Interim / Quarterly Report • Oct 18, 2021
Interim / Quarterly Report
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Half Yearly Financial Report 2021
Santander UK plc
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 Shareholder information section.
| Chief Executive Officer's review | 2 |
|---|---|
| Financial overview | 3 |
| Operating environment and stakeholder update | 5 |
| Financial review | 7 |
| Risk review | 14 |
| Financial statements | 52 |
| Shareholder information | 78 |
"We have delivered another strong financial performance while continuing to support our customers, colleagues and communities through the challenges of the pandemic. The results are a testament to the hard work of our teams and reflect the strategic decisions we have taken over recent years as well as the economic recovery.
We have delivered good growth in net interest income and mortgage lending. At the same time, we have continued to focus on enhancing our customer experience and improving efficiency.
Looking ahead, while we are encouraged by the UK's strong economic recovery, uncertainty remains as we enter a new phase in the pandemic. The strength of our business, underpinned by our prudent approach to risk, means we are well positioned to grow and to continue to support our customers, fulfilling our purpose to help people and businesses prosper."
Profit from continuing operations1 before tax increased 295% to £743m
Operating income was up 20% driven by higher net interest income following deposit repricing. Operating expenses increased 10% as a result of significant transformation programme investment. We made a modest release of Covid-19 related provision given the anticipated UK economic recovery which resulted in a £70m credit impairment write back. Provisions for other liabilities and charges increased by £126m to £190m, of which £112m related to the transformation programme.
We made a £71m gain on sale of our UK head office site in London to Banco Santander, given our decision to invest in a new Milton Keynes campus.
Over 90% of customer balance sheet is secured, the majority of which is prime residential mortgages with an average LTV of 42%. Our prudent approach to risk was reflected by low write-offs, no material corporate defaults in H121 and Expected Credit Loss (ECL) provision of £1.2bn (2020: £1.4bn). Our CET1 capital ratio of 15.8% remains well above regulatory requirements. LCR of 144% remained strong (2020:150%).
Our transformation programme investment of £307m in H121 largely related to our plans to reduce branches and consolidate head office sites (announced in Q121). Since 2019, £638m of investment has realised £342m of savings to date.
We helped circa 1,500 mortgage customers to improve their homes' energy efficiency with launch of a bespoke EnergyFact report in March 2021. Our progress will be outlined in a new Santander UK Environmental, Social and Governance (ESG) Update presentation, planned for August 2021, and a Banco Santander Climate Report that was published in July 2021.
On 28 July 2021, we announced that Deputy CEO Tony Prestedge has stepped down from the Board and Executive Committee with immediate effect and will be leaving Santander UK.
The UK economic environment has faced a range of challenges over the last 18 months from Brexit, the weakening global environment and most significantly the Covid-19 pandemic which resulted in a sharp fall in growth in Q220. The outlook for 2021 is more positive following the success of the vaccination programme in alleviating the health crisis and allowing social restrictions to be lifted and economic activity to resume.
However, we are mindful that despite good progress in the vaccination programme the sustainability of the recovery is not certain. We have long held a cautious approach to risk and with our focus on prime residential mortgages, limited unsecured and commercial real estate exposures as well as significant ECL provision we believe we are prudently positioned.
Nathan Bostock
Chief Executive Officer
(1) See 'Discontinued operations' in the Financial review and Note 33 to the Condensed Consolidated Interim Financial Statements for more on the transfer of our Corporate & Investment Banking (CIB) business to the London Branch of Banco Santander SA (SLB) which is treated as a discontinued operation.
"Given the challenges we have faced over the last 18 months, our improved performance is a great achievement and reflects the hard work of all our people. These results demonstrate the strong progress we are making in transforming the bank, underpinned by our proven balance sheet resilience with strong capital and liquidity. The decisive actions we took last year and the first half of this year have served us well, and driven improvement in our financial performance."
| 30 June 2021 | 30 June 2020 | |
|---|---|---|
| Income statement highlights | £m | £m |
| Net interest income | 1,905 | 1,528 |
| Non-interest income(1) | 286 | 300 |
| Total operating income | 2,191 | 1,828 |
| Operating expenses before credit impairment losses, provisions and charges | (1,328) | (1,212) |
| Credit impairment losses | 70 | (364) |
| Provisions for other liabilities and charges | (190) | (64) |
| Total operating credit impairment losses, provisions and charges | (120) | (428) |
| Profit from continuing operations before tax | 743 | 188 |
| Tax on profit from continuing operations | (205) | (48) |
| Profit from continuing operations after tax | 538 | 140 |
| Profit/(loss) from discontinued operations after tax | 24 | (1) |
| Profit after tax | 562 | 139 |
(1) Comprises 'Net fee and commission income' and 'Other operating income'.
Profit from continuing operations before tax was up 295% to £743m due to the factors outlined below. By income statement line item, the movements were:
Net interest income was up 25%, with repricing actions on the 1I2I3 Current Account and other deposits offsetting base rate cuts and back book mortgage margin pressure, including £1.2bn net attrition on SVR and Follow on Rate products (2020: £1.8bn).
Non-interest income was flat, with the gain on sale of our UK head office offset by significantly lower banking and transaction fees in our retail business largely due to the implementation of regulatory changes to overdrafts.
Operating expenses before credit impairment losses, provisions and charges were up 10% largely related to the transformation programme.
Credit impairment write back of £70m, mainly due to a £104m release related to the improved economic outlook. This compared to H120 when we made a significant charge for Covid-19 related ECL build, which was not repeated. New to arrears flows and Stage 3 defaults remain low as all portfolios perform resiliently.
Provisions for other liabilities and charges were up £126m to £190m, largely related to the transformation programme.
Tax on profit from continuing operations increased £157m to £205m with increased profit. The H121 Effective Tax rate (ETR) of 27.6% (H120: 25.5%) also increased as a result of the increase in profit subject to the bank surcharge.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Customer loans(1) | 208.4 | 207.0 |
| - of which retail mortgages | 170.6 | 166.7 |
| - of which consumer (auto) finance and unsecured lending | 7.7 | 8.0 |
| - of which corporates | 22.9 | 24.3 |
| Customer deposits(1) | 189.4 | 185.7 |
(1) Customer loans includes £2.5bn of loans classified as assets held for sale. Customer deposits includes £3.8bn of deposits classified as liabilities held for sale. See 'Assets and liabilities classified as held for sale' in the Financial review for details.
Customer loans increased £1.4bn, with £3.6bn increase in mortgages with strong application volumes and £17.2bn of gross lending. This was partially offset by lower retail unsecured, consumer (auto) finance and corporate lending including the effect of a migration of customers to SLB in H121.
Customer deposits increased £3.7bn, with £4.5bn growth in Retail Banking partially offset by lower corporate deposits including the effect of a migration of customers to SLB in H121. Growth in 1|2|3 Current account balances to £59bn (H120: £55bn, 2020: £57bn), despite repricing actions taken during 2020 and 2021.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| Capital and funding | £bn | £bn |
| CET1 capital | 11.3 | 11.1 |
| Risk-weighted assets | 71.7 | 71.9 |
| CET1 capital ratio | 15.8 % | 15.4 % |
| Total wholesale funding and AT1 | 59.0 | 65.3 |
| - of which with a residual maturity of less than one year | 17.0 | 21.1 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| Liquidity | £bn | £bn |
| Santander UK Domestic Liquidity Sub Group (RFB DoLSub) | ||
| Liquidity Coverage Ratio (LCR) | 144 % | 150 % |
| LCR eligible liquidity pool | 47.0 | 51.5 |
CET1 capital ratio increased 40 basis points to 15.8% with capital accretion through retained profits, Risk-Weighted Assets (RWA) management and market driven improvements in the defined benefit pensions scheme.
Total capital ratio reduced by c20bps to 21.0%, reflecting the reduction in AT1 securities in issue and the increased effect from January 2021 of the CRD IV Grandfathering Cap rules that reduce the recognition of grandfathered capital instruments issued by Santander UK plc.
We issued £2.1bn of MREL eligible senior unsecured securities and repaid £3.0bn of Term Funding Scheme (TFS), leaving £3.3bn outstanding and drew £3.5bn of Term Funding Scheme with additional incentives for SMEs (TFSME), with £15.2bn outstanding. Wholesale funding costs improved in H121 with buy backs and debt maturities being refinanced at lower cost, this is expected to continue in H221.
The RFB DoLSub LCR of 144% reduced from 150% at year end, remains significantly above regulatory requirements.
Following the announcement from the PRA on 13 July 2021 regarding the return to normalised shareholder distribution framework, we paid a half year ordinary share dividend to our parent in July 2021.
Our structural hedge position remained broadly stable at circa £98bn, with an average duration of circa 2.5 years.
We expect our mortgage book to grow broadly in line with the market.
Our transformation programme is expected to deliver further cost savings. We expect transformation spending in the second half to be significantly lower than in H121.
The credit environment in the first half of 2021 was benign and, if the economy continues to improve with no further Covid-19 restrictions, our second half credit performance will likely be similar.
Chief Financial Officer
The UK economic environment has faced a range of challenges over the last 18 months from Brexit, the weakening global environment and most significantly the Covid-19 pandemic which resulted in a sharp fall in growth in Q220. The outlook for 2021 is more positive following the success of the vaccination programme in alleviating the health crisis and allowing social restrictions to be lifted and economic activity to resume.
Our base case reflects the progress made on vaccinations, the planned end of government support measures and stage 4 of the government's roadmap which removed all legal limits on social contact in July.
The downside scenarios continue to encapsulate different potential outcomes from the base case including a return to high and persistent rates of inflation; lower use of savings as a means of increasing consumption; higher for longer unemployment and the longer-term impact this can have on economic growth; increasing Covid-19 infection rates caused by the emergence of new variants that are more resistant to existing vaccines leading to further lockdowns; continuing weak investment; and a larger negative impact from the EU trade deal than assumed.
The ongoing impact of the Covid-19 pandemic has continued to affect how we work and how we serve our customers. We have played an important role in providing support to our customers as government support measures sought to help insulate the country from the effects of the lockdown.
We have continued to support customers throughout lockdown. As restrictions eased, branch openings and hours have been gradually extended. Branch staff continued to support customers remotely, through live chat, inbound and outbound calls. Our live chat and chatbot services proved essential during the Covid-19 outbreak, enabling us to deal with a significant increase in non-branch customer enquiries.
In common with other banks we have also offered customers affected by the pandemic extensive support, including payments holidays across mortgages and consumer (auto) finance and other unsecured products. We have also continued to support our business and corporate customers through the government's Coronavirus Loan Schemes: the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Most notable of these has been the take up of the BBLS with £3.9bn of lending all with a 100% government guarantee.
Our experience of the operational challenges we faced to quickly help our customers encouraged us to look at how we work in the future and our ability to make decisions quickly, empower our colleagues to implement their ideas and find the most effective and efficient way to get things done for our customers.
We have seen a continued shift by customers towards mobile and online banking, a long-term trend which accelerated during the Covid-19 pandemic. In response we announced plans to close 111 branches in April 2021 (of which 56 had closed by 31 July 2021). A network of 452 branches will remain, providing broad coverage across the UK.
During the first half of 2021 most of our non-branch staff continued to work from home, in line with government guidance to work from home where possible. For our people who continued to work in our branches and offices, we complied with all the Government's workplace Covid-19 guidance. A daily survey is in place to guide each colleague on whether to travel to work and temperature checking is in place for those who work in an office or branch.
We know that childcare has been a challenge for many of our people during this period so we have committed to be as flexible as possible to find the best solution for our people and the business. We also committed to continue to pay contracted hours as normal during the period of the pandemic, including throughout any periods of self-isolation. We did not utilise any government funds through the furlough scheme.
We provide wellbeing support to our people across four pillars: Physical, Mental, Financial and Social, coordinated through an online hub. We supplemented the wellbeing hub to help our people deal with additional Covid-19 related matters including the challenges of working from home and access to live chat with psychologists for mental health issues. We want to ensure our colleagues maintain positive wellbeing each day at work, and at home, and ensure that anyone who needs it can find the right support for them at the right time. We are extremely proud of all our people for their ongoing support and dedication.
We continued to provide support to community initiatives, charities, and university partners, building on our £8.1m of Covid-related support at 31 December 2020. This included £2.8m of repurposed donations to university partners from 2019 directed towards Covid-19. It also included a Santander Universities contribution of £5.1m to partner university initiatives, such as a £300,000 donation to Oxford, UCL and Imperial College to support Covid-19 research and vaccine development, as well as a Santander Foundation donation of £1.5m each to our charity partners, Alzheimer's Society and Age UK.
The Covid-19 pandemic hit older, vulnerable people the hardest. Alongside our donation to Age UK and Alzheimer's Society, we doubled the available volunteering time to colleagues and launched a volunteering campaign, 'QuaranTea', to alleviate social isolation. Santander UK's ambassadors, Ant and Dec, fronted the campaign externally to raise awareness of social isolation, and 3,500 Santander UK colleagues took part. After one year, the Santander Foundation £3m donation has enabled both charities to support over 370,000 people, and the campaign has had a longer-term impact by increasing volunteers for the charities. The number of volunteers making calls for Alzheimer's Society to people affected by dementia increased by 56% and the number of Santander UK telephone befrienders for Age UK increased by 50%, leaving a long-lasting legacy going beyond the campaign.
Santander Foundation launched a new Financial & Digital Empowerment Fund focused on helping people in the UK to become digitally and financially empowered. The ambition is to give people the tools, knowledge and confidence to make better decisions about money, so £1.8million will be awarded over three years to 12 UK charities and Community Interest Companies to have an even greater impact in local communities.
Santander Universities has been working in partnership with Finance Unlocked to deliver finance education to up to 3,000 Black and Black Mixed Race UK university students and recent graduates. The programme ran from 30 March to 9 May 2021 and featured eight hours of learning across ESG, banking essentials and private equity. We had 1,475 black and black mixed students/graduates take part. The programme with Finance Unlocked generated positive feedback, with 97% of students surveyed positive that Finance Unlocked helped them prepare for their future, and 95% of students opting in to receive communications from Santander UK's emerging talent team.
The Covid-19 pandemic had a material impact on 2020 shareholder returns as we built provisions to cover higher expected credit losses. While the situation remains highly uncertain, the economic outlook has improved and we have been able to make a modest write back of some credit provisions. Despite this, we still hold circa 90% of the Covid-19 related provisions that we built in 2020 which reflects our prudent approach to risk. Given circa 90% of our loan portfolio is secured and we have taken a cautious approach to growth in consumer lending and CRE over recent years, we are well positioned to deliver sustainable returns through the credit cycle.
Income improved in the first half of 2021 following deposit repricing which, alongside actions to refinance more expensive legacy debt instruments and drawdowns under TFSME, led to notably lower liability funding costs.
Following the announcement from the PRA on 13 July 2021, regarding the return to normalised shareholder distribution framework, we paid a half year ordinary share dividend to our parent in July 2021, in line with our dividend policy.
We remain strongly capitalised with our CET1 capital ratio growing 40 bps in the first six months of 2021, with capital accretion through retained profits, RWA management and market driven improvements in the defined benefit pensions scheme. CET1 capital ratio includes a benefit of circa 30bps from the change in treatment of software assets outlined in the EBA technical standard on the prudential treatment of software assets. The PRA have outlined in Policy Statement PS17/21 on the Implementation of Basel Standards that this treatment will fall away at the start of 2022 and software assets will instead be fully deducted from CET1 capital from that date.
A description of our principal risks and uncertainties for the remaining six months of the financial year is set out in the Risk overview section of the Risk review, including a discussion of how the relevant risks and uncertainties have changed since our 2020 Annual Report was published.
The Directors confirm that to the best of their knowledge these Condensed Consolidated Interim Financial Statements have been prepared in accordance with UKadopted International Accounting Standard 34, 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and IAS 34 'Interim Financial Reporting' as adopted by the EU, and that the half-year management report herein includes a fair review of the information required by Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA), namely:
By Order of the Board
Chief Executive Officer 12 August 2021
| Income statement review | 8 |
|---|---|
| Summarised Consolidated Income Statement | 8 |
| Profit before tax by segment | 9 |
| Balance sheet review | 10 |
| Summarised Consolidated Balance Sheet | 10 |
| Customer balances | 12 |
| Capital and funding | 13 |
| Liquidity | 13 |
| Alternative Performance Measures | 13 |
| Half year to | Half year to(2) | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Net interest income | 1,905 | 1,528 |
| Non-interest income(1) | 286 | 300 |
| Total operating income | 2,191 | 1,828 |
| Operating expenses before credit impairment losses, provisions and charges | (1,328) | (1,212) |
| Credit impairment losses | 70 | (364) |
| Provisions for other liabilities and charges | (190) | (64) |
| Total operating credit impairment losses, provisions and charges | (120) | (428) |
| Profit from continuing operations before tax | 743 | 188 |
| Tax on profit from continuing operations | (205) | (48) |
| Profit from continuing operations after tax | 538 | 140 |
| Profit/(loss) from discontinued operations after tax | 24 | (1) |
| Profit after tax | 562 | 139 |
| Attributable to: | ||
| Equity holders of the parent | 545 | 128 |
| Non- controlling interests | 17 | 11 |
| Profit after tax | 562 | 139 |
(1) Comprises 'Net fee and commission income' and 'Other operating income'.
(2) Adjusted to reflect the presentation of discontinued operations as set out in Note 33 to the Condensed Consolidated Interim Financial Statements.
A more detailed Consolidated Income Statement is contained in the Condensed Consolidated Interim Financial Statements.
Profit from continuing operations before tax was up 295% to £743m due to the factors outlined below. By income statement line item, the movements were:
Profit from discontinued operations after tax of £24m relates to the Corporate & Investment Banking business. In H121 (H120: loss of £1m) comprised the profit before tax of the discontinued operations of £33m (H120:loss of £2m) and a tax charge of £9m (H120: tax credit of £1m). The increase of £35m in profit before tax of the discontinued operations principally reflected credit impairment write-backs related to the improved economic outlook.
The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Condensed Consolidated Interim Financial Statements.
| Half year to(3) | Retail Banking(2) |
Corporate & Commercial Banking(2) |
Corporate & Investment Banking(2) |
Corporate Centre(2) |
Total |
|---|---|---|---|---|---|
| 30 June 2021 | £m | £m | £m | £m | £m |
| Net interest income/(expense) | 1,741 | 203 | — | (39) | 1,905 |
| Non-interest income(1) | 189 | 51 | — | 46 | 286 |
| Total operating income/(expense) | 1,930 | 254 | — | 7 | 2,191 |
| Operating expenses before credit impairment losses, provisions and charges | (922) | (177) | — | (229) | (1,328) |
| Credit impairment losses | 48 | 22 | — | — | 70 |
| Provisions for other liabilities and charges | (67) | (5) | — | (118) | (190) |
| Total operating credit impairment losses, provisions and charges | (19) | 17 | — | (118) | (120) |
| Profit from continuing operations before tax | 989 | 94 | — | (340) | 743 |
| Half year to(3) | |||||
|---|---|---|---|---|---|
| 30 June 2020 | |||||
| Net interest income/(expense) | 1,369 | 181 | — | (22) | 1,528 |
| Non-interest income(1) | 227 | 49 | — | 24 | 300 |
| Total operating income/(expense) | 1,596 | 230 | — | 2 | 1,828 |
| Operating expenses before credit impairment losses, provisions and charges | (983) | (161) | — | (68) | (1,212) |
| Credit impairment losses | (214) | (150) | — | — | (364) |
| Provisions for other liabilities and charges | (56) | 3 | — | (11) | (64) |
| Total operating credit impairment losses, provisions and charges | (270) | (147) | — | (11) | (428) |
| Profit from continuing operations before tax | 343 | (78) | — | (77) | 188 |
(1) Comprises 'Net fee and commission income' and 'Other operating income'.
(2) The segmental basis of presentation has changed following a management review of our structure and segmental income statements and customer balances for 2020 have been restated accordingly. See Note 2 to the Condensed Consolidated Interim Financial Statements.
