14 | – | 374 |
| – Insurance, protection and investments | 37 | – | – | – | 37 |
| – Credit cards | 42 | – | – | – | 42 |
| –Non-banking and other fees(2) | 36 | 26 | 24 | – | 86 |
| Total fee and commission income | 460 | 41 | 38 | – | 539 |
| Fee and commission expense | (184) | (12) | (7) | (1) | (204) |
| Net fee and commission income | 276 | 29 | 31 | (1) | 335 |
| 30 June 2019 | |||||
| Customer loans | 174,590 | 17,365 | 4,060 | 4,343 | 200,358 |
| Total assets(3) | 182,785 | 17,365 | 4,929 | 79,448 | 284,527 |
| Customer deposits | 142,814 | 18,021 | 6,059 | 2,855 | 169,749 |
| Total liabilities | 143,788 | 18,045 | 6,946 | 99,684 | 268,463 |
(1) The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2) Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3) Includes customer loans, net of credit impairment loss allowances.
| Half year to 30 June 2018(1) | Retail Banking £m |
Corporate & Commercial Banking £m |
Corporate & investment Banking £m |
Corporate Centre £m |
Total £m |
|---|---|---|---|---|---|
| Net interest income | 1,565 | 202 | 33 | 11 | 1,811 |
| Non-interest income | 304 | 40 | 115 | 42 | 501 |
| Total operating income | 1,869 | 242 | 148 | 53 | 2,312 |
| Operating expenses before credit impairment losses, provisions and charges | (957) | (134) | (145) | (47) | (1,283) |
| Credit impairment (losses)/releases | (52) | (22) | (18) | 1 | (91) |
| Provisions for other liabilities and charges | (34) | 8 | (2) | (5) | (33) |
| Total operating credit impairment losses, provisions and (charges)/releases | (86) | (14) | (20) | (4) | (124) |
| Profit/(loss) before tax | 826 | 94 | (17) | 2 | 905 |
| Revenue from external customers Inter-segment revenue |
2,183 (314) |
322 (80) |
177 (29) |
(370) 423 |
2,312 – |
| Total operating income/(expense) | 1,869 | 242 | 148 | 53 | 2,312 |
| Revenue from external customers includes the following fee and commission income disaggregated by income type: (2) |
|||||
| – Current account and debit card fees | 311 | 13 | 14 | – | 338 |
| – Insurance, protection and investments | 46 | – | – | – | 46 |
| – Credit cards | 45 | – | – | – | 45 |
| –Non-banking and other fees(3) | 67 | 32 | 50 | 6 | 155 |
| Total fee and commission income | 469 | 45 | 64 | 6 | 584 |
| Fee and commission expense | (183) | (13) | (8) | – | (204) |
| Net fee and commission income | 286 | 32 | 56 | 6 | 380 |
| 31 December 2018 | |||||
| Customer loans | 172,747 | 17,702 | 4,613 | 4,524 | 199,586 |
| Total assets(4) | 179,572 | 17,702 | 8,607 | 77,491 | 283,372 |
| Customer deposits | 142,065 | 17,606 | 4,853 | 2,791 | 167,315 |
| Total liabilities | 142,839 | 17,634 | 8,885 | 98,105 | 267,463 |
(1) Restated to reflect the resegmentation of our shortterm markets business and our Jersey and Isle of Man branches to Corporate Centre.
(2) The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(3) Non-banking and other fees include mortgages, consumerfinance, commitment commission, asset finance, invoice finance and trade finance. (4) Includes customer loans, net of credit impairment loss allowances.
| Half year to 30 June 2019 |
Half year to 30 June 2018 |
|
|---|---|---|
| £m | £m | |
| Net trading and other income | 118 | 121 |
Included in net trading and other income in H119 is additional consideration of £15m in connection with the 2017 Vocalink Holdings Limited shareholding sale.
In H119 and H118, the Santander UK group did not repurchase any of its debt instruments.
| Half year to | Half year to | |
|---|---|---|
| 30 June 2019 | 30 June 2018 | |
| £m | £m | |
| Staff costs | 641 | 691 |
| Other administration expenses | 356 | 411 |
| Depreciation, amortisation and impairment | 260 | 181 |
| 1,257 | 1,283 |
| Half year to 30 June 2019 |
Half year to 30 June 2018 |
|
|---|---|---|
| £m | £m | |
| Credit impairment losses: | ||
| Loans and advances to customers (See Note 10) | 108 | 102 |
| Recoveries of loans and advances, net of collection costs | (38) | (21) |
| Off-balance sheet exposures (See Note 21) | (1) | 10 |
| 69 | 91 | |
| Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 21) | 205 | 33 |
| Provisions forresidual value (RV) and voluntary termination (See Note 10) | 1 | – |
| 206 | 33 | |
| 275 | 124 |
There were no material credit impairment losses on loans and advances to banks, non-trading reverse repurchase agreements, other financial assets at amortised cost and financial assets at fair value through other comprehensive income.