(3) Adjusted to reflect the presentation of discontinued operations as set out in Note 33 to the Condensed Consolidated Interim Financial Statements.
| Half year to | Half year to | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Net interest income | 24 | 25 |
| Non-interest income(1) | 27 | 22 |
| Operating income | 51 | 47 |
| Operating expenses before impairment losses, provisions and charges | (22) | (33) |
| Credit Impairment losses | 7 | (12) |
| Provisions for other liabilities and charges | (3) | (4) |
| Profit/ (loss) from discontinued operations before tax | 33 | (2) |
| Tax on profit/ (loss) from discontinued operations | (9) | 1 |
| Profit/ (loss) from discontinued operations after tax | 24 | (1) |
(1) Comprises 'Net fee and commission income' and 'Other operating income'.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Assets | ||
| Cash and balances at central banks | 39,021 | 41,250 |
| Financial assets at fair value through profit or loss | 2,181 | 3,614 |
| Financial assets at amortised cost | 228,037 | 231,194 |
| Financial assets at fair value through other comprehensive income | 6,368 | 8,950 |
| Interest in other entities | 183 | 172 |
| Property, plant and equipment | 1,596 | 1,734 |
| Retirement benefit assets | 1,083 | 495 |
| Tax, intangibles and other assets | 4,500 | 4,923 |
| Assets held for sale | 2,645 | — |
| Total assets | 285,614 | 292,332 |
| Liabilities | ||
| Financial liabilities at fair value through profit or loss | 2,086 | 3,018 |
| Financial liabilities at amortised cost | 259,561 | 270,063 |
| Retirement benefit obligations | 152 | 403 |
| Tax, other liabilities and provisions | 3,195 | 2,912 |
| Liabilities held for sale | 3,912 | — |
| Total liabilities | 268,906 | 276,396 |
| Equity | ||
| Total shareholders' equity | 16,528 | 15,774 |
| Non-controlling interests | 180 | 162 |
| Total equity | 16,708 | 15,936 |
| Total liabilities and equity | 285,614 | 292,332 |
A more detailed Consolidated Balance Sheet is contained in the Condensed Consolidated Interim Financial Statements.
30 June 2021 compared to 31 December 2020
Cash and balances at central banks decreased by 5% to £39,021m at 30 June 2021 (2020: £41,250m). This was driven by cash outflows generated from a decrease in repurchase agreements, deposits by customers, deposits by banks and other financial liabilities at fair value through profit or loss, partially offset by lower reverse repurchase agreements.
Financial assets at fair value through profit or loss decreased by 40% to £2,181m at 30 June 2021 (2020: £3,614m), mainly due to a £1.3bn decrease in derivative exchange rate and interest rate contracts held for hedging.
Financial assets at amortised cost decreased by 1% to £228,037m at 30 June 2021 (2020: £231,194m), largely driven by a £3.0bn decrease in non-bounce back corporate loans and non-mortgage related lending, the reclassification of £0.6bn of residential mortgages and £2.0bn of CIB customer loans as held for sale, a £1.4bn decrease in reverse repurchase agreements driven by normal business activities, and the disposal of UK Government Gilts, partially offset by a net increase in residential mortgages.
Financial assets at fair value through other comprehensive income decreased by 29% to £6,368m at 30 June 2021 (2020: £8,950m) mainly due to the settlement of Japanese Government bonds and US Treasury bonds.
Property, plant and equipment decreased by 8% to £1,596m at 30 June 2021 (2020: £1,734m) reflecting freehold and leasehold property sales including the sale of our UK head office.
Retirement benefit assets increased by 119% to £1,083m at 30 June 2021 (2020: £495m). This was mainly due to actuarial gains in the period driven by an increase in the discount rate as a result of higher corporate bond yields, partially offset by actuarial losses due to higher inflation.
Tax, intangibles and other assets decreased by 9% to £4,500m at 30 June 2021 (2020: £4,923m), mainly due to hedge adjustments resulting from an increase in the 5 year GBP SONIA rate over the period.
Assets held for sale comprise £0.6bn of residential mortgages and £2.0bn of CIB assets. For more, see 'Assets and liabilities classified as held for sale' in the Customer balances section that follows, and Note 33 to the Condensed Consolidated Interim Financial Statements.
Financial liabilities at amortised cost decreased by 4% to £259,561m at 30 June 2021 (2020: £270,063m). This was mainly due to maturities and buybacks across a range of debt securities partially offset by new structured notes issuances £6.4bn, a decrease in non-trading repurchase agreements as part of normal business activities, a decrease in deposits by banks due to decreased cash collateral partially offset by an increase in time deposits, and a £1.8bn decrease in customer deposits comprising an increase in retail deposits due to customers continuing to remain cautious with their spending during the Covid-19 pandemic, more than offset by a reduction in financial corporates time deposits and household time deposit balances and the reclassification of £3.8bn of CIB customer deposits as held for sale.
Retirement benefit obligations decreased by 62% to £152m at 30 June 2021 (2020: £403m). This was driven by actuarial losses resulting from higher inflation, partially offset by actuarial gains in the period due to an increase in the discount rate as a result of higher corporate bond yields.
Liabilities held for sale comprise £3.9bn of CIB deposits. For more, see 'Assets and liabilities classified as held for sale' in the Customer balances section that follows, and Note 33 to the Condensed Consolidated Interim Financial Statements.
Total shareholders' equity increased by 5% to £16,528m at 30 June 2021 (2020: £15,774m). This increase was principally due to retained profits for the period, pension remeasurement and the issue and redemption of other equity instruments, partially offset by decreases in the fair value of cash flow hedges, and dividends paid.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Customer loans(1) | 208.4 | 207.0 |
| Other assets | 77.2 | 85.3 |
| Total assets | 285.6 | 292.3 |
| Customer deposits(1) | 189.4 | 185.7 |
| Total wholesale funding | 56.8 | 63.1 |
| Other liabilities | 22.7 | 27.5 |
| Total liabilities | 268.9 | 276.3 |
| Shareholders' equity | 16.5 | 15.8 |
| Non-controlling interest | 0.2 | 0.2 |
| Total liabilities and equity | 285.6 | 292.3 |
(1) Customer loans includes £2.5bn of loans classified as assets held for sale. Customer deposits includes £3.8bn of deposits classified as liabilities held for sale. See 'Assets and liabilities classified as held for sale' on the page that follows for details.
Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.
– Other assets and other liabilities fell, as part of liquidity management during H121.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Mortgages | 170.6 | 166.7 |
| Business banking | 3.9 | 3.9 |
| Consumer (auto) finance | 7.7 | 8.0 |
| Other unsecured lending | 4.5 | 4.8 |
| Customer loans | 186.7 | 183.4 |
| Current accounts | 80.0 | 75.6 |
| Savings | 58.2 | 57.4 |
| Business banking accounts | 13.1 | 13.4 |
| Other retail products | 5.4 | 5.8 |
| Customer deposits | 156.7 | 152.2 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Non-Commercial Real Estate trading businesses | 12.7 | 12.9 |
| Commercial Real Estate | 4.4 | 4.7 |
| Customer loans | 17.1 | 17.6 |
| Customer deposits | 25.3 | 25.0 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Customer loans | 1.9 | 2.8 |
| Customer deposits | 3.8 | 6.5 |
At 30 June 2021, these customer loans and deposits were classified as held for sale, as described below.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Social Housing | 2.6 | 3.0 |
| Non-core | 0.1 | 0.2 |
| Customer loans | 2.7 | 3.2 |
| Customer deposits | 3.6 | 2.0 |
| Strategic report Financial review Risk review Financial statements |
Shareholder information |
|---|---|
| ----------------------------------------------------------------------------- | ------------------------- |
| Customer deposits | |
|---|---|
| Customer loans held for sale | 2.5 |
| Retail Mortgages | 0.6 |
| CIB Part VII banking business transfer scheme | 1.9 |
| £bn | |
| 30 June 2021 | |
| Customer loans |
| 30 June 2021 | |
|---|---|
| £bn | |
| CIB Part VII banking business transfer scheme | 3.8 |
| Customer deposits held for sale | 3.8 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Capital | ||
| CET1 capital | 11.3 | 11.1 |
| Total qualifying regulatory capital | 15.0 | 15.2 |
| CET1 capital ratio | 15.8 % | 15.4 % |
| Total capital ratio | 21.0 % | 21.2 % |
| Risk-weighted assets | 71.7 | 71.9 |
| Funding | ||
| Total wholesale funding and AT1 | 59.0 | 65.3 |
| - of which with a residual maturity of less than one year | 17.0 | 21.1 |
–
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Santander UK Domestic Liquidity Sub Group (RFB DoLSub) | ||
| Liquidity Coverage Ratio (LCR) | 144 % | 150 % |
| LCR eligible liquidity pool | 47.0 | 51.5 |
Further analysis of capital, funding and liquidity is included in the Capital risk and Liquidity risk sections of the Risk review.
In addition to the financial information prepared under IFRS, this Half Yearly Financial Report contains non-IFRS financial measures that constitute APMs, as defined in European Securities and Markets Authority (ESMA) guidelines. The financial measures contained in this Half Yearly Financial Report that qualify as APMs have been calculated using the financial information of the Santander UK group but are not defined or detailed in the applicable financial information framework or under IFRS.
We use these APMs when planning, monitoring and evaluating our performance. We consider these APMs to be useful metrics for management and investors to facilitate operating performance comparisons from period to period. Whilst we believe that these APMs are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for IFRS measures.
There have been no changes to the Santander UK group's APMs as set out in our 2020 Annual Report.
| Risk overview | 15 |
|---|---|
| Risk governance | 17 |
| Credit risk | 18 |
| Santander UK group level | 18 |
| Retail Banking | 34 |
| Other business segments | 39 |
| Market risk | 41 |
| Liquidity risk | 42 |
| Capital risk | 45 |
| Pension risk | 47 |
| Conduct and regulatory risk | 48 |
| Operational risk | 49 |
| Other key risks | 51 |
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 68 of the 2020 Annual Report. We set out below the main changes in our risk profile in H121 in terms of the respective key risk types. Further detail on other key risk types can be found in the relevant sections of this report.
| Credit | Market (Banking | Liquidity | Capital |
|---|---|---|---|
| market) | |||
| Stage 3 ratio (%) 30 June 2021: 1.43 31 December 2020: 1.45 |
NIM sensitivity +50 bps (£m) 30 June 2021: 219 31 December 2020: 225 |
RFB DoLSub Liquidity Coverage Ratio (%) 30 June 2021: 144% 31 December 2020: 150% |
CET1 capital ratio (%) 30 June 2021: 15.8 31 December 2020: 15.4 |
| Prudent approach to credit risk reflected by low write-offs, no material corporate defaults in H121 and ECL provision of £1.2bn remaining (2020: £1.4bn). |
The Santander UK plc group NIM sensitivity reduced in H121 largely due to changes in modelling assumptions used for risk measurement purposes. |
The RFB DoLSub LCR of 144% reduced from 150% at the year-end, but remains significantly above regulatory requirements. |
CET1 capital ratio increased 40bps to 15.8%, with capital accretion through retained profits, RWA management and market driven improvements in the defined benefit pensions scheme. |
| £70m credit impairment write back with modest release of Covid-19 related provision given the anticipated UK economic recovery. |
The UK interest rate environment has remained low for a prolonged period. As a commercial bank we are positioned to benefit from rising rates, although the pace and scale of expected change will moderate any impact on income. |
We continue to focus on achieving the right balance between risk and reward. The main risk management developments in H121 were an increase in interest rate and inflation hedging, and the transaction of a longevity swap to cover circa £5bn of pension obligations.
In H121, the accounting position improved due to a rise in the discount rate and increases in growth assets.
The remaining provision for PPI redress and related costs was £37m (2020: £76m). There were no additional provisions in H121.
In H121, we continued to build on our progress in 2020 and remained vigilant in taking a customer-focused approach in developing strategy, products and policies that support fair customer outcomes and market integrity, in particular within the context of regulator and government driven Covid-19 initiatives.
We continue to treat the wellbeing and safety of our colleagues as one of our top priorities, driven mainly by the challenging Covid-19 environment.
In H121, we prioritised risk management of change and transformation, third-party suppliers, and cyber & IT development. We also developed our strategy for operational resilience.
We also experienced a significant system outage in May 2021. The insights from this are feeding into our operational resilience programme.
In H121, we continued embedding our anti-financial crime strategy, policies, and training across the business. We also built upon promoting the Anti-Financial Crime (AFC) Strategy by embedding the Anti Financial Crime Culture across the bank through a defined framework.
We pro-actively identified potential risks posed by criminal exploitation of Government funding schemes, such as Bounce Back Loans and other Covid -19 related Government loans and grants.
A top risk is a current risk within our business that could have a material impact on our financial results, reputation and the sustainability of our business model. An emerging risk is a risk with largely uncertain outcomes which may develop or crystallise in the future. Crystallisation of an emerging risk could have a material effect on long-term strategy. In 2020, we identified our top risks and emerging risks as identified in the table below, and discussed them on pages 6 and 7 respectively of the 2020 Annual Report.
The table below sets out the Top risks and Emerging risks mapping to Risk types.
| Risk Types | Top Risks | Emerging Risks |
|---|---|---|
| Credit | Covid-19 (first & second order), Brexit | Extended Government involvement in Banking, Extended economic contraction, High inflation, Climate change, Disruption (macro economic factors) |
| Market | Negative rates, Uncertainty (economic/geopolitical) | |
| Capital | Building and maintaining capital strength | Extended Government involvement in banking, Extended economic contraction, High inflation |
| Pension | Pension risk, Capital risk | Extended economic contraction, High inflation |
| Conduct & Regulatory | Conduct & Regulatory, Brexit, Ring-fencing implementation, Covid- 19 (first order) |
Demanding regulatory agenda, Negative rates, IBOR transition |
| Operational | Third party risk, Managing a complex change agenda, Cyber attacks, Data management, People, Covid-19 (First Order), Brexit |
Brexit, Negative rates, IBOR transition, Other environmental/social, Climate change |
| Financial crime | Financial crime | |
| Strategic & Business | Technological change, Customer behaviours, Intense competition | |
| Reputational | Negative rates, IBOR transition, Demanding regulatory agenda |
In H121, reflecting an increased focus on Non-Financial Risks in H121, we introduced two new Top Risks: People Risk and Data management. We expect Cost and Revenue pressures will be removed as a Top Risk in H221, along with significantly reduced Covid-19 impacts on our financial performance.
In H121, there were no significant changes in Third party risk and Ring-fencing implementation. The more notable movements in our other Top Risks in H121 were as follows:
In H121, our overall emerging risk profile remained relatively unchanged, with no new risks identified. However, we have highlighted certain themes that are evolving within our existing emerging risks as the UK economy improved, along with further developments in the Government's response to Covid-19.
The more notable movements in our emerging risks in H121 were as follows:
As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance, withstand stresses, such as the impacts of the Covid-19 pandemic, and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.
Detailed discussions of the impact of Covid-19 on specific risk types are set out in the relevant sections of this Risk review and summarised in the 'Risk management overview' in the Strategic report in the 2020 Annual Report.
In H121, there were no significant changes in our risk governance, including how we define risk and our key risk types, as described in the 2020 Annual Report, except that we updated our climate-related risk minimum standard to consider the impact of environmental and climate-related risk drivers, whether physical or transition-led, which could affect existing risks in the medium and long term.
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.
Credit risk profile and performance data include portfolios classified as held for sale at 30 June 2021, which includes the Corporate & Investment Banking business. For details, see Note 33 to the Condensed Consolidated Interim Financial Statements.
Stage 3 ratio improved slightly to 1.43% (2020: 1.45%).
Loss allowances decreased to £1,192m (2020: £1,377m).
Average LTV of 63% (2020: 64%) 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 2020 Annual Report.
We provide an update on the key changes to the inputs to our ECL model below.
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 risk of a loss being incurred even when it is considered unlikely.
For all our portfolios, except CIB, we use five forward-looking economic scenarios. For H121, they consist of a central base case, one upside scenario and three downside scenarios. We use five scenarios to reflect a wide range of possible outcomes for the UK economy.
For our base case, the forecasts are based on the following assumptions. Restrictions continue to lift throughout Q221 with the majority lifted by beginning of Q321. However, some overseas travel restrictions, such as quarantine measures, remain in place while countries continue their vaccination programmes. It is also assumed that some social distancing restrictions remain in place for most of the rest of 2021. This may limit supply in some sectors such as hospitality and entertainment, although we note that trials are running to see if these could be relaxed further. GDP returns to 2019 levels in H122. It is normal practice to review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances, and we will continue to follow that approach particularly as the advice the UK Government issues is subject to change in this fluid environment.
In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK's growth potential. This is reflected in an average annual growth expectation of 1.6%, the OBR's latest estimate of the UK's long run average growth rate. CPI inflation is forecast to be above the 2% target rate in the initial forecast period but then fall below target by the end. With higher levels of savings, consumers use a proportion of these to help support household spending power through 2021 and 2022.
In summary, the base case assumes that the outlook improves as the successful vaccination programme continues, which ends the need for further national lockdowns.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Credit risk
Key changes to our base case at 30 June 2021
The key changes to our base case assumptions in H121 were: (i) stronger GDP growth in 2021 and weaker expansion in 2022 to reflect the faster recovery this year and return to slower, pre-pandemic growth rates next; (ii) the unemployment rate, whilst lower than expected given the government furlough scheme, peaks in Q421 and only slowly recovers as firms adapt to the new economic environment; (iii) there is low single-digit house price growth for 2021 as the stamp duty holiday ends and unemployment rises; and (iv) the Bank Rate profile is held flat at 0.10% until Q123, when there is a rise to 0.25%. Thereafter, 25 bps increases in Q124 and Q125 takes Bank Rate back to its pre-pandemic level of 0.75%.
Based on this revised base case, we have reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These include (i) a significant rise in Covid-19 cases and further lockdown measures being imposed as variants continue to appear; (ii) a slower recovery that is more akin to the 'U' shape of past recessions; (iii) higher inflation; (iv) the long-term effects caused by persistently high unemployment rates or higher and longer unemployment rate persisting, increasing the natural rate of unemployment; and (v) the global economy bouncing back more strongly than expected.
In order to reflect these potential outcomes, we decided to continue to use the base case and four additional scenarios, which management considers to provide a range wide enough to reflect all of the above potential outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we concluded that only one upside scenario would be needed to reflect the upside risks to the base case. As with the base case, the scenarios are forecast over a fiveyear period and then mean revert over the next three years to the OBR's latest estimate of the UK's long run average growth rate.
The four scenarios are as follows:
Our modest upside scenario for H121 remains appropriate based on vaccines continuing to be distributed quickly and effectively to the population, with a faster global recovery and the UK quickly concluding trade agreements with a number of countries after leaving the EU, along with minimum effective tariffs. It is also based on productivity growth recovering. HPI for Upside 1 is less positive than for the base case and is based on the HPI equations built into the Oxford Global Economic Model (OGEM) and the particular GDP profile used, whereas our base case reflects our planning view which allows for flexibility to align what is currently seen in the market to the outlook of the economic variable forecast.
Downside 1 assumes further local/regional restrictions being implemented as we move through 2021 than in the base case as a means of controlling increases in infection rates, which in turn impact economic growth as vaccines are not as effective in combating new variants as hoped. The scenario also reflects a fall in demand for housing leading to downward price corrections over the next five years with a peak to trough of negative 10%. It assumes trade agreements with other countries being negotiated over the forecast period, but fewer than in the base case.
Downside 2 reflects a severe downturn with a longer recovery needed (U shape) capturing even more conservatism and lack of confidence in terms of spending by consumers with the higher levels of unemployment. For businesses, it reflects a slower return to profitability and more insolvencies as vaccines are unable to keep infection rates from new variants under control. It retains a rising bank rate profile to ensure there is a scenario which reflects rising inflation. However, the rise in interest rates results in a large increase in debt-service costs to households and a rapid undermining of demand in the housing market. House values fall sharply and the combination of rising interest rates and unemployment with falling house prices results in a rising profile of credit impairment losses.
Downside 3 features a double dip in economic activity (W shape) lasting three quarters, with higher unemployment and a sharper fall in house prices compared to the four other scenarios. The fall in GDP of c.13% between Q420 and Q421 is a little more than half the fall of c22% in H120, as this assumes businesses have contingency plans to be able to stay open whilst practising social distancing. The peak in the unemployment rate is similar to that seen in the early 1980s recession peaking at 11.9% in 2021 and remaining in double digits until early 2022, before falling back very gradually. The long-term effects of high unemployment result in a permanent hit to potential output, as persistent and elevated uncertainty leads to more job losses and corporate bankruptcies. Sharp falls in house prices (c30%) combined with persistently higher unemployment have particularly adverse consequences for credit impairment charges.
The key changes to our alternative scenarios in H121 related to changes to the base case, historical data for each variable, and the OGEM. We also rolled forward the GDP path in Downside 3 but kept the overall shape of the profile the same. We did not make any other methodological changes to the scenarios. The combination of these different inputs will mean differences across the variables for each of the alternative scenarios when we update them each quarter. As such, it is not possible to pin-point a specific reason for each change as we do not run the inputs in isolation. However, we compare the variables between each quarter and review any large changes to ensure they are not erroneous.
The table below sets out our macroeconomic assumptions for each of the five scenarios at 30 June 2021:
| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | ||
|---|---|---|---|---|---|---|
| % | % | % | % | % | ||
| GDP(1) | 2020 (actual) | (9.8) | (9.8) | (9.8) | (9.8) | (9.8) |
| 2021 | 6.5 | 6.1 | 5.2 | 2.2 | (4.7) | |
| 2022 | 5.5 | 5.2 | 5.4 | 2.0 | (2.7) | |
| 2023 | 1.8 | 1.6 | 0.3 | 1.3 | 2.3 | |
| Base Rate(1) | 2020 (actual) | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 |
| 2021 | 0.10 | 0.10 | 0.10 | 0.10 | (0.50) | |
| 2022 | 0.25 | 0.10 | 0.10 | 1.00 | (0.50) | |
| 2023 | 0.75 | 0.25 | 0.25 | 2.00 | 0.00 | |
| HPI(1) | 2020 (actual) | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 |
| 2021 | (0.6) | 2.0 | (1.5) | (3.7) | (11.7) | |
| 2022 | (3.9) | 1.5 | (6.3) | (15.1) | (15.2) | |
| 2023 | 0.0 | 2.0 | (2.9) | (8.6) | (2.4) | |
| Unemployment(1) | 2020 (actual) | 5.1 | 5.1 | 5.1 | 5.1 | 5.1 |
| 2021 | 6.0 | 6.5 | 6.8 | 8.1 | 9.7 | |
| 2022 | 5.0 | 6.0 | 5.6 | 7.8 | 9.3 | |
| 2023 | 4.7 | 5.6 | 5.7 | 7.3 | 8.3 |
| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | ||
|---|---|---|---|---|---|---|
| % | % | % | % | % | ||
| GDP(1) | 2020 | (10.5) | (11.5) | (10.5) | (11.1) | (11.5) |
| 2021 | 4.8 | 4.5 | 4.0 | (0.8) | (8.0) | |
| 2022 | 4.9 | 6.1 | 3.6 | 3.2 | 3.1 | |
| 2023 | 3.0 | 2.2 | 1.5 | 2.7 | 1.5 | |
| Base Rate(1) | 2020 | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 |
| 2021 | 0.25 | 0.10 | 0.10 | 0.75 | (0.50) | |
| 2022 | 0.75 | 0.10 | 0.10 | 1.75 | 0.00 | |
| 2023 | 1.25 | 0.10 | 0.10 | 3.00 | 0.00 | |
| HPI(1) | 2020 | 3.7 | 3.5 | 3.7 | 3.7 | 3.5 |
| 2021 | (4.6) | (2.0) | (5.4) | (11.3) | (19.7) | |
| 2022 | (4.1) | 1.4 | (6.6) | (14.5) | (8.2) | |
| 2023 | 2.4 | 2.0 | (1.8) | (3.8) | 1.3 | |
| Unemployment(1) | 2020 | 6.3 | 6.8 | 6.3 | 6.3 | 6.8 |
| 2021 | 6.1 | 7.5 | 6.5 | 8.5 | 11.4 | |
| 2022 | 5.3 | 6.2 | 6.1 | 7.9 | 8.7 | |
| 2023 | 4.4 | 5.6 | 5.7 | 6.9 | 8.0 |
(1) GDP is the calendar year average growth rate, HPI is Q4 annual growth rate and all other data points are at 31 December in the year indicated.
Our macroeconomic assumptions and their evolution throughout the forecast period for 30 June 2021 and 31 December 2020 were:
| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | ||
|---|---|---|---|---|---|---|
| 30 June 2021 | % | % | % | % | % | |
| House price growth | 5-year average increase/decrease | 0.82 | 1.90 | (2.06) | (4.12) | (4.83) |
| Peak/(trough) at (1) | (4.90) | N/A(3) | (10.89) | (25.69) | (29.73) | |
| GDP | 5-year average increase/decrease | 3.08 | 2.67 | 1.76 | 1.26 | (0.96) |
| Cumulative growth/(fall) to peak/(trough) (2) | 16.40 | 14.09 | 9.12 | 6.46 | (4.70) | |
| Unemployment rate | 5-year end period | 3.88 | 5.00 | 5.79 | 6.21 | 7.00 |
| Peak/(trough) at (1) | 6.07 | 6.50 | 6.76 | 8.12 | 11.90 | |
| Bank of England bank rate | 5-year end period | 1.75 | 0.75 | 0.75 | 2.50 | 2.50 |
| Peak/(trough) at (1) | 1.75 | 0.75 | 0.75 | 3.00 | (0.50) | |
| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | ||
| 31 December 2020 | % | % | % | % | % | |
| House price growth | 5-year average increase/decrease | 0.49 | 1.38 | (2.01) | (4.54) | (4.44) |
| Peak/(trough) at (1) | 2.45 | 7.11 | (9.65) | (20.72) | (20.32) | |
| GDP | ||||||
| 5-year average increase/decrease | 0.75 | 0.39 | (0.38) | (0.98) | (2.82) | |
| Cumulative growth/(fall) to peak/(trough) (2) | 3.82 | 1.96 | (1.88) | (4.80) | (13.33) | |
| Unemployment rate | 5-year end period | 4.14 | 5.50 | 5.84 | 6.52 | 7.40 |
| Peak/(trough) at (1) | 6.28 | 7.90 | 6.51 | 8.78 | 11.90 | |
| Bank of England bank rate | 5-year end period | 1.75 | 0.25 | 0.25 | 2.75 | 0.00 |
(1) For GDP and house price growth it is the peak to trough change over the 5 year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.
(2) This is the cumulative growth for the 5 year period.
(3) The HPI curve for the Base case scenario is relatively flat, therefore peak to trough is not applicable.
Given the change to the base case in Q221, we undertook a full review of the probability weights applied to all the scenarios. The setting of probability weights needs to consider both the probability of the forecast economic scenarios occurring while ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support the initial assessment of how likely a scenario is to occur, we would typically undertake a Monte Carlo analysis which would ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring and therefore assign a probability weight to that scenario. However, a key challenge with this approach in a stressed environment like the one seen in 2020 is that the extreme GDP forecasts occur.
Due to the extreme falls in growth, in 2020 we changed the time period that we looked at for the Monte Carlo analysis to 2007-2012 in order to capture the very low period of growth, similar to those seen in 2020. However, this time period is no longer appropriate as we move towards recovery and a large upswing in growth. We have assessed various periods of growth, similar to the action we took in 2020, and the most relevant period would be to include the entire data set given that the number of growth periods since 1948 far outweighs the downswings. In this case, the base case sits at the 10th percentile with such a growth rate occurring, historically, nearly half the time (46%) implying that a weight of between 40-50% remains appropriate. Under the longer period, the Covid-19 scenario now sits between the 70th-80th percentile, suggesting a lower weight remains appropriate.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Credit risk
We also need to consider the UK economic and political environment when applying weights. Although the economic recovery has started, it is clear that the roadmap will need to be altered in order to deal with any increasing infection rates caused by new variants, particularly as they are appearing regularly and vaccines may need to evolve further to deal with potential resistance to them. As such, we remain of the view that the risks are still biased to the downside and include: emergence of further variants that are resistant to existing vaccines leading to further lockdowns; a substantial increase in inflation; continuing weak investment; a larger negative impact from the EU trade deal than assumed; and the increasing possibility of a second Scottish referendum which may bring disruption to any recovery in the latter years of the forecast. As such, it remains appropriate to reflect this with a 45% weight for the downside scenarios.
The scenario weights we applied for 30 June 2021 and 31 December 2020 were:
| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | |
|---|---|---|---|---|---|
| Scenario weights | % | % | % | % | % |
| 30 June 2021 | 5 | 50 | 15 | 25 | 5 |
| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | |
| Scenario weights | % | % | % | % | % |
| 31 December 2020 | 5 | 45 | 15 | 25 | 10 |
The scenario we applied for CIB is an overlay calculation which is used for the overlay in provisions estimation, due to Covid-19. This is the same methodology as adopted since Q2 2020. The Long Run scenario is based on a long run (rather than point in time) view and is prepared in the context of a long-term stable outlook where the structural deterioration is materialised to quantify the overlay to account for the macroeconomic worsening. This is to avoid excessive volatility and considered appropriate due to the size of the portfolio. No weights are applied.
There have been no changes to the approach taken in H121.
Our macroeconomic assumptions and their evolution throughout the forecast period for our CIB portfolio at 30 June 2021 and 31 December 2020 were:
| GDP assumption | % | |
|---|---|---|
| 30 June 2021 | Long Run global growth scenario (1) | 1.5 |
| 31 December 2020 | Long Run global growth scenario (2) | 1.3 |
(1) The Long Run scenario is the average annual global growth rate over the 5 year period 2021 to 2025. (2) The Long Run scenario is the average annual global growth rate over the 5 year period 2020 to 2024.
At 30 June 2021, the probability-weighted ECL allowance totalled £1,192m (2020: £1,377m), of which £1,173m (2020: £1,344m) related to exposures in Retail Banking, Corporate & Commercial Banking and Corporate Centre, and £19m (2020: £33m) related to exposures in Corporate & Investment Banking. The ECL allowance is sensitive to the methods, assumptions and estimates underlying its calculation. For example, management could have applied different probability weights to the economic scenarios and, depending on the weights chosen, this could have a material effect on the ECL allowance. In addition, the ECL allowance for residential mortgages, in particular, is significantly affected by the HPI assumptions which determine the valuation of collateral used in the calculations.
Had management used different assumptions on probability weights and HPI, a larger or smaller ECL charge would have resulted that could have had a material impact on the Santander UK group's reported ECL allowance and profit before tax. Sensitivities to these assumptions are set out below.
The amounts shown in the following tables illustrate the ECL allowances that would have arisen had management applied a 100% weight to each economic scenario. The allowances were calculated using a stage allocation appropriate to each economic scenario presented and differs from the probability-weighted stage allocation used to determine the ECL allowance shown above. For exposures subject to individual assessment, the distribution of ECL which could reasonably be expected has also been considered, assuming no change in the number of cases subject to individual assessment, and within the context of a potential best to worst case outcome.
As described above, our CIB segment uses a single forward-looking economic scenario. However, three scenarios are still used within the model, with a Post Model Adjustment (PMA) held to increase provisions to the level required in the single scenario. In order to present a consolidated view in a single table and show variation from the forward-looking component, the three scenarios are presented in the table with the overlay value added to each scenario. As all other segments use five scenarios, interpolation is also required. Data from the CIB Upside scenario is presented in the Upside 1 Column, the Downside scenario is in the Downside 3 column, the Base case is in the Base case column and values in Downside 1 and Downside 2 are interpolated from the Base case and Downside scenarios.
| Weighted | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | |
|---|---|---|---|---|---|---|
| 30 June 2021 | £m | £m | £m | £m | £m | £m |
| Exposure | 315,471 | 315,471 | 315,471 | 315,471 | 315,471 | 315,471 |
| Retail Banking | 213,499 | 213,499 | 213,499 | 213,499 | 213,499 | 213,499 |
| – of which mortgages | 183,693 | 183,693 | 183,693 | 183,693 | 183,693 | 183,693 |
| CCB | 24,562 | 24,562 | 24,562 | 24,562 | 24,562 | 24,562 |
| CIB | 7,680 | 7,680 | 7,680 | 7,680 | 7,680 | 7,680 |
| Corporate Centre | 69,730 | 69,730 | 69,730 | 69,730 | 69,730 | 69,730 |
| ECL | 1,192 | 933 | 1,010 | 1,127 | 1,494 | 1,717 |
| Retail Banking | 603 | 433 | 457 | 528 | 769 | 892 |
| – of which mortgages | 250 | 112 | 156 | 174 | 369 | 481 |
| CCB | 534 | 450 | 500 | 543 | 661 | 755 |
| CIB | 19 | 19 | 19 | 19 | 19 | 19 |
| Corporate Centre | 36 | 31 | 34 | 37 | 45 | 51 |
| % | % | % | % | % | % | |
| Proportion of assets in Stage 2 | 4.7 | 4.2 | 4.1 | 4.3 | 5.7 | 6.5 |
| Retail Banking | 4.5 | 4.0 | 4.0 | 4.2 | 5.8 | 6.5 |
| – of which mortgages | 4.9 | 4.3 | 4.3 | 4.4 | 6.2 | 7.2 |
| CCB | 20.1 | 17.8 | 17.8 | 18.6 | 22.9 | 26.4 |
| CIB | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 |
| Corporate Centre | — | — | — | — | — | — |
| Weighted | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | |
| 31 December 2020 | £m | £m | £m | £m | £m | £m |
| Exposure | 322,745 | 322,745 | 322,745 | 322,745 | 322,745 | 322,745 |
| Retail Banking | 210,251 | 210,251 | 210,251 | 210,251 | 210,251 | 210,251 |
| – of which mortgages | 180,006 | 180,006 | 180,006 | 180,006 | 180,006 | 180,006 |
| CCB | 24,503 | 24,503 | 24,503 | 24,503 | 24,503 | 24,503 |
| CIB | 11,646 | 11,646 | 11,646 | 11,646 | 11,646 | 11,646 |
| Corporate Centre | 76,345 | 76,345 | 76,345 | 76,345 | 76,345 | 76,345 |
| ECL | 1,377 | 1,129 | 1,222 | 1,300 | 1,613 | 1,802 |
| Retail Banking | 706 | 610 | 587 | 660 | 850 | 863 |
| – of which mortgages | 280 | 212 | 207 | 253 | 389 | 415 |
| CCB | 603 | 485 | 575 | 567 | 671 | 824 |
| CIB | 33 | 5 | 26 | 40 | 53 | 66 |
| Corporate Centre | 35 | 29 | 34 | 33 | 39 | 49 |
| % | % | % | % | % | % | |
| Proportion of assets in Stage 2 | 5.3 | 4.6 | 4.7 | 4.6 | 6.6 | 6.8 |
| Retail Banking | 5.4 | 4.6 | 4.6 | 4.7 | 7.2 | 7.0 |
| – of which mortgages | 5.7 | 4.8 | 4.9 | 4.9 | 7.7 | 7.5 |
| CCB | 22.4 | 20.1 | 20.8 | 20.2 | 24.5 | 28.6 |
| CIB | 1.7 | 1.7 | 1.7 | 1.7 | 1.7 | 1.7 |
Changes to Stage 3 instruments are part of the sensitivity analysis but excluded from the disclosure because their values do not move due to changes in macroeconomic assumptions, i.e. they are either in default or not in default at the reporting date.
We have incorporated our post model adjustments into the sensitivity analysis.
During H121 performance across all sectors was strong, with arrears decreasing, driving down ECL provisions and Stage 2 balances as PDs and LGDs reduce. At the same time economic forecasts improved, with GDP paths revised upwards and a much lower unemployment rate forecast in the Downside 2 scenario. This further reduced PDs hence ECL provisions and moved accounts below the SICR thresholds, curing them out of Stage 2. PMAs that were introduced last year in response to Covid-19 are still in place, with no unwinding having yet occurred. Management also introduced new PMAs to hold back some ECL releases, as uncertainty about future performance remains, which have increased ECL and pushed some accounts back into Stage 2.
Given the relative size of our residential mortgage portfolio, management considers that changes in HPI assumptions underpinning the calculation of the ECL allowance for residential mortgages of £250m at 30 June 2021 (2020: £280m) would have the most significant impact on the ECL allowance. Management have reassessed the impact of applying an immediate and permanent of +10% house price increase and -10% decrease to our unweighted base case economic scenario. The impacts are not materially changed from those calculated at 31 December 2020 as disclosed in the 2020 Annual Report.
Credit risk
Significant Increase in Credit Risk (SICR)
There have been no changes to the criteria that we use to identify where an exposure has significantly increased in credit risk as described in the 2020 Annual Report. We continue to apply the following post model adjustments to reflect increases in credit risk for certain loans as a result of Covid-19:
We introduced a SME debt burden PMA in H121 to take account of the potential debt burden risk of unsecured lending to our SME customers who also took a BBL. This does not incorporate the credit risk on BBLs, as these are government guaranteed but instead considers the possible impact on repayment of other lending with us.
The application of the ECL impairment methodology for calculating credit impairment allowances is highly susceptible to change from period to period. The methodology requires management to make a number of judgemental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group's future financial results and financial condition.
The key judgements and estimates made by management in applying the ECL impairment methodology are set out below:
The most significant PMAs that we applied at 30 June 2021 and 31 December 2020 were:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| PMAs | £m | £m |
| Non Covid-19 PMAs | ||
| Interest-only maturity default risk(1) | 41 | 49 |
| Buy-To-Let | 12 | 24 |
| Long-term indeterminate arrears(1) | 24 | 29 |
| 12+ months in arrears(1) | 36 | 30 |
| Total non Covid-19 PMAs | 113 | 132 |
| Covid-19 PMAs | ||
| Corporate Covid-19 affected segments | 190 | 193 |
| Payment holidays | 24 | 27 |
| Corporate single large exposure | 35 | 35 |
| Model underestimation | 76 | 20 |
| SME debt burden | 15 | — |
| Other Covid-19 PMAs | 16 | 15 |
| Total Covid-19 PMAs | 356 | 290 |
(1) In model adjustment
The Covid-19 pandemic had a major impact on the UK and global economies in 2020 and continued to impact in H121. The UK Government's fiscal interventions helped our customers to mitigate some of the adverse financial effects.
Since March 2020, we have provided mortgage customers with payment holiday terms in line with UK Government's and FCA's guidance. Similar payment holidays have also been granted in respect of consumer (auto) finance, personal loans, credit cards, businesses and corporates. Applications for these payment holidays were closed on 31 March 2021.
We participated in the UK Government's Coronavirus Loan Schemes, of which the applications were closed on 31 March 2021:
We are participating in the Recovery Loan Scheme (RLS) launched on 6 April 2021.
The UK Government guarantees losses for amounts lent under these schemes, although losses are limited to 80% in the case of the CBILS, the CLBILS and the RLS. As a result, ECL is not applied to the BBLS but a 20% weighting is applied to the ECL for the CBILS, the CLBILS and the RLS. The UK Government also pays interest on behalf of customers for the first twelve months under the CBILS and the BBLS, plus any lender-levied charges under the CBILS.
Loans for customers who were provided with payment holidays were considered to have the contract terms modified. The granting of a payment holiday on its own was not considered to be a SICR event, nor was it considered a default under regulatory definitions. Neither were they considered to have been granted forbearance. For customers who have needed further financial support after the payment holiday period, we help them by offering assistance in line with our policies. See the section 'Significant Increase in Credit Risk (SICR)' above for more on this.