| Half year to 30 June 2019 |
Half year to 30 June 2018(1) |
|
|---|---|---|
| £m | £m | |
| Profit before tax | 589 | 905 |
| Tax calculated at a tax rate of 19% (H118: 19%) | 112 | 172 |
| Bank surcharge on profits | 39 | 64 |
| Non-deductible preference dividends paid | 5 | 5 |
| Non-deductible UK Bank Levy | 13 | 13 |
| Non-deductible conduct remediation, fines and penalties | 11 | (2) |
| Net disallowable items and non-taxable income | 11 | 10 |
| Tax relief on dividends in respect of other equity instruments | (21) | (23) |
| Adjustment to prior period provisions | – | (6) |
| Tax charge | 170 | 233 |
(1) Adjusted to reflect the amendment to IAS 12, as described in Note 1.
Interim period corporation tax is accrued based on the estimated average annual effective corporation tax for the year of 28.9% (H118: 25.7%). The standard rate of UK corporation tax was 27% for banking entities and 19% for non-banking entities (2018: 27% for banking entities and 19% for non-banking entities) following the introduction of an 8% surcharge to be applied to banking companies from 1 January 2016. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. The Finance Act 2016, introduced a further reduction in the standard rate of corporation tax rate to 17% from 2020. The effects of this future change in tax rates is included in the deferred tax balances at both 30 June 2019 and 31 December 2018.
An interim dividend of £164m was declared on 18 June 2019 and paid on 27 June 2019 on the Company's ordinary shares in issue (H118: £250m).
| 30 June 2019 | 31 December 2018 | |||||
|---|---|---|---|---|---|---|
| Fair value | Fair value | |||||
| Notional amount £m |
Assets £m |
Liabilities £m |
Notional amount £m |
Assets £m |
Liabilities £m |
|
| Derivatives held for trading | ||||||
| Exchange rate contracts | 17,087 | 861 | 710 | 13,830 | 454 | 351 |
| Interest rate contracts | 50,698 | 793 | 284 | 79,038 | 1,421 | 1,105 |
| Equity and credit contracts | 2,586 | 272 | 150 | 2,762 | 251 | 168 |
| Total derivatives held for trading | 70,371 | 1,926 | 1,144 | 95,630 | 2,126 | 1,624 |
| Derivatives held for hedging | ||||||
| Designated as fair value hedges: | ||||||
| Exchange rate contracts | 1,542 | 229 | 14 | 3,010 | 357 | – |
| Interest rate contracts | 91,598 | 1,020 | 1,636 | 86,422 | 1,065 | 1,315 |
| Equity derivative contracts | – | – | – | – | – | – |
| 93,140 | 1,249 | 1,650 | 89,432 | 1,422 | 1,315 | |
| Designated as cash flow hedges: | ||||||
| Exchange rate contracts | 32,870 | 3,334 | 203 | 33,901 | 3,537 | 200 |
| Interest rate contracts | 19,333 | 197 | 39 | 18,808 | 46 | 102 |
| Equity derivative contracts | – | – | – | – | – | – |
| 52,203 | 3,531 | 242 | 52,709 | 3,583 | 302 | |
| Total derivatives held for hedging | 145,343 | 4,780 | 1,892 | 142,141 | 5,005 | 1,617 |
| Derivative netting(1) | (1,261) | (1,261) | (1,872) | (1,872) | ||
| Total derivatives | 215,714 | 5,445 | 1,775 | 237,771 | 5,259 | 1,369 |
(1) Derivative netting excludes the effect of cash collateral, which is offset against the gross derivative position. The amount of cash collateral received that had been offset against the gross derivative assets was £218m (2018: £9m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £756m (2018: £354m).
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Loans and advances to customers: | ||
| Loans to housing associations | 13 | 13 |
| Other loans | 81 | 81 |
| 94 | 94 | |
| Debt securities | 651 | 3,251 |
| Equity securities | – | – |
| Reverse repurchase agreements – non trading | – | 2,272 |
| 745(1) | 5,617(1) |
(1) Comprised of £13m (2018: £1,095m) of financial assets designated at FVTPL and £732m (2018: £4,522m) of financial assets mandatorily at FVTPL.