Interest income continues to be recognised during any payment holiday period. As explained above on the interaction between payment holidays and SICR, the majority of customers affected have not been moved to Stage 2 for a lifetime ECL assessment unless they had triggered other SICR criteria. Such payment holidays also did not cause accounts to become past due and therefore did not automatically trigger a Stage 2 or Stage 3 lifetime ECL assessment.
For quantitative information, see 'Covid-19 support measures' section in 'Santander UK Group level - credit risk review'.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Credit risk
The tables below show the credit rating of our most material financial assets to which the impairment requirements in IFRS 9 apply. Post-PMA balances are used in risk grade allocation. For more on the credit rating profiles of key portfolios, see the 'Credit risk – Retail Banking' and 'Credit risk – Other business segments' sections. The Santander UK risk grade consists of eight grades for non-defaulted exposures ranging from 9 (lowest risk) to 2 (highest risk). For details, including the approximate equivalent credit rating grade used by Standard & Poor's Rating Services, see page 90 of the 2020 Annual Report.
| Santander UK risk grade | Loss | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | (1) Other |
allowance | Total | |
| 30 June 2021 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
| Exposures | ||||||||||
| On balance sheet | ||||||||||
| Financial assets at amortised cost: | ||||||||||
| – Loans and advances to customers(2)(3) | 9.8 | 29.6 | 74.5 | 42.8 | 13.4 | 24.2 | 6.9 | 8.0 | (1.2) | 208.0 |
| – Stage 1 | 9.8 | 29.4 | 74.0 | 41.6 | 11.1 | 17.6 | 0.5 | 7.8 | (0.2) | 191.6 |
| – Stage 2 | — | 0.2 | 0.5 | 1.2 | 2.3 | 6.6 | 3.5 | 0.2 | (0.5) | 14.0 |
| – Stage 3 | — | — | — | — | — | — | 2.9 | — | (0.5) | 2.4 |
| Of which mortgages: | 9.8 | 26.5 | 69.4 | 37.2 | 5.3 | 18.3 | 3.5 | — | (0.3) | 169.7 |
| – Stage 1 | 9.8 | 26.5 | 69.1 | 36.3 | 3.7 | 13.8 | — | — | — | 159.2 |
| – Stage 2 | — | — | 0.3 | 0.9 | 1.6 | 4.5 | 1.6 | — | (0.2) | 8.7 |
| – Stage 3 | — | — | — | — | — | — | 1.9 | — | (0.1) | 1.8 |
| ECL | ||||||||||
| On balance sheet | ||||||||||
| Financial assets at amortised cost: | ||||||||||
| – Loans and advances to customers(2)(3) | — | — | — | — | 0.3 | 0.2 | 0.7 | — | 1.2 | |
| – Stage 1 | — | — | — | — | 0.2 | — | — | — | 0.2 | |
| – Stage 2 | — | — | — | — | 0.1 | 0.2 | 0.2 | — | 0.5 | |
| – Stage 3 | — | — | — | — | — | — | 0.5 | — | 0.5 | |
| Of which mortgages: | — | — | — | — | — | 0.1 | 0.2 | — | 0.3 | |
| – Stage 1 | — | — | — | — | — | — | — | — | — | |
| – Stage 2 | — | — | — | — | — | 0.1 | 0.1 | — | 0.2 | |
| – Stage 3 | — | — | — | — | — | — | 0.1 | — | 0.1 | |
| 30 June 2021 | % | % | % | % | % | % | % | % | % | |
| Coverage ratio | ||||||||||
| On balance sheet | ||||||||||
| Financial assets at amortised cost: | ||||||||||
| – Loans and advances to customers(2)(3) | — | — | — | — | 2.2 | 0.8 | 10.1 | — | 0.6 | |
| – Stage 1 | — | — | — | — | 1.8 | — | — | — | 0.1 | |
| – Stage 2 | — | — | — | — | 4.3 | 3.0 | 5.7 | — | 3.6 | |
| – Stage 3 | — | — | — | — | — | — | 17.2 | — | 20.8 | |
| Of which mortgages: | — | — | — | — | — | 0.5 | 5.7 | — | 0.2 | |
| – Stage 1 | — | — | — | — | — | — | — | — | — | |
| – Stage 2 | — | — | — | — | — | 2.2 | 6.3 | — | 2.3 | |
| – Stage 3 | — | — | — | — | — | — | 5.3 | — | 5.6 |
| Santander UK risk grade | Loss | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | (1) Other |
allowance | Total | |
| 31 December 2020 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
| Exposures | ||||||||||
| On balance sheet | ||||||||||
| Financial assets at amortised cost: | ||||||||||
| – Loans and advances to customers⁽²⁾ | 8.0 | 27.7 | 74.4 | 44.1 | 13.5 | 27.0 | 8.2 | 7.2 | (1.3) | 208.8 |
| – Stage 1 | 8.0 | 27.6 | 74.0 | 42.6 | 10.8 | 19.0 | 1.1 | 7.0 | (0.2) | 189.9 |
| – Stage 2 | — | 0.1 | 0.4 | 1.5 | 2.7 | 8.0 | 4.2 | 0.2 | (0.5) | 16.6 |
| – Stage 3 | — | — | — | — | — | — | 2.9 | — | (0.6) | 2.3 |
| Of which mortgages: | 7.9 | 24.3 | 68.0 | 36.8 | 5.6 | 19.6 | 4.5 | — | (0.3) | 166.4 |
| – Stage 1 | 7.9 | 24.3 | 67.7 | 35.5 | 3.9 | 14.7 | 0.6 | — | — | 154.6 |
| – Stage 2 | — | — | 0.3 | 1.3 | 1.7 | 4.9 | 2.1 | — | (0.2) | 10.1 |
| – Stage 3 | — | — | — | — | — | — | 1.8 | — | (0.1) | 1.7 |
| ECL | ||||||||||
| On balance sheet | ||||||||||
| Financial assets at amortised cost: | ||||||||||
| – Loans and advances to customers⁽²⁾ | — | — | — | 0.1 | 0.1 | 0.2 | 0.9 | — | 1.3 | |
| – Stage 1 | — | — | — | 0.1 | — | — | 0.1 | — | 0.2 | |
| – Stage 2 | — | — | — | — | 0.1 | 0.2 | 0.2 | — | 0.5 | |
| – Stage 3 | — | — | — | — | — | — | 0.6 | — | 0.6 | |
| Of which mortgages: | — | — | — | — | — | 0.1 | 0.2 | — | 0.3 | |
| – Stage 1 | — | — | — | — | — | — | — | — | — | |
| – Stage 2 | — | — | — | — | — | 0.1 | 0.1 | — | 0.2 | |
| – Stage 3 | — | — | — | — | — | — | 0.1 | — | 0.1 | |
| 31 December 2020 | % | % | % | % | % | % | % | % | % | |
| Coverage ratio | ||||||||||
| On balance sheet | ||||||||||
| Financial assets at amortised cost: | ||||||||||
| – Loans and advances to customers⁽²⁾ | — | — | — | 0.2 | 0.7 | 0.7 | 11.0 | — | 0.4 | |
| – Stage 1 | — | — | — | 0.2 | — | — | 9.1 | — | 0.1 | |
| – Stage 2 | — | — | — | — | 3.7 | 2.5 | 4.8 | — | 3.0 | |
| – Stage 3 | — | — | — | — | — | — | 20.7 | — | 26.1 | |
| Of which mortgages: | — | — | — | — | — | 0.5 | 4.4 | — | 0.2 | |
| – Stage 1 | — | — | — | — | — | — | — | — | — | |
| – Stage 2 | — | — | — | — | — | 2.0 | 4.8 | — | 2.0 | |
| – Stage 3 | — | — | — | — | — | — | 5.6 | — | 5.9 |
(1) Includes cash at hand and smaller cases mainly in the consumer (auto) finance and commercial mortgages portfolios, as well as loans written as part of the UK Government Covid-19 support schemes for micro-SMEs. We use scorecards for these items, rather than rating models.
(2) Includes interest we have charged to the customer's account and accrued interest we have not charged to the account yet.
(3) Excludes portfolios classed as held for sale at 30 June 2021, which is consistent with the Balance Sheet presentation. For details, see Note 33 to the Condensed Consolidated Interim Financial Statements.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information | ||
|---|---|---|---|---|---|---|
| Credit risk |
| Customer Loans | ||||||
|---|---|---|---|---|---|---|
| Total | Stage 1 | Stage 2 | Stage 3 | offs | Allowance | |
| 30 June 2021 | £bn | £bn | £bn | £bn | £m | £m |
| Retail Banking | 186.6 | 174.9 | 9.7 | 2.0 | 72 | 603 |
| Corporate & Commercial Banking | 17.1 | 11.3 | 4.9 | 0.9 | 19 | 534 |
| Corporate & Investment Banking | 1.9 | 1.7 | 0.2 | — | — | 19 |
| Corporate Centre | 2.7 | 2.7 | — | — | — | 36 |
| 208.3 | 190.6 | 14.8 | 2.9 | 91 | 1,192 | |
| Undrawn Balances | 40.2 | 1.4 | 0.1 | |||
| Stage 1, Stage 2 and Stage 3(1) ratios % | 91.55 | 7.11 | 1.43 |
| 31 December 2020 | £bn | £bn | £bn | £bn | £m | £m |
|---|---|---|---|---|---|---|
| Retail Banking | 183.4 | 170.2 | 11.3 | 1.9 | 180 | 706 |
| Corporate & Commercial Banking | 17.6 | 11.1 | 5.5 | 1.0 | 51 | 603 |
| Corporate & Investment Banking | 2.8 | 2.6 | 0.2 | — | 22 | 33 |
| Corporate Centre | 3.2 | 3.2 | — | — | — | 35 |
| 207.0 | 187.1 | 17.0 | 2.9 | 253 | 1,377 | |
| Undrawn Balances | 41.8 | 1.3 | 0.1 | |||
| Stage 1, Stage 2 and Stage 3(1) ratios % | 90.34 | 8.26 | 1.45 |
(1) Stage3 ratio = (Stage3 drawn + Stage3 undrawn assets)/(total drawn assets + Stage3 undrawn assets)
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.
Unemployment has remained lower than expected to date, and with the lifting of restrictions in July 2021, it means that we now expect peak unemployment to be lower compared to Q121. The housing market has been strong and bank rate is expected to remain at current lows until H123. As a result, we released £28m and £76m of ECL in Q121 and Q221 respectively. The Q221 macroeconomic scenario update led to a circa £2.7bn reduction in accounts in Stage 2.
We introduced a PMA to take account of the potential debt burden risk of unsecured lending to our SME customers who also took a BBL. This does not incorporate the credit risk on BBLs as these are government guaranteed. Instead, we consider the possible impact on repayment of other lending those SME customers have with us. We continued to apply a model underestimation risk PMA given the extreme scenarios and timing effects of government support schemes on emergence of defaults. In H121, we utilised some payment holiday and corporate staging PMAs in the period.
Total on-balance sheet exposures at 30 June 2021 comprised £208.3bn of customer loans, loans and advances to banks of £1.3bn, £18.7bn of sovereign assets measured at amortised cost, £6.4bn of assets measured at FVOCI, and £39.0bn of cash and balances at central banks.
| Stage 1 | Stage 2 | Stage 3 | Total | |
|---|---|---|---|---|
| 30 June 2021 | £m | £m | £m | £m |
| Exposures | ||||
| On-balance sheet | ||||
| Retail Banking | 175,055 | 9,670 | 1,981 | 186,706 |
| – of which mortgages | 159,808 | 8,947 | 1,863 | 170,618 |
| Corporate & Commercial Banking | 11,202 | 4,939 | 914 | 17,055 |
| Corporate & Investment Banking | 1,755 | 158 | — | 1,913 |
| Corporate Centre | 68,078 | 22 | 1 | 68,101 |
| Total on-balance sheet | 256,090 | 14,789 | 2,896 | 273,775 |
| Off-balance sheet | ||||
| Retail Banking(1) | 26,599 | 151 | 43 | 26,793 |
| – of which mortgages(1) | 12,999 | 61 | 15 | 13,075 |
| Corporate & Commercial Banking | 6,534 | 934 | 39 | 7,507 |
| Corporate & Investment Banking | 5,526 | 241 | — | 5,767 |
| Corporate Centre | 1,585 | 44 | — | 1,629 |
| Total off-balance sheet(2) | 40,244 | 1,370 | 82 | 41,696 |
| Total exposures | 296,334 | 16,159 | 2,978 | 315,471 |
| ECL | ||||
| On-balance sheet | ||||
| Retail Banking | 92 | 304 | 183 | 579 |
| – of which mortgages | 9 | 132 | 106 | 247 |
| Corporate & Commercial Banking | 27 | 166 | 321 | 514 |
| Corporate & Investment Banking | 4 | 8 | — | 12 |
| Corporate Centre | 36 | — | — | 36 |
| Total on-balance sheet | 159 | 478 | 504 | 1,141 |
| Off-balance sheet | ||||
| Retail Banking | 13 | 10 | 1 | 24 |
| – of which mortgages | 2 | 1 | — | 3 |
| Corporate & Commercial Banking | 7 | 8 | 5 | 20 |
| Corporate & Investment Banking | 4 | 3 | — | 7 |
| Total off-balance sheet | 24 | 21 | 6 | 51 |
| Total ECL | 183 | 499 | 510 | 1,192 |
| % | % | % | % | |
| Coverage ratio(3) | ||||
| On-balance sheet | ||||
| Retail Banking | 0.1 | 3.1 | 9.2 | 0.3 |
| – of which mortgages | — | 1.5 | 5.7 | 0.1 |
| Corporate & Commercial Banking | 0.2 | 3.4 | 35.1 | 3.0 |
| Corporate & Investment Banking | 0.2 | 5.1 | — | 0.6 |
| Corporate Centre | 0.1 | — | — | 0.1 |
| Total on-balance sheet | 0.1 | 3.2 | 17.4 | 0.4 |
| Off-balance sheet | ||||
| Retail Banking | — | 6.6 | 2.3 | 0.1 |
| – of which mortgages | — | 1.6 | — | — |
| Corporate & Commercial Banking | 0.1 | 0.9 | 12.8 | 0.3 |
| Corporate & Investment Banking | 0.1 | 1.2 | — | 0.1 |
| Total off-balance sheet | 0.1 | 1.5 | 7.3 | 0.1 |
| Total coverage | 0.1 | 3.1 | 17.1 | 0.4 |
(1) Off-balance sheet exposures include £7.6bn of retail mortgage offers in the pipeline.
(2) Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 26 to the Condensed Consolidated Interim Financial Statements.
(3) ECL as a percentage of the related exposure.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information | |
|---|---|---|---|---|---|
| Credit risk |
Total on-balance sheet exposures at 31 December 2020 comprised £207.0bn of customer loans, loans and advances to banks of £1.7bn, £20.8bn of sovereign assets measured at amortised cost, £9.0bn of assets measured at FVOCI, and £41.3bn of cash and balances at central banks.
| Stage 1 | Stage 2 | Stage 3 | Total | |
|---|---|---|---|---|
| 31 December 2020 | £m | £m | £m | £m |
| Exposures | ||||
| On-balance sheet | ||||
| Retail Banking | 170,128 | 11,341 | 1,935 | 183,404 |
| – of which mortgages | 154,586 | 10,345 | 1,799 | 166,730 |
| Corporate & Commercial Banking | 11,167 | 5,498 | 961 | 17,626 |
| Corporate & Investment Banking | 2,587 | 198 | — | 2,785 |
| Corporate Centre | 75,743 | 27 | — | 75,770 |
| Total on-balance sheet | 259,625 | 17,064 | 2,896 | 279,585 |
| Off-balance sheet | ||||
| Retail Banking(1) | 26,550 | 256 | 41 | 26,847 |
| – of which mortgages(1) | 13,180 | 82 | 14 | 13,276 |
| Corporate & Commercial Banking | 6,050 | 768 | 59 | 6,877 |
| Corporate & Investment Banking | 8,630 | 231 | — | 8,861 |
| Corporate Centre | 558 | 17 | — | 575 |
| Total off-balance sheet(2) | 41,788 | 1,272 | 100 | 43,160 |
| Total exposures | 301,413 | 18,336 | 2,996 | 322,745 |
| ECL | ||||
| On-balance sheet | ||||
| Retail Banking | 100 | 350 | 218 | 668 |
| – of which mortgages | 15 | 130 | 132 | 277 |
| Corporate & Commercial Banking | 46 | 189 | 342 | 577 |
| Corporate & Investment Banking | 5 | 17 | — | 22 |
| Corporate Centre | 35 | — | — | 35 |
| Total on-balance sheet | 186 | 556 | 560 | 1,302 |
| Off-balance sheet | ||||
| Retail Banking | 18 | 19 | 1 | 38 |
| – of which mortgages | 2 | 1 | — | 3 |
| Corporate & Commercial Banking | 8 | 10 | 8 | 26 |
| Corporate & Investment Banking | 4 | 7 | — | 11 |
| Total off-balance sheet | 30 | 36 | 9 | 75 |
| Total ECL | 216 | 592 | 569 | 1,377 |
| % | % | % | % | |
| Coverage ratio(3) | ||||
| On-balance sheet | ||||
| Retail Banking | 0.1 | 3.1 | 11.3 | 0.4 |
| – of which mortgages | — | 1.3 | 7.3 | 0.2 |
| Corporate & Commercial Banking | 0.4 | 3.4 | 35.6 | 3.3 |
| Corporate & Investment Banking | 0.2 | 8.6 | — | 0.8 |
| Corporate Centre | — | — | — | — |
| Total on-balance sheet | 0.1 | 3.3 | 19.3 | 0.5 |
| Off-balance sheet | ||||
| Retail Banking | 0.1 | 7.4 | 2.4 | 0.1 |
| – of which mortgages | — | 1.2 | — | — |
| Corporate & Commercial Banking | 0.1 | 1.3 | 13.6 | 0.4 |
| Corporate & Investment Banking | — | 3.0 | — | 0.1 |
| Total off-balance sheet | 0.1 | 2.8 | 9.0 | 0.2 |
| Total coverage | 0.1 | 3.2 | 19.0 | 0.4 |
(1) Off-balance sheet exposures include £7.7bn of retail mortgage offers in the pipeline.
(2) Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 26 to the Condensed Consolidated Interim Financial Statements.
(3) ECL as a percentage of the related exposure.
Key movements in exposures and ECL in the period by Stage were:
The following table analyses our Stage 2 exposures and ECL by the reason the exposure is classified as Stage 2.
| Retail Banking | Other business segments | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Exposure | ECL | Coverage | Exposure | ECL | Coverage | Exposure | ECL | Coverage | |
| 30 June 2021 | £m | £m | % | £m | £m | % | £m | £m | % |
| PD deterioration | 6,515 | 206 | 3.2 | 1,228 | 40 | 3.3 | 7,743 | 246 | 3.2 |
| Forbearance | 645 | 4 | 0.6 | 347 | 11 | 3.2 | 992 | 15 | 1.5 |
| Other | 842 | 23 | 2.7 | 1,053 | 57 | 5.4 | 1,895 | 80 | 4.2 |
| 30 DPD | 723 | 54 | 7.5 | 254 | 1 | 0.4 | 977 | 55 | 5.6 |
| Payment Holiday | 1,096 | 27 | 2.5 | — | — | — | 1,096 | 27 | 2.5 |
| High Risk Corporate | — | — | — | 3,456 | 76 | 2.2 | 3,456 | 76 | 2.2 |
| 9,821 | 314 | 3.2 | 6,338 | 185 | 2.9 | 16,159 | 499 | 3.1 | |
| 31 December 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| PD deterioration | 7,840 | 260 | 3.3 | 2,160 | 39 | 1.8 | 10,000 | 299 | 3.0 |
| Forbearance | 612 | 3 | 0.5 | 155 | 6 | 3.9 | 767 | 9 | 1.2 |
| Other | 1,404 | 21 | 1.5 | 1,046 | 90 | 8.6 | 2,450 | 111 | 4.5 |
| 30 DPD | 897 | 58 | 6.5 | 253 | 5 | 2.0 | 1,150 | 63 | 5.5 |
| Payment Holiday | 844 | 27 | 3.2 | — | — | — | 844 | 27 | 3.2 |
| High Risk Corporate | — | — | — | 3,125 | 83 | 2.7 | 3,125 | 83 | 2.7 |
| 11,597 | 369 | 3.2 | 6,739 | 223 | 3.3 | 18,336 | 592 | 3.2 |
Where balances satisfy more than one of the criteria above for determining a SCIR, we have assigned the corresponding gross carrying amount and ECL in order of the categories presented.