In H119 £2.1bn of senior tranches of credit linked notes, which were previously classified as debt securities in the table above, were presented on a net basis. This followed a deed of amendment, including a legal right of set-off between the principal amounts of the senior tranches of credit linked notes and the senior cash deposits included as collateral in Note 16. At 30 June 2019 the amount of this netting was £1.8bn.
| 30 June 2019 £m |
31 December 2018 £m |
|
|---|---|---|
| Loans and advances to customers | 201,016 | 200,095 |
| Amounts due from fellow Banco Santander subsidiaries and joint ventures | 2,329 | 2,014 |
| Loans and advances to customers | 203,345 | 202,109 |
| Credit impairment loss allowances on loans and advances to customers | (760) | (751) |
| RV and voluntary termination provisions on finance leases | (69) | (69) |
| Net loans and advances to customers | 202,516 | 201,289 |
Movement in credit impairment loss allowances:
| Loans secured on residential properties £m |
Corporate loans £m |
Finance leases £m |
Other unsecured loans £m |
Total £m |
|
|---|---|---|---|---|---|
| At 1 January 2019 | 234 | 226 | 85 | 206 | 751 |
| (Release)/charge to the income statement | (18) | 30 | 18 | 78 | 108 |
| Write-offs and other items | (6) | (7) | (17) | (69) | (99) |
| At 30 June 2019 | 210 | 249 | 86 | 215 | 760 |
| At 31 December 2017 | 225 | 490 | 46 | 179 | 940 |
| Adoption of IFRS 9(1) | 47 | 99 | 11 | 54 | 211 |
| Re-allocation of expected credit losses (ECL) on off-balance sheet exposures(1) | (3) | (25) | – | (22) | (50) |
| At 1 January 2018 | 269 | 564 | 57 | 211 | 1,101 |
| (Release)/charge to the income statement | (13) | 24 | 17 | 74 | 102 |
| Write-offs and other items | (7) | (318) | (15) | (71) | (411) |
| At 30 June 2018 | 249 | 270 | 59 | 214 | 792 |
(1) The adjustment for the adoption of IFRS 9 related to the re-measurement of loss allowances on loans and advances to customers at amortised cost. The re-allocation of ECL on off-balance sheet exposures was a transfer to provisions following the adoption of a methodology to enable their separate identification from ECL on drawn exposures.
The information in this Note relates to securitisations and covered bonds for consolidated structured entities, used to obtain funding or collateral. It excludes unconsolidated structured entities, including credit protection vehicles that are described in more detail in Note 15.
The gross assets securitised, or for the covered bond programme assigned, at 30 June 2019 and 31 December 2018 were:
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Mortgage-backed master trust structures: | ||
| –Holmes | 4,256 | 4,414 |
| – Fosse | 4,200 | 4,646 |
| – Langton | 2,671 | 3,034 |
| 11,127 | 12,094 | |
| Other asset-backed securitisation structures: | ||
| – Motor | 737 | 1,055 |
| – Auto ABS UK Loans | 1,358 | 1,468 |
| 2,095 | 2,523 | |
| Total securitisation programmes | 13,222 | 14,617 |
| Covered bond programme: | ||
| – Euro 35bn Global Covered Bond Programme | 23,157 | 21,578 |
| Total securitisation and covered bond programmes | 36,379 | 36,195 |
The following table sets out the internal and external issuances and redemptions for the half year ended 30 June 2019 and the half year ended 30 June 2018 for each securitisation and covered bond programme.
| Internal issuances | External issuances | Internal redemptions |
External redemptions |
|||||
|---|---|---|---|---|---|---|---|---|
| H119 £bn |
H118 £bn |
H119 £bn |
H118 £bn |
H119 £bn |
H118 £bn |
H119 £bn |
H118 £bn |
|
| Mortgage-backed master trust structures: | ||||||||
| –Holmes | – | – | – | 1.0 | – | – | 0.8 | – |
| – Fosse | – | – | – | – | – | – | – | 0.4 |
| Other asset-backed securitisation structures: | ||||||||
| – Motor | – | – | – | – | 0.1 | 0.1 | 0.2 | – |
| – Auto ABS UK Loans | – | – | – | – | – | – | 0.1 | – |
| Covered bond programme | – | – | 1.9 | 2.4 | – | 0.5 | – | 1.9 |
| – | – | 1.9 | 3.4 | 0.1 | 0.6 | 1.1 | 2.3 |
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Agreements with banks | 4,258 | 3,254 |
| Agreements with customers | 18,151 | 17,873 |
| 22,409 | 21,127 |
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Asset backed securities | 455 | 720 |
| Debt securities | 6,682 | 6,509 |
| 7,137 | 7,229 |
A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the 'Liquidity risk' section of the Risk review.