The following table analyses our Stage 2 exposures and the related ECL by whether or not they are in a cure period at the balance sheet date.
| 30 June 2021 | 31 December 2020 | |||||
|---|---|---|---|---|---|---|
| Exposure ECL |
Coverage | Exposure | ECL | Coverage | ||
| £m | £m | % | £m | £m | % | |
| Stage 2 not in cure period | 14,611 | 467 | 3.2 | 16,992 | 554 | 3.3 |
| Stage 2 in cure period (for transfer to Stage 1) | 1,548 | 32 | 2.1 | 1,344 | 38 | 2.8 |
| 16,159 | 499 | 3.1 | 18,336 | 592 | 3.2 |
Credit performance was strong during H121. Arrears and other credit risk indicators improved. This reduced accounts hitting the qualitative indicators for Stage 2, reduced PDs, and moved accounts below the SICR thresholds, curing them out of Stage 2. The economic outlook also contributed to this, where GDP paths were revised upwards, further decreasing PDs and allowing accounts to exit out of Stage 2. Management took action to hold back some of the ECL releases as uncertainty about future performance remains, including updating the payment holiday PMA to move more accounts to Stage 2, introducing new PMAs across Retail Banking unsecured portfolios to move risky accounts to Stage 2, and undoing some of the improvements in credit risk indicators this year-to-date.
Coverage remained broadly stable due to the above mentioned PMAs and the model underestimation PMA that increased Stage 2 ECL.
The accounts in a cure period at 30 June 2021 increased compared to 31 December 2020, as more accounts offered payment holidays were held in Stage 2 and more corporate accounts cured.
We do not have any cure period criteria for exiting Stage 3.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Credit risk |
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 Condensed Consolidated Balance Sheet.
| On-balance sheet | Off-balance sheet | ||||
|---|---|---|---|---|---|
| Exposures | Loss allowance |
Net carrying amount |
Exposures | Loss allowance |
|
| 30 June 2021 | £m | £m | £m | £m | £m |
| Retail Banking(2) | 186,706 | 579 | 186,127 | 26,793 | 24 |
| – of which mortgages(3) | 170,618 | 247 | 170,371 | 13,075 | 3 |
| Corporate & Commercial Banking | 17,055 | 514 | 16,541 | 7,507 | 20 |
| Corporate & Investment Banking | 1,913 | 12 | 1,901 | 5,767 | 7 |
| Corporate Centre | 68,101 | 36 | 68,065 | 1,629 | — |
| Total exposures presented in Credit Quality tables | 273,775 | 1,141 | 272,634 | 41,696 | 51 |
| Other items(1) | 3,437 | ||||
| Adjusted net carrying amount | 276,071 | ||||
| Assets classified at FVTPL | 2,181 | ||||
| Non-financial assets | 7,362 | ||||
| Total assets per the Condensed Consolidated Balance Sheet | 285,614 | ||||
| 31 December 2020 | |||||
| Retail Banking(2) | 183,404 | 668 | 182,736 | 26,847 | 38 |
| Retail Banking(2) | 183,404 | 668 | 182,736 | 26,847 | 38 |
|---|---|---|---|---|---|
| – of which mortgages(3) | 166,730 | 277 | 166,453 | 13,276 | 3 |
| Corporate & Commercial Banking | 17,626 | 577 | 17,049 | 6,877 | 26 |
| Corporate & Investment Banking | 2,785 | 22 | 2,763 | 8,861 | 11 |
| Corporate Centre | 75,770 | 35 | 75,735 | 575 | — |
| Total exposures presented in Credit Quality tables | 279,585 | 1,302 | 278,283 | 43,160 | 75 |
| Other items(1) | 3,111 | ||||
| Adjusted net carrying amount | 281,394 | ||||
| Assets classified at FVTPL | 3,614 | ||||
| Non-financial assets | 7,324 | ||||
| Total assets per the Condensed Consolidated Balance Sheet | 292,332 |
(1) These assets mainly relate to loans as part of a joint venture agreement and the accrued interest on them. They carry low credit risk and therefore have an immaterial ECL.
(2) Off-balance sheet exposures include credit cards in addition to mortgages.
(3) Off-balance sheet exposures include offers in the pipeline and undrawn balances from flexible mortgage products.
The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the period. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.
| Stage 1 | Stage 2 | Stage 3 | Total | |||||
|---|---|---|---|---|---|---|---|---|
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | |
| £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2021 | 301,413 | 216 | 18,336 | 592 | 2,996 | 569 | 322,745 | 1,377 |
| Transfers from Stage 1 to Stage 2(3) | (3,680) | (9) | 3,680 | 9 | — | — | — | — |
| Transfers from Stage 2 to Stage 1(3) | 4,961 | 140 | (4,961) | (140) | — | — | — | — |
| Transfers to Stage 3(3) | (156) | (5) | (475) | (30) | 631 | 35 | — | — |
| Transfers from Stage 3(3) | 10 | 1 | 287 | 23 | (297) | (24) | — | — |
| Transfers of financial instruments | 1,135 | 127 | (1,469) | (138) | 334 | 11 | — | — |
| Net ECL remeasurement on stage transfer(4) | — | (122) | — | 108 | — | 40 | — | 26 |
| Change in economic scenarios(2) | — | (6) | — | (86) | — | (12) | — | (104) |
| New lending and assets purchased(5) | 28,910 | 25 | 623 | 10 | 11 | 9 | 29,544 | 44 |
| Redemptions, repayments and assets sold(7) | (34,471) | (29) | (1,781) | (55) | (285) | (31) | (36,537) | (115) |
| Changes in risk parameters and other movements(6) | (653) | (28) | 450 | 68 | 69 | 15 | (134) | 55 |
| Assets written off(7) | — | — | — | — | (147) | (91) | (147) | (91) |
| At 30 June 2021 | 296,334 | 183 | 16,159 | 499 | 2,978 | 510 | 315,471 | 1,192 |
| Net movement in the period | (5,079) | (33) | (2,177) | (93) | (18) | (59) | (7,274) | (185) |
| ECL charge/(release) to the Income Statement | (33) | (93) | 32 | (94) | ||||
| Less: Discount unwind | — | — | (6) | (6) | ||||
| Less: Recoveries net of collection costs | — | — | 23 | 23 | ||||
| ECL charge/(release) to the Income Statement from continued operations |
(33) | (93) | 49 | (77) | ||||
| Discontinued operations ECL adjustment | — | 7 | — | 7 | ||||
| Total ECL charge/(release) to the Income Statement | (33) | (86) | 49 | (70) | ||||
| At 1 January 2020 | 295,438 | 147 | 12,351 | 348 | 2,367 | 368 | 310,156 | 863 |
|---|---|---|---|---|---|---|---|---|
| Transfers from Stage 1 to Stage 2(3) | (9,922) | (37) | 9,922 | 37 | — | — | — | — |
| Transfers from Stage 2 to Stage 1(3) | 2,161 | 80 | (2,161) | (80) | — | — | — | — |
| Transfers to Stage 3(3) | (244) | (2) | (517) | (38) | 761 | 40 | — | — |
| Transfers from Stage 3(3) | 5 | — | 246 | 17 | (251) | (17) | — | — |
| Transfers of financial instruments | (8,000) | 41 | 7,490 | (64) | 510 | 23 | — | — |
| Net remeasurement of ECL on stage transfer(4) | — | (75) | — | 222 | — | 83 | — | 230 |
| Change in economic scenarios(2) | — | 9 | — | 129 | — | 10 | — | 148 |
| New lending and assets purchased(5) | 31,045 | 21 | 693 | 26 | 63 | 17 | 31,801 | 64 |
| Redemptions, repayments and assets sold(7) | (28,485) | (17) | (1,508) | (32) | (283) | (20) | (30,276) | (69) |
| Changes in risk parameters and other movements(6) | 7,237 | 32 | 568 | (42) | 105 | 78 | 7,910 | 68 |
| Assets written off(7) | — | — | — | — | (191) | (123) | (191) | (123) |
| At 30 June 2020 | 297,235 | 158 | 19,594 | 587 | 2,571 | 436 | 319,400 | 1,181 |
| Net movement in the period | 1,797 | 11 | 7,243 | 239 | 204 | 68 | 9,244 | 318 |
| ECL charge/(release) to the Income Statement | 11 | 239 | 191 | 441 | ||||
| Less: Discount unwind | — | — | (6) | (6) | ||||
| Less: Recoveries net of collection costs | — | — | (59) | (59) | ||||
| ECL charge/(release) to the Income Statement from continued operations |
11 | 239 | 126 | 376 | ||||
| Discontinued operations ECL adjustment | (5) | (2) | (5) | (12) | ||||
| Total ECL charge/(release) to the Income Statement | 6 | 237 | 121 | 364 |
(1) Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2) Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, the scenarios themselves, and the probability weights from all other movements. Also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in Transfers of financial instruments.
(3) Total impact of facilities that moved Stage(s) in the period. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the period. Transfers between Stages are based on opening balances and ECL at the start of the period.
(4) Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.
(5) Exposures and ECL of facilities that did not exist at the start of the period but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6) Residual movements on existing facilities that did not change Stage in the period, and which were not acquired in the period. Includes the net increase or decrease in the period of cash at central banks, the impact of changes in risk parameters in the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the period.
(7) Exposures and ECL for facilities that existed at the start of the period but not at the end.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Credit risk
Underlying performance was strong during H121, with arrears reducing and improved macroeconomic forecasts resulting in the transfers of accounts from Stage 2 to Stage 1, lower transfers into Stage 3 and accounts curing out of Stage 3 following improved credit quality of the book. The reduction in ECL provisions was primarily driven by a favourable macroeconomic outlook, offset by actions taken in Residential Mortgages, Business Banking, Unsecured Lending to remediate the model underestimation risk in these portfolios.
A summary of the Covid-19 financial support measures that were in place at 30 June 2021 and 31 December 2020 is set out below:
| Breakdown of total PH granted | ||||||
|---|---|---|---|---|---|---|
| Customers supported |
Up to date after PH |
Ongoing PH | New to arrears after PH ends |
In arrears before PH |
Outstanding PH |
|
| 30 June 2021 | % | % | % | % | £bn | |
| Payment holidays (PH)(1) | ||||||
| Mortgages | 256,000 | 96 | — | 2 | 2 | 0.1 |
| Consumer (auto) finance(2) | 58,000 | 90 | — | 6 | 4 | <0.1 |
| Unsecured Personal Loans (UPLs) | 36,000 | 92 | — | 5 | 3 | — |
| Credit Cards | 34,000 | 86 | — | 11 | 3 | — |
| Business and corporates | 3,000 | 98 | — | 2 | — | — |
| 31 December 2020 | ||||||
| Payment holidays (PH)(1) | ||||||
| Mortgages | 251,000 | 88 | 8 | 2 | 2 | 2.5 |
| Consumer (auto) finance(2) | 54,000 | 77 | 11 | 8 | 4 | 0.1 |
| Unsecured Personal Loans (UPLs) | 34,000 | 77 | 13 | 4 | 6 | <0.1 |
| Credit Cards | 32,000 | 76 | 12 | 8 | 4 | <0.1 |
| Business and corporates | 2,500 | 98 | 2 | — | — | 0.1 |
| Number of customers |
Loan balance | % of relevant loan book |
|
|---|---|---|---|
| 30 June 2021 | £bn | % | |
| Government lending schemes | |||
| BBLS - 100% government guaranteed | 153,000 | 3.9 | 19 |
| CBILS | 2,000 | 0.7 | 3 |
| CLBILS | 36 | 0.2 | 4 |
| 31 December 2020 | |||
| Government lending schemes | |||
| BBLS - 100% government guaranteed | 148,000 | 4.0 | 19 |
| CBILS | 2,000 | 0.4 | 2 |
| CLBILS | 30 | 0.2 | 3 |
(1) Retail balances are stock positions for customers supported and loans at period end date that have had, or currently have, PHs granted.
(2) Includes customers supported by PSA Finance UK Limited.
We offer mortgages to people who want to buy a property and offer additional borrowing (known as further advances) to existing mortgage customers. The property must be in the UK.
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 new customers who are taking a new mortgage with us.
| Stock | New business | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 30 June 2021 | 31 December 2020 | 30 June 2021 | 30 June 2020 | ||||||
| £m | % | £m | % | £m | % | £m | % | ||
| Home movers | 73,751 | 43 | 71,008 | 42 | 8,005 | 50 | 3,776 | 33 | |
| Remortgagers | 49,400 | 29 | 50,934 | 31 | 2,977 | 18 | 4,277 | 37 | |
| First-time buyers | 34,113 | 20 | 33,180 | 20 | 3,133 | 19 | 2,248 | 19 | |
| Buy-to-let | 13,354 | 8 | 11,608 | 7 | 2,195 | 13 | 1,232 | 11 | |
| 170,618 | 100 | 166,730 | 100 | 16,310 | 100 | 11,533 | 100 |
As well as the new business in the table above, there were £14.2bn (H120: £17.4bn) of remortgages where we moved existing customers with maturing products onto new mortgages. We also provided £0.7bn (H120: £0.6bn) of further advances and flexible mortgage drawdowns.
The borrower profile of stock remained broadly unchanged. The new business borrower profile showed an increase in Home movers and a reduction in Remortgagers in H121, reflecting market conditions and in particular the increased demand for purchases driven by the temporarily reduced rates of Stamp Duty Land Tax. In H121, we helped first-time buyers purchase their new home with £3.1bn of gross lending (H120: £2.2bn).
The interest rate profile of our mortgage asset stock was:
| 30 June 2021 | 31 December 2020 | |||
|---|---|---|---|---|
| £m | % | £m | % | |
| Fixed rate | 140,320 | 83 | 133,231 | 80 |
| Variable rate | 18,973 | 11 | 20,986 | 13 |
| Standard Variable Rate (SVR) | 9,065 | 5 | 10,627 | 6 |
| Follow on Rate (FoR) | 2,260 | 1 | 1,886 | 1 |
| 170,618 100 |
166,730 | 100 |
In H121, we continued to see customers refinance from variable rate and SVR to fixed rate products influenced by low mortgage rates and the competitive mortgage market. Within fixed rate products, we saw an increase in the proportion of 5 year fixed rate mortgages in H121.
The geographical distribution of our mortgage asset stock was:
| Stock | New business | ||||
|---|---|---|---|---|---|
| 30 June 2021 31 December 2020 | 30 June 2021 | 30 June 2020 | |||
| Region | £bn | £bn | £bn | £bn | |
| London | 43.3 | 41.8 | 4.4 | 3.0 | |
| Midlands and East Anglia | 23.1 | 22.5 | 2.3 | 1.6 | |
| North | 22.8 | 22.6 | 1.9 | 1.5 | |
| Northern Ireland | 3.1 | 3.1 | 0.1 | 0.1 | |
| Scotland | 6.6 | 6.7 | 0.4 | 0.3 | |
| South East excluding London | 53.9 | 52.5 | 5.5 | 3.8 | |
| South West, Wales and other | 17.8 | 17.5 | 1.7 | 1.2 | |
| 170.6 166.7 |
16.3 | 11.5 |
| Average loan size for new business | £'000 | £'000 |
|---|---|---|
| South East including London | 303 | 273 |
| Rest of the UK | 179 | 154 |
| UK as a whole | 239 | 208 |
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. The loan-to-income multiple of mortgage lending in the period, based on average earnings of new business at inception, was 3.38 (2020: 3.29).
| Credit risk | ||||
|---|---|---|---|---|
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
This table shows the LTV distribution for the gross carrying amount and the related ECL of our total mortgage portfolio and Stage 3 mortgages, as well as the LTV distribution for new business. We also show the collateral value and simple average LTV 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 2021 | 31 December 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Stock | Stage 3 | Stock | Stage 3 | New | ||||||
| Total | ECL | Total | ECL | Business | Total | ECL | Total | ECL | Business | |
| LTV | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| Up to 50% | 73,748 | 35 | 897 | 9 | 2,767 | 73,489 | 28 | 858 | 11 | 4,180 |
| >50-75% | 72,159 | 75 | 659 | 28 | 7,406 | 68,324 | 89 | 633 | 36 | 10,088 |
| >75-85% | 19,417 | 35 | 135 | 15 | 3,940 | 18,113 | 41 | 125 | 19 | 5,858 |
| >85-100% | 4,625 | 36 | 89 | 17 | 2,165 | 6,070 | 44 | 93 | 22 | 4,781 |
| >100% | 669 | 69 | 83 | 37 | 32 | 734 | 78 | 90 | 44 | 46 |
| 170,618 | 250 | 1,863 | 106 | 16,310 | 166,730 | 280 | 1,799 | 132 | 24,953 | |
| Collateral value of residential properties (1) | 170,522 | 1,849 | 16,310 | 166,623 | 1,783 | 24,953 | ||||
| % | % | % | % | % | % | |||||
| Simple Average(2) LTV (indexed) | 42 | 40 | 63 | 42 | 41 | 64 |
(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 £575m (2020: £629m).
(2) Total of all LTV% divided by the total of all accounts.
At 30 June 2021, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances was £96m (2020: £107m).
In H121, the simple average LTV of mortgage total new lending in London was 61% (2020: 60%).
There were no significant changes in the quality of our collateral in H121. Despite the economic pressures from the Covid-19 pandemic, simple average LTV remained broadly flat over the period. We continue to monitor the LTV profile of new lending and take action as needed to ensure the LTV mix of completions is appropriate.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Mortgage loans and advances to customers of which: | 170,618 | 166,730 |
| – Stage 1 | 159,808 | 154,586 |
| – Stage 2 | 8,947 | 10,345 |
| – Stage 3 | 1,863 | 1,799 |
| Loss allowances(3) | 250 | 280 |
| % | % | |
| Stage 1 ratio(1) | 93.66 | 92.72 |
| Stage 2 ratio(1) | 5.24 | 6.20 |
| Stage 3 ratio(2) | 1.10 | 1.09 |
(1) Stage 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 on and off-balance sheet 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 32 are also applicable to this table.
| Stage 1 | Stage 2 | Stage 3 | Total | |||||
|---|---|---|---|---|---|---|---|---|
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | |
| £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2021 | 167,766 | 17 | 10,427 | 131 | 1,813 | 132 | 180,006 | 280 |
| Transfers from Stage 1 to Stage 2(3) | (2,098) | (2) | 2,098 | 2 | — | — | — | — |
| Transfers from Stage 2 to Stage 1(3) | 2,803 | 19 | (2,803) | (19) | — | — | — | — |
| Transfers to Stage 3(3) | (113) | (1) | (392) | (6) | 505 | 7 | — | — |
| Transfers from Stage 3(3) | 2 | — | 251 | 10 | (253) | (10) | — | — |
| Transfers of financial instruments | 594 | 16 | (846) | (13) | 252 | (3) | — | — |
| Net ECL remeasurement on stage transfer(4) | — | (18) | — | 18 | — | 9 | — | 9 |
| Change in economic scenarios(2) | — | (1) | — | (25) | — | (12) | — | (38) |
| New lending and assets purchased(5) | 17,129 | 3 | 12 | — | — | — | 17,141 | 3 |
| Redemptions, repayments and assets sold(7) | (12,591) | (2) | (673) | (5) | (185) | (9) | (13,449) | (16) |
| Changes in risk parameters and other movements(6) | (91) | (4) | 88 | 27 | 10 | (7) | 7 | 16 |
| Assets written off (7) | — | — | — | — | (12) | (4) | (12) | (4) |
| At 30 June 2021 | 172,807 | 11 | 9,008 | 133 | 1,878 | 106 | 183,693 | 250 |
| Net movement in the period | 5,041 | (6) | (1,419) | 2 | 65 | (26) | 3,687 | (30) |
| Charge/(release) to the Income Statement | (5) | 2 | (22) | (25) | ||||
| Less: Discount unwind | — | — | (1) | (1) | ||||
| Less: Recoveries net of collection costs | — | — | (1) | (1) | ||||
| Total ECL charge/(release) to the Income Statement | (5) | 2 | (24) | (27) |
| At 1 January 2020 | 168,830 | 14 | 8,224 | 101 | 1,734 | 103 | 178,788 | 218 |
|---|---|---|---|---|---|---|---|---|
| Transfers from Stage 1 to Stage 2(3) | (4,826) | (2) | 4,826 | 2 | — | — | — | — |
| Transfers from Stage 2 to Stage 1(3) | 1,116 | 11 | (1,116) | (11) | — | — | — | — |
| Transfers to Stage 3(3) | (102) | (1) | (381) | (9) | 483 | 10 | — | — |
| Transfers from Stage 3(3) | 3 | — | 224 | 9 | (227) | (9) | — | — |
| Transfers of financial instruments | (3,809) | 8 | 3,553 | (9) | 256 | 1 | — | — |
| Net ECL remeasurement on stage transfer(4) | — | (11) | — | 56 | — | 6 | — | 51 |
| Change in economic scenarios(2) | — | 2 | — | 27 | — | 11 | — | 40 |
| New lending and assets purchased (5) | 12,129 | 2 | 52 | 2 | — | — | 12,181 | 4 |
| Redemptions, repayments and assets sold(7) | (10,652) | (2) | (437) | (4) | (179) | (8) | (11,268) | (14) |
| Changes in risk parameters and other movements(6) | (2,410) | — | 107 | (9) | 12 | 3 | (2,291) | (6) |
| Assets written off (7) | — | — | — | — | (28) | (7) | (28) | (7) |
| At 30 June 2020 | 164,088 | 13 | 11,499 | 164 | 1,795 | 109 | 177,382 | 286 |
| Net movement in the period | (4,742) | (1) | 3,275 | 63 | 61 | 6 | (1,406) | 68 |
| Charge/(release) to the Income Statement | (1) | 63 | 13 | 75 | ||||
| Less: Discount unwind | — | — | (1) | (1) | ||||
| Less: Recoveries net of collection costs | — | — | (1) | (1) | ||||
| Total ECL charge/(release) to the Income Statement | (1) | 63 | 11 | 73 |
At 30 June 2021, there were £1.5bn (2020: £1.5bn) of mortgages on the balance sheet that we had forborne. The majority of customers who have taken a payment holiday had no material impact on forbearance in H121. At 30 June 2021, there were £2.4bn (2020: £2.6bn) of other mortgages on the balance sheet that we had modified since January 2008.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Credit risk
Credit performance
| Portfolio of particular interest(1) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Part interest only, part repayment (2) (3) |
Flexible(3) | Other | ||||||
| 30 June 2021 | Total £m |
Interest-only £m |
£m | £m | LTV >100% £m |
Buy-to-let £m |
portfolio £m |
|
| Mortgage portfolio | 170,618 | 39,554 | 13,486 | 9,203 | 669 | 13,354 | 113,649 | |
| – Stage 1 | 159,808 | 34,861 | 12,284 | 8,127 | 413 | 12,952 | 109,002 | |
| – Stage 2 | 8,947 | 3,857 | 956 | 843 | 173 | 364 | 3,922 | |
| – Stage 3 | 1,863 | 836 | 246 | 233 | 83 | 38 | 725 | |
| Stage 3 ratio(4) | 1.10% | 2.13% | 1.83% | 2.69% | 12.45% | 0.28% | 0.64% | |
| PIPs | 3 | 2 | 1 | 1 | 2 | — | 1 | |
| Simple average LTV (indexed) | 42% | 45% | 44% | 25% | 117% | 60% | 42% |
| 31 December 2020 | |||||||
|---|---|---|---|---|---|---|---|
| Mortgage portfolio | 166,730 | 38,441 | 13,234 | 9,953 | 734 | 11,608 | 110,854 |
| – Stage 1 | 154,586 | 33,330 | 11,860 | 8,731 | 423 | 11,180 | 105,514 |
| – Stage 2 | 10,345 | 4,228 | 1,126 | 989 | 221 | 393 | 4,728 |
| – Stage 3 | 1,799 | 883 | 248 | 233 | 90 | 35 | 612 |
| Stage 3 ratio(4) | 1.09% | 2.31% | 1.88% | 2.48% | 12.30% | 0.30% | 0.55% |
| PIPs | 10 | 5 | 2 | 1 | 4 | 0 | 2 |
| Simple average LTV (indexed) | 42% | 44% | 44% | 26% | 117% | 59% | 43% |
(1) Where a loan falls into more than one category, we include it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the total mortgage portfolio.
(2) Mortgage balance includes both the interest-only part of £10,000m (2020: £9,847m) and the non-interest-only part of the loan.
(3) Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product. (4) Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
– In H121, the combined total proportion of interest-only loans, part interest-only, part repayment loans and flexible loans reduced, reflecting our strategy to manage down our proportional exposure to these lending profiles.
– BTL mortgage balances increased £1.8bn to £13.4bn (2020: £11.6bn) driven by continued focus in growing this portfolio. In H121, the simple average LTV of mortgage total new BTL lending was 68% (2020: 65%).
| Consumer (auto) finance |
Personal loans |
Credit cards |
Overdrafts | Total other unsecured |
Total | |
|---|---|---|---|---|---|---|
| 30 June 2021 | £m | £m | £m | £m | £m | £m |
| Loans and advances to customers of which: | 7,656 | 1,997 | 2,172 | 391 | 4,560 | 12,216 |
| – Stage 1 | 7,339 | 1,875 | 1,937 | 272 | 4,084 | 11,423 |
| – Stage 2 | 276 | 103 | 197 | 103 | 403 | 679 |
| – Stage 3 | 41 | 19 | 38 | 16 | 73 | 114 |
| Loss allowances(2) | 93 | 66 | 129 | 43 | 238 | 331 |
| Stage 3 undrawn exposures | — | 27 | 27 | |||
| Stage 3 ratio(1) | 0.54 % | 2.18 % | 1.15 % | |||
| Gross write offs | 15 | 49 | 64 |
| 31 December 2020 | ||||||
|---|---|---|---|---|---|---|
| Loans and advances to customers of which: | 8,024 | 2,038 | 2,349 | 408 | 4,795 | 12,819 |
| – Stage 1 | 7,587 | 1,881 | 1,975 | 253 | 4,109 | 11,696 |
| – Stage 2 | 379 | 139 | 335 | 138 | 612 | 991 |
| – Stage 3 | 58 | 18 | 39 | 17 | 74 | 132 |
| Loss allowances(2) | 118 | 80 | 158 | 61 | 299 | 417 |
| Stage 3 undrawn exposures | — | 27 | 27 | |||
| Stage 3 ratio(1) | 0.72 % | 2.09 % | 1.24 % | |||
| Gross write-offs | 25 | 129 | 154 |
(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.
We maintained our prudent Consumer (auto) finance underwriting criteria throughout the period. In Q4 2020 SCUK purchased a 50% share in a new joint venture, Volvo Car Financial Services UK Limited, and this entity commenced trading in wholesale finance facilities (stock finance) from January 2021 and retail finance from May 2021. We apply the equity method of accounting for this entity. In H121, we experienced a significant decrease in stock finance of £0.6bn due to the transfer of £390m of dealer lending to the new entity along with a further reduction of £160m as a result of low availability of new cars. The retail car finance market saw challenges in H121 mainly due to a one month closure at dealerships as a result of Covid-19 in Q121. It was also impacted in Q221 by an ongoing global semiconductor shortage which acted as a limiting factor on the supply of new vehicles. We monitor residuals on all types of vehicles, including diesel, petrol, hybrid and electric.
At 30 June 2021, Consumer (auto) finance balances decreased by £368m (5%), and represented 4% (2020: 4%) of total Retail Banking loans and 4% (2020: 4%) of total customer loans. Gross lending (new business) in H121 was £1,806m (H120: £1,240m). Wholesale loans (Stock finance) to car dealerships were approximately 11% of the Consumer loan book, a decrease of £814m since 31 December 2020. The average Consumer (auto) finance loan size was £16,497 (2020: £15,918).
The risk profile for Consumer (auto) finance remained stable in terms of our credit scoring acceptance policies. The risk profile improved in H121 with a reduction in both Stage 2 and Stage 3 balances. The overall risk performance was good with a majority of customers paying.
In H121, we transferred some other unsecured balances from Stage 2 to Stage 1 as a result of the improved macroeconomic outlook. Lower than expected new to arrear flows and Stage 3 accounts in default led to a reduction of ECL provisions over the period. The reduction in exposure further reduced the related ECL provisions.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Loans and advances to customers of which: | 3,873 | 3,855 |
| – Stage 1 | 3,826 | 3,845 |
| – Stage 2 | 44 | 6 |
| – Stage 3 | 3 | 4 |
| Loss allowances(2) | 22 | 9 |
| Stage 3 undrawn exposures | — | — |
| Stage 3 ratio(1) | 0.10 % | 0.10 % |
| Gross write offs | 3 | 12 |
(1) Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures. (2) The ECL allowance is for both on and off–balance sheet exposures.
Business banking balances remained stable over the period. Loss allowances remained low because BBLs are 100% guaranteed by the UK Government. The slight increase in loss allowances was mainly due to the potential debt burden risk of unsecured lending to our SME customers who also took a BBL.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Credit risk
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) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.
| Santander UK risk grade | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total | ||
| 30 June 2021 | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Corporate & Commercial Banking | 37 | 3,104 | 3,786 | 3,043 | 4,574 | 5,903 | 3,294 | 856 | 24,597 | |
| Corporate & Investment Banking | 209 | 1,220 | 3,232 | 2,789 | 1,037 | 142 | 65 | — | 8,694 | |
| Corporate Centre | 48,005 | 4,293 | 1,762 | 45 | — | — | — | 45 | 54,150 | |
| Total | 48,251 | 8,617 | 8,780 | 5,877 | 5,611 | 6,045 | 3,359 | 901 | 87,441 | |
| Of which: | ||||||||||
| Stage 1 | 48,251 | 8,259 | 8,398 | 5,517 | 4,761 | 3,746 | 495 | 725 | 80,152 | |
| Stage 2 | — | 358 | 382 | 360 | 850 | 2,299 | 1,911 | 176 | 6,336 | |
| Stage 3 | — | — | — | — | — | — | 953 | — | 953 |
| 31 December 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Corporate & Commercial Banking | 112 | 3,099 | 3,687 | 2,854 | 3,516 | 7,204 | 3,274 | 934 | 24,680 |
| Corporate & Investment Banking | 541 | 2,245 | 3,889 | 3,905 | 1,529 | 157 | 81 | — | 12,347 |
| Corporate Centre | 50,246 | 5,628 | 2,052 | 47 | — | — | — | 156 | 58,129 |
| Total | 50,899 | 10,972 | 9,628 | 6,806 | 5,045 | 7,361 | 3,355 | 1,090 | 95,156 |
| Of which: | |||||||||
| Stage 1 | 50,899 | 10,889 | 9,567 | 6,541 | 4,136 | 4,029 | 431 | 905 | 87,397 |
| Stage 2 | — | 83 | 61 | 265 | 909 | 3,332 | 1,904 | 185 | 6,739 |
| Stage 3 | — | — | — | — | — | — | 1,020 | — | 1,020 |
(1) Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.
In Corporate & Commercial Banking, committed exposure reduced marginally by 0.3% with Covid-19 related lending in SME and mid Corporate offset by redemptions in the CRE portfolio. Our CRE portfolio decreased by 6% as we continue to manage our exposure in line with proactive risk management policies. The rating distribution improved slightly, particularly in the CRE and SME and mid Corporate portfolios following improvements in the credit quality of a number of names initially downgraded as a result of Covid-19.
In Corporate & Investment Banking, committed exposures decreased by 30% mainly due to exposures in our Large Corporate portfolio being refinanced into Banco Santander London Branch as part of the agreed strategy to transfer the whole portfolio. This exercise impacted on the rating distribution as the rating profile of those exposures refinanced in the period was slightly higher than the residual portfolio. There was limited demand for Covid-19 related funding as the majority of CIB customers had access to equity and debt markets and the Covid Corporate Financing Facility.
In Corporate Centre, committed exposures decreased by 7% mainly driven by UK Sovereign and Supranational exposures which decreased by 6%. The portfolio profile remained short-term, reflecting the purpose of the holdings. Social Housing exposures reduced by 8% and Legacy Portfolios in run-off reduced by 77%, driven by deals not refinancing at maturity.
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 2021 | 31 December 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 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 | 24,551 | 45 | — | 1 | 24,597 | 24,632 | 47 | — | 1 | 24,680 |
| Corporate & Investment Banking | 7,740 | 543 | 161 | 250 | 8,694 | 10,456 | 1,487 | 130 | 274 | 12,347 |
| Corporate Centre | 49,052 | 2,113 | 485 | 2,500 | 54,150 | 50,484 | 2,680 | 855 | 4,110 | 58,129 |
We monitor exposures that show potentially higher risk characteristics using our Watchlist process. The table below shows the exposures we monitor, and those we classify as Stage 3 by portfolio at 30 June 2021 and 31 December 2020.
| Committed exposure | |||||||
|---|---|---|---|---|---|---|---|
| Watchlist | |||||||
| Fully | Enhanced | Proactive | Loss | ||||
| performing | monitoring | management | Stage 3 | Total(1) | allowances | ||
| 30 June 2021 | £m | £m | £m | £m | £m | £m | |
| Corporate & Commercial Banking | 19,971 | 679 | 2,994 | 953 | 24,597 | 534 | |
| Corporate & Investment Banking | 7,855 | 167 | 672 | — | 8,694 | 19 | |
| Corporate Centre | 54,081 | — | 69 | — | 54,150 | 36 | |
| Total loss allowances | 589 | ||||||
| 31 December 2020 | |||||||
| Corporate & Commercial Banking | 20,044 | 573 | 3,043 | 1,020 | 24,680 | 603 | |
| Corporate & Investment Banking | 10,835 | 252 | 1,260 | — | 12,347 | 33 | |
| Corporate Centre | 58,060 | 69 | — | — | 58,129 | 35 | |
| Total loss allowances | 671 |
(1) Includes committed facilities and derivatives.
In Corporate & Commercial Banking, exposures subject to enhanced monitoring increased by 18%. This was mainly in SME and mid Corporate. Accommodation and food service activities have been particularly heavily impacted by Covid-19 despite the measures taken by the UK Government to support industries through the pandemic. Exposures subject to proactive monitoring decreased by 1.6%. This was mainly in the CRE portfolio following the upgrade of a number of names initially downgraded as a result of Covid-19 but which have since stabilised.
In Corporate & Investment Banking, Large Corporate exposures subject to enhanced monitoring have reduced by 34% while exposures subject to proactive management have almost halved. This was driven by exposures being refinanced into Banco Santander London Branch as part of the agreed strategy, as well as the upgrade of a number of names initially downgraded as a result of Covid-19 who have since stabilised their position. In Financial Institutions, there are no exposures subject to enhanced or proactive monitoring. There are no Stage 3 exposures in CIB.
Across the non-retail portfolios, loan loss allowances decreased by £82m (12%). This reflected the improved economic assumptions and scenario weights applied to the ECL model as the economy emerges from lockdown. We also reclassified staging for some corporate loans as they emerged from lockdown. We saw provision releases as well as the reversal of a provision held against a large single name exposure in CIB upon a successful restructuring.
In H121, our CRE portfolio decreased by 7%. Exposures subject to Proactive monitoring decreased from 11% at 31 December 2020 to 8% at 30 June 2021 following the upgrade of a number of names initially downgraded as a result of Covid-19 but which have since stabilised. LTVs in this portfolio are conservative with almost three quarters of the total CRE portfolio having an LTV below 50%, following planned deleveraging of the portfolio in recent years.
Market risk
Market risk comprises banking market risk and trading market risk.
In H121, there were no significant changes in the way we manage market risk as described in the 2020 Annual Report.
In this section, we analyse our key banking and trading market risk metrics.
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 2021 and 31 December 2020. Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable. 50 basis points is the stress we typically focus on for banking market risk controls, although we also monitor sensitivities to other parallel and non-parallel shifts as well as scenarios.
| 30 June 2021 | 31 December 2020 | |||
|---|---|---|---|---|
| +50bps -50bps |
+50bps | -50bps | ||
| £m | £m | £m | £m | |
| NIM sensitivity | 219 | (237) | 225 | (15) |
| EVE sensitivity | 280 | (490) | 367 | (585) |
Each year, we periodically review our risk models and metrics including underlying modelling assumptions to ensure they continue to reflect the risks inherent in the current low rate environment and incorporate regulatory expectations. The adverse movement in Santander UK plc group NIM sensitivities in H121 was largely driven by these changes in modelling assumptions used for risk measurement purposes.
These assumption changes also contributed to the movement in Santander UK plc group EVE sensitivities in H121 but was largely offset by less margin compression risk as a result of higher levels of the yield curve over the longer time horizon considered under the EVE metric.
In H121, there were no significant changes to our trading market risk exposures. We are only exposed to a small amount of trading market risk. This is from permitted products sold to permitted customers, offset by permitted market risk hedges.
The Internal VaR for exposure to trading market risk in H121 was less than £1m (2020: less than £1m).
Net Interest Margin (NIM) sensitivity to +50bps was £219m and to ‑50bps was £(237)m (2020: £225m and £(15)m)
Economic Value of Equity (EVE) sensitivity to +50bps was £280m and to ‑50bps was £(490)m (2020: £367m and £(585)m)
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 H121, there were no significant changes in the way we manage liquidity risk as described in the 2020 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 information on asset encumbrance.
RFB DoLSub LCR of 144% (2020: 150%)
Wholesale funding with maturity <1 year £17.0bn (2020: £21.1bn)
RFB DoLSub LCR eligible liquidity pool carrying value of £47.0bn (2020: £51.5bn)
This table shows our LCR and LRA at 30 June 2021 and 31 December 2020. The LRA data reflect the stress testing methodology in place at that time.
| RFB DoLSub LCR(1) | RFB LRA(2) | ||||
|---|---|---|---|---|---|
| 30 June 2021 31 December 2020 | 30 June 2021 31 December 2020 | ||||
| £bn | £bn | £bn | £bn | ||
| Eligible liquidity pool (liquidity value)(3) | 46.8 | 51.2 | 47.0 | 47.2 | |
| Net stress outflows | (32.5) | (34.1) | (34.6) | (34.4) | |
| Surplus | 14.3 | 17.1 | 12.4 | 12.8 | |
| Eligible liquidity pool as a percentage of anticipated net cash flows | 144% | 150% | 136% | 137% |
(1) The RFB LCR was 146% (2020:152%).
(2) The LRA is calculated for the Santander UK plc group (the RFB Group) and is a three-month Santander UK specific requirement.
(3) The liquidity value is calculated as applying an applicable haircut to the carrying value.
| RFB DoLSub LCR | |||
|---|---|---|---|
| 30 June 2021 31 December 2020 | |||
| £bn | £bn | ||
| Eligible liquidity pool (carrying value) | 47.0 | 51.5 |
The RFB DoLSub LCR of 144% reduced from 150% at the year-end, but remains significantly above regulatory requirements.
We remain in a strong liquidity position and Covid-19 did not trigger a liquidity stress.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
Liquidity risk
Our funding strategy continues to be based on maintaining a conservatively structured balance sheet and diverse sources of funding to meet the needs of our business strategy and plans. The CFO Division maintains a funding plan and ensures it is compliant with the LRA and regulatory liquidity and capital requirements.