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Debt securities | 13,369 | 13,229 |
| Loans and advances to customers | 69 | 73 |
| 13,438 | 13,302 |
A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the 'Liquidity risk' section of the Risk review.
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 2018 Annual Report.
As part of ring-fencing implementation, Santander UK Group Holdings plc adopted a wide ring-fenced bank model with most of our operations within Santander UK plc, the ring-fenced bank. ANTS is outside the RFB and also holds wealth management businesses in the Crown Dependencies, which are not permitted within the ring-fence as they are located outside the UK. To optimise the overall funding structure of the bank Santander UK Group Holdings plc is considering the transfer of some RFB assets to ANTS to enable more efficient use of Crown Dependencies deposits.
Santander UK has established four (2018: three) credit protection entities, which are Designated Activity Companies limited by shares, incorporated in Ireland. Each entity has issued a series of credit linked notes varying in seniority which reference portfolios of Santander UK group loans. Concurrently, these entities sell credit protection to Santander UK in respect of the referenced loans and, in return for a fee, are liable to make protection payments to Santander UK upon the occurrence of a credit event in relation to any of the referenced loans.
Senior credit linked notes, which amounted to £4,786m (2018: £3,053m), are issued to, and held by, Santander UK. Junior credit linked notes, which amounted to £766m (2018: £408m), are all held by third party investors and suffer the first losses incurred in the referenced portfolios. Funds raised by the sale of the credit linked notes are deposited with Santander UK as collateral for the credit protection.
£194m (2018: £3,053m) of the senior credit linked notes are presented on a gross basis and included within 'Other financial assets at fair value through profit or loss' on the balance sheet (see Note 9). Deposits and associated guarantees relating to the senior notes are included within 'Other financial liabilities at fair value through profit or loss' (see Note 16). The remainder of the senior credit linked notes, along with the deposits and associated guarantees, are presented on a net basis, to reflect a legal right of set-off between the principal amounts of senior notes and the senior cash deposits. Deposits and associated guarantees in respect of the junior credit linked notes are included within 'Deposits by customers' (see Note 17).
The entities are not consolidated by Santander UK because the third party investors have the exposure, or rights, to all of the variability of returns from the performance of the entities. No assets are transferred to, or income received from, these vehicles. Because the credit linked notes (including those held by Santander UK) are fully cash collateralised, Santander UK's maximum exposure to loss is equal to any unamortised fees paid to the credit protection entities in connection with the credit protection outlined above.
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| US\$30bn Euro Medium Term Note Programme | 168 | 165 |
| Structured Notes Programmes | 773 | 696 |
| Eurobonds | 131 | 129 |
| Structured deposits | 133 | 133 |
| Collateral and associated financial guarantees | 428 | 3,053 |
| Repurchase agreements – non trading | – | 2,110 |
| 1,633 (1) | 6,286(1) |
(1) At 30 June 2019 and 31 December 2018 all amounts were designated at fair value through profit or loss.
In H119 £2.1bn of senior cash deposits, which were previously included within collateral and associated financial guarantees in the table above, were presented on a net basis. This followed a deed of amendment, including a legal right of set-off between the principal amounts of senior tranches of credit linked notes, classified as debt securities in Note 9, and the senior cash deposits. At 30 June 2019 the amount of this netting was £1.8bn.
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Current and demand accounts | 86,639 | 86,207 |
| Savings accounts(1) | 65,546 | 66,039 |
| Time deposits | 17,849 | 15,485 |
| Amounts due to other Santander UK Group Holdings plc subsidiaries | 56 | 83 |
| Amounts due to Santander UK Group Holdings plc(2) | 9,223 | 9,206 |
| Amounts due to fellow Banco Santander subsidiaries and joint ventures | 1,304 | 1,070 |
| 180,617 | 178,090 |
(1) Includes equity index-linked deposits of £1,122m (2018: £1,176m). The capital amount guaranteed/protected and the amount of return guaranteed in respect ofthe equity index-linked deposits were £1,122m and £20m (2018: £1,176m and £28m) respectively.