This table shows our main sources of wholesale funding. It does not include securities finance 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.
| ≤ 1 | >1 and ≤ 3 | >3 and ≤ 6 | >6 and ≤ 9 | >9 and ≤ | Sub-total | >1 and | >2 and | |||
|---|---|---|---|---|---|---|---|---|---|---|
| month | months | months | months | 12 months | ≤ 1 year | ≤ 2 years | ≤ 5 years | >5 years | Total | |
| 30 June 2021 | £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 | — | 1.1 | — | 0.7 | 0.4 | 2.2 | 1.4 | 5.6 | 1.3 | 10.5 |
| – privately placed | — | — | — | — | — | — | — | — | 0.1 | 0.1 |
| Subordinated liabilities and equity (incl. AT1) |
— | — | — | — | 0.8 | 0.8 | — | 1.7 | 0.3 | 2.8 |
| — | 1.1 | — | 0.7 | 1.2 | 3.0 | 1.4 | 7.3 | 1.7 | 13.4 | |
| Other Santander UK plc | ||||||||||
| Deposits by banks | — | 0.2 | — | — | — | 0.2 | — | — | — | 0.2 |
| Certificates of deposit and commercial | ||||||||||
| paper | 1.2 | 3.6 | 0.4 | 0.3 | — | 5.5 | — | — | — | 5.5 |
| Senior unsecured – public benchmark | — | — | 0.8 | 0.6 | — | 1.4 | 0.3 | 1.1 | 0.3 | 3.1 |
| – privately placed | — | — | 0.1 | — | — | 0.1 | — | 0.3 | 0.2 | 0.6 |
| Covered bonds | — | 1.7 | — | — | 0.7 | 2.4 | 1.9 | 6.4 | 3.4 | 14.1 |
| Securitisation & structured issuance(2) | 0.2 | — | — | 0.2 | 0.1 | 0.5 | 0.2 | 0.2 | — | 0.9 |
| Term Funding Scheme (TFS) | — | 1.0 | — | 2.3 | — | 3.3 | — | — | — | 3.3 |
| TFSME | — | — | — | — | — | — | — | 15.2 | — | 15.2 |
| Subordinated liabilities | — | — | — | — | — | — | — | 0.7 | 0.9 | 1.6 |
| 1.4 | 6.5 | 1.3 | 3.4 | 0.8 | 13.4 | 2.4 | 23.9 | 4.8 | 44.5 | |
| Other group entities | ||||||||||
| Securitisation & structured issuance(3) | 0.1 | 0.1 | 0.2 | 0.1 | 0.1 | 0.6 | 0.3 | 0.2 | — | 1.1 |
| Total at 30 June 2021 | 1.5 | 7.7 | 1.5 | 4.2 | 2.1 | 17.0 | 4.1 | 31.4 | 6.5 | 59.0 |
| Of which: | ||||||||||
| – Secured | 0.3 | 2.8 | 0.2 | 2.6 | 0.9 | 6.8 | 2.4 | 22.0 | 3.4 | 34.6 |
| – Unsecured | 1.2 | 4.9 | 1.3 | 1.6 | 1.2 | 10.2 | 1.7 | 9.4 | 3.1 | 24.4 |
| 31 December 2020 | ||||||||||
| Total at 31 December 2020 | 2.2 | 5.6 | 8.0 | 4.1 | 1.2 | 21.1 | 7.9 | 28.2 | 8.1 | 65.3 |
| Of which: | ||||||||||
| – Secured | 0.4 | 1.6 | 5.2 | 3.0 | 0.2 | 10.4 | 5.3 | 18.6 | 4.4 | 38.7 |
| – Unsecured | 1.8 | 4.0 | 2.8 | 1.1 | 1.0 | 10.7 | 2.6 | 9.6 | 3.7 | 26.6 |
(1) 95% 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 H121, our external term issuance (sterling equivalent) was:
| Sterling | US Dollar | Euro | Other | Total H121 | Total H120 | |
|---|---|---|---|---|---|---|
| £bn | £bn | £bn | £bn | £bn | £bn | |
| Downstreamed from Santander UK Group Holdings plc to Santander UK plc | ||||||
| Senior unsecured – public benchmark | — | 2.1 | — | — | 2.1 | 0.6 |
| Subordinated debt and equity (inc. AT1) | 0.3 | — | — | — | 0.3 | — |
| 0.3 | 2.1 | — | — | 2.4 | 0.6 | |
| Other Santander UK plc | ||||||
| Covered bonds | — | — | — | — | — | 3.0 |
| Senior unsecured – public benchmark | — | — | — | — | — | 1.0 |
| – privately placed | 0.1 | — | — | — | 0.1 | — |
| TFSME | 3.5 | — | — | — | 3.5 | — |
| 3.6 | — | — | — | 3.6 | 4.0 | |
| Other group entities | ||||||
| Securitisations | — | — | — | — | — | — |
| Total gross issuances | 3.9 | 2.1 | — | — | 6.0 | 4.6 |
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 14 and 26 to the Consolidated Financial Statements in the 2020 Annual Report.
Our level of encumbrance from external and internal issuance of mortgage securitisations and covered bonds decreased in H121 to £23.7bn (2020: £31.8bn). For more information, see Note 11 to the Condensed Consolidated Interim Financial Statements.
Capital risk
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.
In H121, there were no significant changes in the way we manage capital risk as described in the 2020 Annual Report.
In this section, we analyse our capital resources and key capital ratios including our RWAs.
We target a CET1 management buffer of sufficient size to absorb volatility in CET1 deductions, capital supply and capital demand whilst remaining above the regulatory CET1 requirement. Distribution restrictions would be expected to be applied if we were unable to meet both our minimum requirement, which consists of the Pillar 1 minimum plus Pillar 2A, the CRD IV buffers consisting of the Capital Conservation Buffer (CCB), the Countercyclical Capital Buffer (CCyB), and from 28 December 2020 the Other Systemically Important Institutions Buffer (O-SII).
At 30 June 2021, the headroom of our CET1 capital ratio of 15.8% to our 7% AT1 permanent write down (PWD) securities trigger was 8.8% of total RWAs or £6.3bn (2020: 8.4% of total RWAs or £6.0bn).
The headroom of our CET1 capital ratio to our current maximum distributable amount (MDA) trigger level at 30 June 2021 was:
| Current MDA | |
|---|---|
| % | |
| Pillar 1 | 4.5 |
| Pillar 2A(1) | 2.8 |
| CCB | 2.5 |
| O-SII | 1.0 |
| Current MDA trigger | 10.8 |
| Headroom to current MDA | 5.0 |
| Total CET1 capital ratio | 15.8 |
(1) Santander UK's (i.e. the Ring-Fenced Bank's) Pillar 2 requirement was 4.9% at 30 June 2021, Pillar 2A guidance is a point in time assessment.
To date, we have down streamed £9.1bn of senior unsecured bonds from Santander UK Group Holdings plc as Internal MREL compliant, secondary non-preferential debt to Santander UK plc as the ring-fenced bank.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| % | % | |
| CET1 capital ratio | 15.8 | 15.4 |
| AT1 | 2.7 | 2.7 |
| Grandfathered Tier 1 | 0.2 | 0.4 |
| Tier 2 | 2.3 | 2.7 |
| Total capital ratio | 21.0 | 21.2 |
The total subordination available to Santander UK plc bondholders was 21.0% (2020: 21.2%) of RWAs.
Return on assets - profit after tax divided by average total assets was 0.20% (2020: 0.16%).
CET1 capital ratio increased 40bps to 15.8%, with capital accretion through retained profits, RWA management and market driven improvements in the defined benefit pensions scheme.
CET1 capital ratio includes a benefit of circa 30bps from the change in treatment of software assets outlined in the EBA technical standard on the prudential treatment of software assets. The PRA have outlined in Policy Statement PS17/21 on the Implementation of Basel Standards that this treatment will fall away at the start of 2022 and software assets will instead be fully deducted from CET1 capital from that date.
Total capital ratio reduced by circa 20bps to 21.0%, reflecting the reduction in AT1 securities in issue and the increased effect from January 2021 of the CRD IV Grandfathering Cap rules that reduce the recognition of grandfathered capital instruments issued by Santander UK plc.
CET1 capital ratio of 15.8% (2020: 15.4% )
Total qualifying regulatory capital decreased to £15.0bn (2020: £15.2bn)
This table shows our qualifying regulatory capital:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| CET1 capital | 11,289 | 11,057 |
| AT1 capital | 2,118 | 2,281 |
| Tier 1 capital | 13,407 | 13,338 |
| Tier 2 capital | 1,619 | 1,909 |
| Total regulatory capital(1) | 15,026 | 15,247 |
(1) Capital resources include a transitional IFRS 9 benefit at 30 June 2021 of £5m (2020: £73m).
The tables below are consistent with our regulatory filings for 30 June 2021 and 31 December 2020.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £bn | £bn | |
| Total RWAs | 71.7 | 71.9 |
Pension risk
Pension risk is the risk caused by our statutory contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to some other reason.
In H121, there were no significant changes in the way we manage pension risk as described in the 2020 Annual Report.
In this section, we provide an update on key movements in pension risk profile in H121.
Interest and inflation hedging increased in H121 as part of the long-term goal to reduce the risk of the Santander (UK) Group Pension Scheme (the Scheme). The Scheme also entered into a circa £5bn longevity swap in March 2021, which covers approximately 40% of Scheme liabilities and materially reduces longevity risk.
Our main focus is to ensure the Scheme achieves the right balance between risk and reward whilst minimising the impact on our capital and financial position. At 30 June 2021, the Funding Deficit at Risk decreased to £1,195m (2020: £1,280m), mainly due to interest rate and inflation hedging, and the annual update to scenarios used for risk measurement where severe asset stresses reduced and interest rate stresses increased to reflect a review of likely economic conditions. Our long-term objective is to reduce the risk of the Scheme and eliminate the deficit on the funding basis. On the funding basis, the interest rate hedging ratio was 93% (2020: 81%) and the inflation hedging ratio was 90% (2020: 79%) at 30 June 2021.
We also monitor the potential impact from variations in the IAS 19 position on CET1 capital. The negative impact on CET1 capital decreased in H121. For more on the impact of our defined benefit schemes on capital, see the 'Capital risk' section.
The accounting position improved over H121. The Scheme sections in surplus had an aggregate surplus of £1,083m at 30 June 2021 (2020: £495m) while the sections in deficit had an aggregate deficit of £113m (2020: £361m). The overall funded position was a £970m surplus (2020: £134m surplus). There were also unfunded Scheme liabilities of £39m at 30 June 2021 (2020: £42m). The improvement in the overall position was mainly driven by an increase in the discount rate and increases in the value of growth assets over the period.
There remains considerable market uncertainty and while the actions highlighted above mitigate some of the impact of market movements in yields, our position could change materially over a short period.
For more on our pension schemes, including the current asset allocation and our accounting assumptions, see Note 25 to the Condensed Consolidated Interim Financial Statements.
Funding Deficit at Risk was £1,195m (2020: £1,280m)
Funded defined benefit pension scheme accounting surplus was £970m (2020: £134m)
We manage the conduct and non-financial regulatory risk types in one framework. We do this to reflect their similarities.
In H121, there were no significant changes in the way we manage conduct and regulatory risk as described in the 2020 Annual Report.
In this section, we provide an update on key movements in conduct and regulatory risk profile in H121.
In H121, to ensure we fully considered customer and conduct impacts across our business, we continued to maintain a strong focus on robust oversight and control of the full customer journey.
In H121, we continued to build on our progress in 2020 and remained vigilant in taking a customer-focused approach in developing strategy, products and policies that support fair customer outcomes and market integrity, in particular within the context of regulator and government driven Covid-19 initiatives. These have all been deployed at a fast pace, with systems and controls in place to enable and increase our working from home capability, whilst continuing to provide critical services to our customers. As part of this, we:
Following the implementation of the Contingent Reimbursement Model, a voluntary code of practice to deal with authorised push payment fraud, we continue to engage with the industry and authorities, giving input and support to further develop the code's framework.
Like all UK banks, we continue to see a demanding regulatory agenda focused on addressing customer detriment, price regulation and vulnerability. Conduct risks will rise in the near- and medium-term as banks deal with a large number of personal and business borrowers impacted by the Covid-19 pandemic. When implementing regulatory change, we focus on ensuring that our strategy, leadership, governance arrangements, and approach to managing and rewarding staff does not lead to a detrimental impact on our customers, competition, or to market integrity. We expect all our staff to take responsibility for identifying, assessing, managing and reporting risks and our I AM Risk programme supports them in doing so.
For the update on key movements in financial crime risk profile, see the 'Financial crime risk review' section.
For more on our provisions, see Note 24 to the Condensed Consolidated Interim Financial Statements. For more on our contingent liabilities, see Note 26 to the Condensed Consolidated Interim Financial Statements.
PPI provision was £37m (2020: £76m) Other conduct provision was £8m (2020: £8m)
Operational risk
Operational risk is the risk of loss due to inadequate or failed internal processes, people and systems, or external events.
In H121, there were no significant changes in the way we manage operational risk as described in the 2020 Annual Report.
In this section, we provide an update on key movements in operational risk profile in
H121.
In H121 we did not experience any material operational risk losses. The losses were in line with H120 and remained comfortably within our forecast and 2021 risk appetite. Aligned to the rest of the industry, we continue to experience losses related to Push Payment fraud. In addition, provisions are being managed to cover existing customer remediation programmes and associated costs.
We continue to treat the wellbeing and safety of our colleagues as one of our top priorities, driven mainly by the challenging Covid-19 environment. We have maintained our support, with 91% of colleagues in agreement that "Santander is taking the appropriate steps to ensure employees stay safe and healthy at this stage of the pandemic". Our matured Wellbeing Strategy and Wellbeing Hub continue to provide a solid foundation with targeted interventions designed for colleagues to maintain positive wellbeing outcomes through the pandemic. This includes access to a technology-based app with access to a live text chat with qualified psychologists and enhancements to offer virtual counselling for more complex mental wellbeing support. As we look to H221, we will start to consider how our ways of working proposition will evolve with changes to any guidance on working arrangements to continue to support our colleagues. Alongside this, we continue to focus on targeted support interventions though our Wellbeing Hub. We expect lockdown easing to be a long, phased process with the potential for longer-term impacts on psychological wellbeing. People risk is compounded further by other factors, such as changes in operating models and the execution of future strategies, which we recognise need to be managed carefully. We will continue to adapt our strategy to allow for these factors, along with the potential impact on productivity. In addition, to manage the potential risk associated with the flu season we will again offer flu vaccinations to all our colleagues in autumn 2021.
Information and cyber security remain a top risk and a priority. We experienced no notable information and cyber security incidents in H121. Cyber threats continue to increase as criminals seek new ways to monetise their efforts. Externally in H121, we observed a large increase in ransomware attacks across all sectors driven by supply chain tools compromises and we expect this trend to continue. As a result, we constantly review and enhance our controls based on the latest intelligence. We also actively work with peers in the Cyber Defence Alliance to share threat intelligence, expertise, and experience to help identify common features of cyber-attacks and effective mitigation strategies.
We also continue to strengthen our capabilities across other well established attack vectors including DDoS, attacks on payment systems, ATM networks and thirdparty suppliers. Our cyber transformation programme is constantly enhancing our control environment and helping to deliver more secure products and solutions for our customers and the communities we serve. We also continue to invest to maintain the right skills and resources to manage information and cyber security risk effectively across all our lines of defence.
We experienced a systems outage on 15 May 2021, following a routine software update. The outage impacted a number of services, including online and mobile banking, cards and ATM services, along with branches and contact centres. Customer servicing technologies were fully recovered by 23:30 on 15 May 2021 and contact centre technologies were re-enabled by 01:00 on 16 May 2021. During the outage, customers were able to obtain cash over our branch counters and through other banks' ATMs. They were also able to obtain cashback within their limits and use their credit cards, with Visa and Mastercard credit cards remaining available throughout the incident.
Incidents like this may require remediation work involving material expenses and delays to the wider information technology infrastructure upgrades and improvements programme, and attract regulatory scrutiny. From time to time, we are required to migrate information relating to our customers to new information technology systems. Any failure to manage such migration effectively could have a negative impact on our ability to provide services to our customers and could cause reputational damage to us.
We will be enabling a more agile response to this kind of disruption as part of the Operational resilience programme referred to below.
Operational risk losses remain within forecast
We continue our transformation journey to simplify the bank, digitise processes and customer journeys, reduce cost, extend internal capabilities and ensure a resilient operating model. Key examples in H121 were the reduction of our property footprint and the further closure of branches. The transformation is underpinned by a project governance framework, known as One Governance, which brings together project planning and prioritisation, cost discipline and risk management of all project portfolios under one unified system environment. The key risk requirements for all but very low risk projects are an initial Project Risk Rating (PRR), an Executive Risk Summary (ERS) and an Operational Risk Assessment (ORA). Risks at portfolio level are assessed and managed by a newly established Change Risk Oversight Group. We continue to take a measured approach to executing risk and delivering cost savings, with focus provided to prioritisation and capacity management.
We are on track to meet industry and regulatory deadlines. We are continuing with the transformation of key systems and processes to deal with the new risk-free rates. Some challenges remain, in particular for products with cross-currency dimensions, different responses across jurisdictions will need multi-stage transitions. We still await regulator's guidelines regarding 'Tough Legacy', where a transition path cannot be agreed with the customer. For quantitative information, see Note 32 to the Condensed Consolidated Interim Financial Statements.
Data Management continues to increase in importance. We have invested and are making good progress with our ability to identify and manage key risks such as data quality. We have appointed a new Chief Data Officer, who has further enhanced the data governance model and implemented a multi-tier governance model to incorporate an Executive Data and Information Council, which includes ExCo members. It will provide executive sponsorship of the data agenda and the new data strategy. Our new data strategy is designed to enhance our data management capabilities and to support our transformation initiatives.
The Bank of England, PRA and FCA published joint consultation papers in December 2019 to help financial firms evolve their approach to operational resilience. Following a consultation period, in March 2021 they published the final regulations and all UK banks must comply by March 2022. The UK regulators expect companies to assume disruptive operational incidents will occur, and be able to show that they can withstand, absorb, recover and manage these in a way which considers the needs of all affected parties.
We continue to improve our operational resilience by enhancing our working from home capability and establishing a programme of work to meet the new regulatory requirements. This work includes producing a combined Operational Risk and Resilience Framework defining our Important Business Services (IBS). We will also set Board-approved impact tolerances for each IBS and conduct tress testing of our ability to remain within these impact tolerances through a series of scenarios with any operational resilience vulnerabilities identified escalated to the Board and proactively actioned. In addition to regulatory compliance, this will achieve business and operational benefits designed to embed operational resilience in our Digital Transformation programme as well as day-to-day activities
We continue to rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of services and goods. These include outsourced services, such as IT infrastructure including increasing use of the Cloud, software development and banking operations. Regulatory requirements relating to the management of our outsourced services continue to increase, with the PRA publishing their Supervisory Statement on Outsourcing and Third Party Risk Management in March 2021. These require us to use certain internal governance arrangements, including sound risk management, whenever we outsource functions. These also complement the above-mentioned requirements and expectations on operational resilience, including the management of third parties relating to our important business services. We are progressing with a programme of work to review and enhance our governance arrangements ahead of the 31 March 2022 implementation deadline.
In order to address the requirements in the Supervisory Statement issued in March 2019, which describes the PRA expectations for banks to manage the financial risks of climate related risks, we have produced a 2021 Implementation plan. As part of this plan, in H221 we will undertake three main activities. We will incorporate climate change in our Operational Risk Scenario Programme; embed climate change in our Risk & Control Assessments; and conduct a physical climate change risk assessment of our head offices, branches and data centres.
Other key risks
Other key risks consist of Financial crime risk, Legal risk, Strategic and business risk, Reputational risk and Model risk.
In H121, there were no significant changes in the way we manage other key risks as described in the 2020 Annual Report.
In this section, we provide an update on key movements in our financial crime risk profile and model risk profile in H121.