(2) Includes downstreamed funding from our immediate parent company Santander UK Group Holdings plc.
| 30 June 2019 £m |
31 December 2018 £m |
|
|---|---|---|
| Items in the course of transmission | 326 | 262 |
| Deposits held as collateral | 3,571 | 4,048 |
| Other deposits(1) | 12,592 | 12,891 |
| Amounts due to Santander UK subsidiaries | – | 20 |
| 16,489 | 17,221 |
(1) Includes drawdown from the TFS of £10.8bn (2018: £10.8bn).
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Agreements with banks | 9,619 | 5,865 |
| Agreements with customers | 5,152 | 5,045 |
| 14,771 | 10,910 |
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Medium-term notes | 17,331 | 19,984 |
| Euro 35bn Global Covered Bond Programme | 19,926 | 18,114 |
| Certificates of deposit | 3,226 | 3,221 |
| Credit linked notes | – | 42 |
| Securitisation programmes | 4,091 | 5,331 |
| 44,574 | 46,692 |
| Conduct remediation | |||||||
|---|---|---|---|---|---|---|---|
| Other | FSCS and | Off-balance | Regulatory | ||||
| PPI | products | Bank Levy | Property | sheet ECL | and other | Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 31 December 2018 | 246 | 30 | 45 | 37 | 56 | 95 | 509 |
| Adoption of IFRS 16 (see Note 1) | – | – | – | 17 | – | – | 17 |
| At 1 January 2019 | 246 | 30 | 45 | 54 | 56 | 95 | 526 |
| Additional provisions (see Note 5) | 70 | – | – | 38 | – | 114 | 222 |
| Provisions released (see Note 5) | – | – | (2) | (8) | (1) | (7) | (18) |
| Utilisation | (68) | (1) | (41) | (4) | – | (69) | (183) |
| At 30 June 2019 | 248 | 29 | 2 | 80 | 55 | 133 | 547 |
| At 31 December 2017 | 356 | 47 | 57 | 39 | 59 | 558 | |
| Reallocation of ECL on off-balance sheet exposures(1) | – | – | – | – | 50 | – | 50 |
| At 1 January 2018 | 356 | 47 | 57 | 39 | 50 | 59 | 608 |
| Additional provisions (seeNote 5) | – | – | – | 11 | 10 | 54 | 75 |
| Provisions released (see Note 5) | – | (14) | (4) | – | – | (14) | (32) |
| Utilisation | (55) | (2) | (37) | (7) | – | (46) | (147) |
| At 30 June 2018 | 301 | 31 | 16 | 43 | 60 | 53 | 504 |
(1) ECL on off-balance sheet exposures following the adoption of a methodology to enable their separate identification from ECL on drawn exposures. See Note 10.
At 30 June 2019, the remaining provision for Payment Protection Insurance (PPI) redress and related costs was £248m. This includes a provision for PPI redress as well as our best estimate of liability for a specific portfolio which was disclosed in our 2018 Annual Report.
For every additional 25,000 inbound PPI complaints above the future expected claims of c.311k from June to the end of the industry deadline, we would expect an additional charge of £6.9m.
We made an additional provision of £70m in Q219 reflecting an increase in PPI claims volumes, additional industry activities and having considered guidance provided by the FCA, in advance of the PPI claims deadline on 29 August 2019.
We will continue to monitor our provision levels and take account of the impact of any further change in claims received and FCA guidance.
Property provisions include vacant property provisions, as described in Note 30 to the Consolidated Financial Statements in the 2018 Annual Report, and property dilapidation provisions within the scope of IFRS 16.
Property provisions were impacted by £38m of transformation charges in H119. These relate to a multi-year project to deliver on our strategic priorities and enhance efficiency in order for us to better serve our customers and meet our medium term targets. Q119 charges largely related to restructuring of our branch network associated with the announcement made earlier in the year to reshape our branch network.
Regulatory and other provisions were impacted by £62m of transformation charges in H119, also relating to the multi-year project described above. In addition to the Q119 charges largely related to the restructuring of our branch network, further charges in Q219 were largely associated with the announced plans to reshape our Corporate & Commercial Banking business.
The amounts recognised in the balance sheet were as follows:
| 30 June 2019 £m |
31 December 2018 £m |
|
|---|---|---|
| Assets/(liabilities) | ||
| Funded defined benefit pension scheme – surplus | 779 | 842 |
| Funded defined benefit pension scheme – deficit | (213) | (75) |
| Unfunded defined benefit pension scheme | (39) | (39) |
| Total net assets | 527 | 728 |
An expense of £34m (H118: £23m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 4). None of this amount was recognised in respect of key management personnel for H119 and H118.
The total amount charged to the income statement was £10m (H118: £22m).
Movements in the present value of defined benefit obligations and fair value of scheme assets in H119 and H118 were as follows:
| Half year to | Half year to | |
|---|---|---|
| 30 June 2019 | 30 June 2018 | |
| £m | £m | |
| Return on plan assets (excluding amounts included in net interest expense) | (916) | 72 |
| Actuarial (gains)/losses arising from experience adjustments | (5) | 39 |
| Actuarial losses/(gains) arising from changes in financial assumptions | 1,201 | (640) |
| Pension remeasurement | 280 | (529) |
The net assets recognised in the balance sheet were determined as follows:
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Present value of defined benefit obligations | (11,980) | (10,804) |
| Fair value of scheme assets | 12,507 | 11,532 |
| Net defined benefit assets | 527 | 728 |
There have been no significant changes to the methods for setting the principal actuarial assumptions used as set out in Note 31 to the Consolidated Financial Statements in the 2018 Annual Report.
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| Guarantees given to third parties | 1,055 | 1,610 |
| Formal standby facilities, credit lines and other commitments | 41,851 | 40,111 |
| 42,906 | 41,721 |
At 30 June 2019, the Santander UK group had credit impairment loss provisions relating to guarantees given to third parties and undrawn loan commitments. See Note 21 for further details.
There have been no significant changes to the contingent liabilities as set out in Note 32 to the Consolidated Financial Statements in the 2018 Annual Report, including in respect of the following:
Santander UK engages in discussion, and co-operates, with the FCA, PRA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.
In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made.
Note 21 details our provisions including those in relation to PPI. In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is ongoing. There are factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is difficult to reliably predict the resolution of the matter including timing or the significance of the possible impact. The PPI provision includes our best estimate of Santander UK's liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial.
Santander UK plc, ANTS and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) are currently under investigation by the Cologne Criminal Prosecution Office and the German Federal Tax Office in relation to historical involvement in German dividend tax arbitrage transactions (known as cum/ex transactions). We are cooperating with the German authorities and are conducting our own internal investigation into the matters in question. There are factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict with reasonable certainty the resolution of the matter including timing or the significance of the possible impact.
The Santander UK group's unsecured lending and other consumer credit business is governed by consumer credit law and related regulations, including the CCA. Claims brought by customers in relation to potential breaches of these requirements could result in costs to the Santander UK group where such potential breaches are not found to be de minimis. The CCA includes very detailed and prescriptive requirements for lenders, including in relation to post contractual information.
As described in Note 30 to the 2018 Annual Report, other provisions includes an amount of £58m arising from a systems related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, but these reviews are not yet complete, such that the approach and timing to any remediation has not yet been finalised. As a result, the actual cost of customer compensation could differ materially from the amount provided, and it is not currently practicable to provide a reliable estimate of the amount or timing of any additional financial effects.
As described in Note 15 to the Consolidated Financial Statements in the 2018 Annual Report, Santander UK plc and certain of its subsidiaries issue securitisations and covered bonds. At 30 June 2019, there were £36,379m (2018: £36,195m) of gross assets in these secured programmes and £439m (2018: £501m) of these related to internally retained issuances and were available for use as collateral for liquidity purposes in the future.
At 30 June 2019, a total of £3,939m (2018: £4,039m) of notes issued under securitisation and covered bond programmes had 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 2019 (2018: £1,834m), or for use as collateral for liquidity purposes in the future.
| 31 December | ||||
|---|---|---|---|---|
| Interest rate | 30 June 2019 | 2018 | ||
| % | Next call date | £m | £m | |
| £300m Step-up Callable Perpetual Reserve Capital Instruments | 7.037 | February 2026 | 235 | 235 |
| AT1 securities: | ||||
| – £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.75 | June 2024 | 496 | 496 |
| – £750m Fixed Rate Reset Perpetual AT1 Capital Securities | 7.375 | June 2022 | 750 | 750 |
| – £300m Fixed Rate Reset Perpetual AT1 Capital Securities | 7.60 | December 2019 | 300 | 300 |
| – £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 5.18 | September 2019 | 210 | 210 |
| 1,991 | 1,991 |
| 30 June 2019 | 31 December 2018 | |
|---|---|---|
| £m | £m | |
| PSA Finance UK Limited | 159 | 151 |
| 159 | 151 |
The financial position and performance of the Santander UK group have not been materially affected in H119 by any related party transactions, or changes to related party transactions. These transactions were made in the ordinary course of business, on substantially 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. In addition, transactions with pension schemes operated by the Santander UK group are described in Note 31 to the Consolidated Financial Statements in the 2018 Annual Report.
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 to the Consolidated Financial Statements in the 2018 Annual Report describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.
At 30 June 2019 and 31 December 2018, the Santander UK group categorised assets and liabilities measured at fair value within the fair value hierarchy based on the fair value measurement and hierarchy, and valuation techniques, described in Note 41(b) and (c) to the Consolidated Financial Statements in the 2018 Annual Report.
The following table analyses the fair value of the financial instruments carried at amortised cost at 30 June 2019 and 31 December 2018. 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 41(e) to the Consolidated Financial Statements in the 2018 Annual Report.
| 30 June 2019 | 31 December 2018 | |||
|---|---|---|---|---|
| Fair value £m |
Carrying value £m |
Fair value £m |
Carrying value £m |
|
| Assets | ||||
| Loans and advances to customers | 207,080 | 202,516 | 204,061 | 201,289 |
| Loans and advances to banks | 2,065 | 2,065 | 2,799 | 2,799 |
| Reverse repurchase agreements- non trading | 22,416 | 22,409 | 21,130 | 21,127 |
| Other financial assets at amortised cost | 7,168 | 7,137 | 7,111 | 7,229 |
| 238,729 | 234,127 | 235,101 | 232,444 | |
| Liabilities | ||||
| Deposits by customers | 180,777 | 180,617 | 178,181 | 178,090 |
| Deposits by banks | 16,500 | 16,489 | 17,232 | 17,221 |
| Repurchase agreements- non trading | 14,779 | 14,771 | 10,923 | 10,910 |
| Debt securities in issue | 45,664 | 44,574 | 47,787 | 46,692 |
| Subordinated liabilities | 4,235 | 3,645 | 3,877 | 3,601 |
| 261,955 | 260,096 | 258,000 | 256,514 |
The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 30 June 2019 and 31 December 2018, analysed by their levels in the fair value hierarchy – Level 1, Level 2 and Level 3.
| 30 June 2019 | 31 December 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Valuation | ||
| Assets | £m | £m | £m | £m | £m | £m | £m | £m | technique | |
| Derivatives | Exchange rate contracts | – | 4,402 | 22 | 4,424 | – | 4,323 | 25 | 4,348 | A |
| Interest rate contracts | – | 2,005 | 5 | 2,010 | – | 2,526 | 6 | 2,532 | A & C | |
| Equity and credit contracts | – | 210 | 62 | 272 | – | 188 | 63 | 251 | B & D | |
| Netting | – | (1,261) | – | (1,261) | – | (1,872) | – | (1,872) | ||
| – | 5,356 | 89 | 5,445 | – | 5,165 | 94 | 5,259 | |||
| Other financial | Loans and advances to customers | – | – | 94 | 94 | – | 12 | 82 | 94 | A |
| assets at FVTPL | Debt securities | 17 | 72 | 562 | 651 | 18 | 2,339 | 894 | 3,251 | A, B & D |
| Reverse repurchase agreements – | A | |||||||||
| non trading | – | – | – | – | – | 2,272 | – | 2,272 | ||
| 17 | 72 | 656 | 745 | 18 | 4,623 | 976 | 5,617 | |||
| Financial assets at | Debt securities | 12,781 | 588 | – | 13,369 | 12,487 | 742 | – | 13,229 | D |
| FVOCI | Loans and advances to customers | – | – | 69 | 69 | – | – | 73 | 73 | D |
| 12,781 | 588 | 69 | 13,438 | 12,487 | 742 | 73 | 13,302 | |||
| Total assets at fair value | 12,798 | 6,016 | 814 | 19,628 | 12,505 | 10,530 | 1,143 | 24,178 | ||
| Liabilities | ||||||||||
| Derivatives | Exchange rate contracts | – | 926 | 1 | 927 | – | 528 | 23 | 551 | A |
| Interest rate contracts | – | 1,951 | 8 | 1,959 | – | 2,515 | 7 | 2,522 | A & C | |
| Equity and credit contracts | – | 121 | 29 | 150 | – | 132 | 36 | 168 | B & D | |
| Netting | – | (1,261) | – | (1,261) | – | (1,872) | – | (1,872) | ||
| – | 1,737 | 38 | 1,775 | – | 1,303 | 66 | 1,369 | |||
| Other financial | Debt securities in issue | – | 1,065 | 7 | 1,072 | – | 983 | 7 | 990 | A |
| liabilities at | Structured deposits | – | 104 | 29 | 133 | – | 104 | 29 | 133 | A |
| FVTPL | Repurchase agreements – non | A | ||||||||
| trading | – | – | – | – | – | 2,110 | – | 2,110 | ||
| Collateral and associated financial | D | |||||||||
| guarantees | – | 407 | 21 | 428 | – | 3,040 | 13 | 3,053 | ||
| – | 1,576 | 57 | 1,633 | – | 6,237 | 49 | 6,286 | |||
| Total liabilities at fair value | – | 3,313 | 95 | 3,408 | – | 7,540 | 115 | 7,655 |
During H119, there were no significant transfers of financial instruments from Level 1 to Level 2, or from Level 2 to Level 3 (H118: none).
The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model.
Santander UK classifies fair value adjustments as either 'risk-related' or 'model-related'. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table:
| 30 June 2019 £m |
31 December 2018 £m |
|
|---|---|---|
| Risk-related: | ||
| – Bid-offer and trade specific adjustments | 17 | 13 |
| – Uncertainty | 37 | 36 |
| – Credit risk adjustment | 8 | 9 |
| – Funding fair value adjustment | 5 | 4 |
| 67 | 62 | |
| Model-related | 1 | 5 |
| 68 | 67 |
Risk-related adjustments are driven, in part, by the magnitude of Santander UK's market or credit risk exposure, and by external market factors, such as the size of market spreads. For further details, see the 'Risk-related adjustments' section in Note 41(g) to the Consolidated Financial Statements in the 2018 Annual Report.
There have been no significant changes to the valuation techniques as set out in Note 41(h) to the Consolidated Financial Statements in the 2018 Annual Report.
The following table sets out the movements in Level 3 financial instruments in H119 and H118:
| Assets | Liabilities | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Derivatives | Other financial assets at FVTPL |
Financial assets at FVOCI |
Financial investments |
Assets held for sale |
Total | Derivatives | Other financial liabilities at FVTPL |
Liabilities held for sale |
Total | |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2019 | 94 | 976 | 73 | – | 1,143 | (66) | (49) | – | (115) | |
| Total gains/(losses) recognised in profit or loss: |
||||||||||
| – Fair value movements | 7 | 1 | – | – | 8 | (3) | (5) | – | (8) | |
| – Foreign exchange/other movements | – | 3 | – | – | 3 | – | (3) | – | (3) | |
| Transfers in | – | 11 | – | – | 11 | – | – | – | – | |
| Additions | 3 | 188 | – | – | 191 | – | (2) | – | (2) | |
| Settlements | (15) | (523) | (4) | – | (542) | 31 | 2 | – | 33 | |
| At 30 June 2019 | 89 | 656 | 69 | – | 814 | (38) | (57) | – | (95) | |
| Gains/(losses) recognised in profit or loss relating to assets and liabilities |
||||||||||
| held at the end of the period | 7 | 4 | – | – | 11 | (3) | (8) | – | (11) | |
| At 31 December 2017 | 64 | 240 | 53 | – | 357 | (63) | (6) | – | (69) | |
| Adoption of IFRS 9 | – | 598 | 199 | (53) | – | 744 | – | – | – | – |
| At 1 January 2018 Total gains/(losses) recognised in profit or loss: |
64 | 838 | 199 | – | 1,101 | (63) | (6) | – | (69) | |
| – Fair value movements | 26 | (5) | (4) | – | 17 | 4 | – | – | 4 | |
| – Foreign exchange/other movements | (5) | – | – | – | (5) | 5 | – | – | 5 | |
| Transfers in | – | 19 | – | – | 19 | – | – | – | – | |
| Transfer to held for sale | (2) | (146) | – | 148 | – | 1 | – | (1) | – | |
| Additions | – | – | 17 | – | 17 | – | – | – | – | |
| Sales | – | (23) | – | – | (23) | – | – | – | – | |
| Settlements | (21) | – | (37) | – | (58) | 15 | – | – | 15 | |
| At 30 June 2018 | 62 | 683 | 175 | 148 | 1,068 | (38) | (6) | (1) | (45) | |
| Gains/(losses) recognised in profit or loss on assets and liabilities held at the end of the period |
21 | (5) | (4) | 12 | 9 | – | – | 9 |
Other than as described above, there has been no significant change to the unobservable inputs and sensitivities used in Level 3 fair values as set out in Note 41(h) to the Consolidated Financial Statements in the 2018 Annual Report.
There have been no significant events between 30 June 2019 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements.
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