There were no significant changes to our risk profile for Legal risk, Strategic and business risk, and Reputational risk in H121. For more on those risks, see 'Other key risks' in the 2020 Annual Report.
The financial crime landscape continues to be complex, with evolving regulatory and legal requirements, geo-political factors and changing criminal methods influencing the risks we face. In H121, we continued to progress towards a more sustainable and effective strategic financial crime compliance approach. Engagement on the topic from senior management and the Board has remained high, proportionate to one of our top risks. We continued embedding our Anti-Financial Crime (AFC) strategy, policy and culture framework, and improving training across the business in H121, endorsed by senior management. An investment of £60m was allocated for financial crime enhancements in 2021 providing continued support for our financial crime transformation activities.
Our Board continued to support improvement in systems and controls to increase efficiency through automation. In H121, we made material investment and enhanced focus on transformation within our financial crime operational capabilities, mainly in the first line of defence. This includes establishing centralised operations (the Financial Crime Centre of Excellence) and restructuring all financial crime related change covering:
In H121, we updated our AML, Sanctions and Anti Bribery and Corruption policies and standards to ensure that we reflect all current external obligations appropriately. We also continued to proactively monitor external developments with a focus on current regulatory and industry developments. We take a proactive approach to engagement with the FCA and HM Government, including through our participation in the Economic Crime Reform Program. This external engagement helps inform our internal policies and strategies.
We also continued to proactively participate in external partnerships of a more operational nature, including the Joint Money Laundering Intelligence Task Force. We built partnerships with Regional Organised Crime Units and with NGOs. These partnerships enabled us to learn more about emerging risks and turn these into alerts and intelligence briefings that are communicated to colleagues to support proactive prevention and detection of financial crime risks. We pro-actively identified potential risks posed by criminal exploitation of Government funding schemes, such as BBLs and other Covid-19 Government loans and grants.
Submissions across the industry for the PRA Mortgage Hybrid Model were originally scheduled across H121, with implementation by 1 January 2022. However, following communications with the PRA, a phased application approach has been agreed, similar to other UK banks. Final submission delivery is now expected in Q122, with implementation now anticipated to follow later in 2022.
£60m investment in financial crime enhancements planned for 2021
| Independent review report | |
|---|---|
| Primary financial statements | 54 |
| Consolidated Income Statement | 54 |
| Consolidated Statement of Comprehensive Income | 55 |
| Consolidated Balance Sheet | 56 |
| Consolidated Cash Flow Statement | 57 |
| Consolidated Statement of Changes in Equity | 58 |
| Notes to the financial statements | 59 |
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 2021 (the "period").
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 UK adopted International Accounting Standard 34, 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB), IAS 34 'Interim Financial Reporting' as adopted by the EU, and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
The interim financial statements included in the Half Yearly Financial Report of Santander UK plc have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB), IAS 34 'Interim Financial Reporting' as adopted by the EU, and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
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 12 August 2021
For the half year to 30 June 2021 and the half year to 30 June 2020
| Half year to | Half year to(1) | ||
|---|---|---|---|
| 30 June 2021 | 30 June 2020 | ||
| Notes | £m | £m | |
| Interest and similar income | 2,355 | 2,592 | |
| Interest expense and similar charges | (450) | (1,064) | |
| Net interest income | 1,905 | 1,528 | |
| Fee and commission income | 305 | 380 | |
| Fee and commission expense | (154) | (180) | |
| Net fee and commission income | 151 | 200 | |
| Other operating income | 3 | 135 | 100 |
| Total operating income | 2,191 | 1,828 | |
| Operating expenses before credit impairment losses, provisions and charges | 4 | (1,328) | (1,212) |
| Credit impairment losses | 5 | 70 | (364) |
| Provisions for other liabilities and charges | 5 | (190) | (64) |
| Total operating credit impairment losses, provisions and charges | (120) | (428) | |
| Profit from continuing operations before tax | 743 | 188 | |
| Tax on profit from continuing operations | 6 | (205) | (48) |
| Profit from continuing operations after tax | 538 | 140 | |
| Profit/(loss) from discontinued operations after tax | 33 | 24 | (1) |
| Profit after tax | 562 | 139 | |
| Attributable to: | |||
| Equity holders of the parent | 545 | 128 | |
| Non-controlling interests | 28 | 17 | 11 |
| Profit after tax | 562 | 139 |
(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Primary financial statements |
S a |
For the half year to 30 June 2021 and the half year to 30 June 2020
| Profit after tax Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently: Movement in fair value reserve (debt instruments): |
30 June 2021 £m 562 (62) 59 |
30 June 2020 £m 139 146 |
|---|---|---|
| – Change in fair value | ||
| – Income statement transfers | (166) | |
| – Taxation | (1) | 5 |
| (4) | (15) | |
| Cash flow hedges: | ||
| – Effective portion of changes in fair value | (618) | 2,607 |
| – Income statement transfers | 377 | (2,041) |
| – Taxation | 41 | (161) |
| (200) | 405 | |
| Currency translation on foreign operations | — | (1) |
| Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently | (204) | 389 |
| Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently: | ||
| Pension remeasurement: | ||
| – Change in fair value | 745 | (376) |
| – Taxation | (248) | 97 |
| 497 | (279) | |
| Own credit adjustment: | ||
| – Change in fair value | — | 20 |
| – Taxation | — | (5) |
| — | 15 | |
| Net other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently | 497 | (264) |
| Total other comprehensive income net of tax | 293 | 125 |
| Total comprehensive income | 855 | 264 |
| Attributable to: | ||
| Equity holders of the parent | 837 | 254 |
| Non-controlling interests | 18 | 10 |
| Total comprehensive income | 855 | 264 |
| 30 June 2021 | 31 December 2020 | ||
|---|---|---|---|
| Notes | £m | £m | |
| Assets | |||
| Cash and balances at central banks | 39,021 | 41,250 | |
| Financial assets at fair value through profit or loss: | |||
| – Derivative financial instruments | 8 | 2,002 | 3,406 |
| – Other financial assets at fair value through profit or loss | 9 | 179 | 208 |
| Financial assets at amortised cost: | |||
| – Loans and advances to customers | 10 | 207,998 | 208,750 |
| – Loans and advances to banks | 1,312 | 1,682 | |
| – Reverse repurchase agreements – non trading | 12 | 18,197 | 19,599 |
| – Other financial assets at amortised cost | 13 | 530 | 1,163 |
| Financial assets at fair value through other comprehensive income | 14 | 6,368 | 8,950 |
| Interests in other entities | 15 | 183 | 172 |
| Intangible assets | 16 | 1,589 | 1,646 |
| Property, plant and equipment | 17 | 1,596 | 1,734 |
| Current tax assets | 282 | 264 | |
| Retirement benefit assets | 25 | 1,083 | 495 |
| Other assets | 2,629 | 3,013 | |
| Assets held for sale | 33 | 2,645 | — |
| Total assets | 285,614 | 292,332 | |
| Liabilities | |||
| Financial liabilities at fair value through profit or loss: | |||
| – Derivative financial instruments | 8 | 1,063 | 1,584 |
| – Other financial liabilities at fair value through profit or loss | 18 | 1,023 | 1,434 |
| Financial liabilities at amortised cost: | |||
| – Deposits by customers | 19 | 193,317 | 195,135 |
| – Deposits by banks | 20 | 20,502 | 20,958 |
| – Repurchase agreements – non trading | 21 | 14,089 | 15,848 |
| – Debt securities in issue | 22 | 29,140 | 35,566 |
| – Subordinated liabilities | 23 | 2,513 | 2,556 |
| Other liabilities | 2,365 | 2,337 | |
| Provisions | 24 | 444 | 464 |
| Deferred tax liabilities | 386 | 111 | |
| Retirement benefit obligations | 25 | 152 | 403 |
| Liabilities held for sale | 33 | 3,912 | — |
| Total liabilities | 268,906 | 276,396 | |
| Equity | |||
| Share capital | 3,105 | 3,105 | |
| Share premium | 5,620 | 5,620 | |
| Other equity instruments | 27 | 2,191 | 2,191 |
| Retained earnings | 5,306 | 4,348 | |
| Other reserves | 306 | 510 | |
| Total shareholders' equity | 16,528 | 15,774 | |
| Non-controlling interests | 28 | 180 | 162 |
| Total equity | 16,708 | 15,936 | |
| Total liabilities and equity | 285,614 | 292,332 |
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Primary financial | S | |||
| statements | a |
For the half year to 30 June 2021 and the half year to 30 June 2020
| Half year to | Half year to | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Cash flows from operating activities | ||
| Profit after tax | 562 | 139 |
| Adjustments for: | ||
| Non-cash items included in profit | 645 | 778 |
| Change in operating assets | 251 | (4,172) |
| Change in operating liabilities(1) | 2,725 | 10,697 |
| Corporation taxes paid | (153) | (110) |
| Effects of exchange rate differences | (534) | 891 |
| Net cash flows from operating activities | 3,496 | 8,223 |
| Cash flows from investing activities | ||
| Purchase of property, plant and equipment and intangible assets | (350) | (151) |
| Proceeds from sale of property, plant and equipment and intangible assets | 272 | 92 |
| Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income | (1,016) | (2,626) |
| Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income | 3,789 | 2,581 |
| Net cash flows from investing activities | 2,695 | (104) |
| Cash flows from financing activities | ||
| Issue of other equity instruments | 210 | — |
| Issue of debt securities and subordinated notes | 36 | 4,097 |
| Issuance costs of debt securities and subordinated notes | (3) | (10) |
| Repayment of debt securities and subordinated notes | (8,031) | (6,133) |
| Repurchase of other equity instruments | (210) | — |
| Dividends paid on preference shares and other equity instruments | (83) | (82) |
| Principal elements of lease payments(1) | (13) | (28) |
| Net cash flows from financing activities | (8,094) | (2,156) |
| Change in cash and cash equivalents | (1,903) | 5,963 |
| Cash and cash equivalents at beginning of the period | 45,582 | 27,817 |
| Effects of exchange rate changes on cash and cash equivalents | (10) | 94 |
| Cash and cash equivalents at the end of the period | 43,669 | 33,874 |
| Cash and cash equivalents consist of: | ||
| Cash and balances at central banks | 39,021 | 30,276 |
| Less: regulatory minimum cash balances | (897) | (772) |
| 38,124 | 29,504 | |
| Other cash equivalents | 5,545 | 4,370 |
| Cash and cash equivalents at the end of the period | 43,669 | 33,874 |
(1) For H121, Principal elements of lease payments are included as a separate line item in the Condensed Consolidated Cash Flow Statement. As a result, cash flows of £28m for H120 have been reclassified from 'Change in operating liabilities' within operating activities to 'Principal elements of lease payments' within financing activities.
For the half year to 30 June 2021 and the half year to 30 June 2020
| Other reserves Non |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Share | Share | Other equity | Cash flow | Currency | Retained | controlling | ||||
| capital | premium | instruments Fair value | hedging | translation | earnings | Total | interests | Total | ||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2021 | 3,105 | 5,620 | 2,191 | 28 | 481 | 1 | 4,348 | 15,774 | 162 | 15,936 |
| Profit after tax | — | — | — | — | — | — | 545 | 545 | 17 | 562 |
| Other comprehensive income, net of tax: | ||||||||||
| – Fair value reserve (debt instruments) | — | — | — | (4) | — | — | — | (4) | — | (4) |
| – Cash flow hedges | — | — | — | — | (200) | — | — | (200) | — | (200) |
| – Pension remeasurement | — | — | — | — | — | — | 496 | 496 | 1 | 497 |
| Total comprehensive income | — | — | — | (4) | (200) | — | 1,041 | 837 | 18 | 855 |
| Issue of other equity instruments | — | — | 210 | — | — | — | — | 210 | — | 210 |
| Repurchase of other equity instruments | — | — | (210) | — | — | — | — | (210) | — | (210) |
| Dividends on preference shares and other equity | ||||||||||
| instruments | — | — | — | — | — | — | (83) | (83) | — | (83) |
| At 30 June 2021 | 3,105 | 5,620 | 2,191 | 24 | 281 | 1 | 5,306 | 16,528 | 180 | 16,708 |
| At 1 January 2020 | 3,105 | 5,620 | 2,191 | 23 | 371 | 1 | 4,546 | 15,857 | 160 | 16,017 |
| Profit after tax | — | — | — | — | — | — | 128 | 128 | 11 | 139 |
| Other comprehensive income, net of tax: | ||||||||||
| – Fair value reserve (debt instruments) | — | — | — | (15) | — | — | — | (15) | — | (15) |
| – Cash flow hedges | — | — | — | — | 405 | — | — | 405 | — | 405 |
| – Pension remeasurement | — | — | — | — | — | — | (278) | (278) | (1) | (279) |
| – Own credit adjustment | — | — | — | — | — | — | 15 | 15 | — | 15 |
| – Currency translation on foreign operations | — | — | — | — | — | (1) | — | (1) | — | (1) |
| Total comprehensive income | — | — | — | (15) | 405 | (1) | (135) | 254 | 10 | 264 |
| Dividends on preference shares and other equity instruments |
— | — | — | — | — | — | (82) | (82) | — | (82) |
| At 30 June 2020 | 3,105 | 5,620 | 2,191 | 8 | 776 | — | 4,329 | 16,029 | 170 | 16,199 |
| - | Strategic report |
|---|---|
Notes to the financial statements
S a n
The financial information in these Condensed Consolidated Interim Financial Statements is unaudited and does not constitute statutory accounts as defined in section 434 of the UK Companies Act 2006. Statutory accounts for the year ended 31 December 2020 have been delivered to the Registrar of Companies.
The Condensed Consolidated Interim Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of operations for the interim period. All such adjustments to the financial information are of a normal, recurring nature. Because the results from common banking activities are so closely related and responsive to changes in market conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the year.
On 31 December 2020, International Financial Reporting Standards (IFRSs) as adopted by the European Union at that date was brought into UK law and became UKadopted International Accounting Standards (IAS), with future changes being subject to endorsement by the UK Endorsement Board. Santander UK plc (the Company) and its subsidiaries (collectively Santander UK or the Santander UK group) transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework.
The Condensed Consolidated Interim Financial Statements have been prepared in accordance with UK adopted IAS 34 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB), IAS 34 'Interim Financial Reporting' as adopted by the EU, and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA). They do not include all the information and disclosures normally required for full annual financial statements and should be read in conjunction with the Consolidated Financial Statements of Santander UK for the year ended 31 December 2020 which were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Those consolidated financial statements were also prepared in accordance with IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, as there were no applicable differences from IFRSs as issued by the IASB for the periods presented. At 30 June 2021, there were no differences between IFRSs adopted by the UK, IFRSs issued by the IASB, and IFRSs adopted by the EU in terms of their application to Santander UK. The financial statements for Santander UK for the year ended 31 December 2021 will be prepared in accordance with IFRS as adopted by the UK, IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, and IFRSs as adopted by the EU. Except as noted below, the same accounting policies, presentation and methods of computation are followed in these Condensed Consolidated Interim Financial Statements as were applied in the presentation of Santander UK's 2020 Annual Report.
Non-current assets (or disposal groups) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction rather than continuing use. In order to be classified as held for sale, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary and the sale must be highly probable. Non-current assets (or disposal groups) held for sale are measured at the lower of carrying amount and fair value less cost to sell, with the exception of financial instruments which remain governed by the requirements of IFRS 9, and are held at their IFRS 9 carrying value. For details of the disposal of assets and liabilities in connection with the transfer of the Corporate & Investment Banking (CIB) business to the London Branch of Banco Santander SA (SLB), and for details on the sale of Retail Banking residential mortgage assets, see Note 33.
A discontinued operation is a component of the Santander UK group that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the Condensed Consolidated Income Statement. Prior periods have been restated accordingly.
At 30 June 2021, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued, including those which are not yet effective or which have otherwise not been early adopted where permitted.
In light of the continuing economic uncertainty, the Directors updated their going concern assessment in preparing these Condensed Consolidated Interim Financial Statements. After making enquiries, the Directors have a reasonable expectation that Santander UK has adequate resources to continue in operational existence for at least twelve months from the date of this report and, therefore, having reassessed the principal risks and uncertainties, the Directors consider it appropriate for the Condensed Consolidated Interim Financial Statements to be prepared on a going concern basis.
In making their going concern assessment in connection with preparing the Condensed Consolidated Interim Financial Statements, the Directors considered a wide range of information that included Santander UK's long-term business and strategic plans, forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities and the reasonably possible changes in trading performance arising from potential economic, market and product developments. The Directors' assessment specifically considered the impacts of Covid-19, including for the following areas:
The preparation of the Condensed Consolidated Interim Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Condensed Consolidated Interim Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions.
In the course of preparing the Condensed Consolidated Interim Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, provisions and contingent liabilities, pensions and goodwill.
There have been no significant changes in the basis upon which judgements and accounting estimates have been determined compared to that applied in the 2020 Annual Report, except as described below. Management have considered the impact of Covid-19 on critical judgements and accounting estimates.
| Key judgements | – Determining an appropriate definition of default |
|---|---|
| – Establishing the criteria for a significant increase in credit risk (SICR) and, for corporate borrowers, internal credit risk rating |
|
| – Applying post model adjustments |
|
| – Assessing individual corporate Stage 3 exposures |
|
| Key estimates | – Forward-looking multiple economic scenario assumptions |
| – Probability weights assigned to multiple economic scenarios |
For more on each of these key judgements and estimates, including the impact of Covid-19 on them, see 'Management judgements and estimates applied in calculating ECL' in the 'Credit risk – Santander UK group level – credit risk management' section of the Risk review.
For detailed disclosures, see 'Sensitivity of ECL allowance' in the 'Credit risk – Santander UK group level – credit risk management' section of the Risk review.
| Key judgements | – Determining whether a present obligation exists |
|---|---|
| – Assessing the likely outcome of future legal decisions |
|
| Key estimates | – Probability, timing, nature and amount of any outflows that may arise from past events |
Note 26 'Contingent liabilities and commitments' includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions, as well as an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. It also includes disclosure relating to certain leases in which current and former Santander UK group members were the lessor that are currently under review by HMRC in connection with claims for tax allowances.
These judgements are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters. As a result, it is often not possible to make reliable estimates of the likelihood and amount of any potential outflows, or to calculate any resulting sensitivities. For more on each of these key judgements and estimates, see Notes 24 and 26.
| Key judgements | – Setting the criteria for constructing the corporate bond yield curve used to determine the discount rate |
|---|---|
| – Determining the methodology for setting the inflation assumption |
|
| Key estimates | – Discount rate applied to future cash flows |
| – Rate of price inflation |
|
| – Expected lifetime of the schemes' members |
For more on each of these key judgements and estimates, including the impact of Covid-19 on them, see Note 25.
For detailed disclosures see 'Actuarial assumption sensitivities' in Note 25.
| Key judgements: | – Determining the basis of goodwill impairment calculation assumptions, including management's planning assumptions considering internal capital allocations needed to support Santander UK's strategy, current market conditions and the macro-economic outlook. |
|---|---|
| Key estimates: | – Forecast cash flows for cash generating units, including estimated allocations of regulatory capital |
| – Growth rate beyond initial cash flow projections |
|
| – Discount rates which factor in risk-free rates and applicable risk premiums |
|
| These are variables subject to fluctuations in external market rates and economic conditions beyond management's control |
For more on each of these key judgements and estimates, see Note 16.
For detailed disclosures, see 'Sensitivities of key assumptions in calculating VIU' in Note 20 to the Consolidated Financial Statements in the 2020 Annual Report.
| Strategic report | |
|---|---|
Notes to the financial statements
S a n
Santander UK's principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of four segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies.
As reflected in the 2020 Annual Report, the segmental basis of presentation in these Condensed Consolidated Interim Financial Statements changed following a management review of our structure. At 31 December 2020 this resulted in customer assets of £2.0bn and customer deposits of £3.1bn being transferred from Business Banking (in Retail Banking) to CCB, non-core corporate mortgages of £0.4bn transferring from Corporate Centre to CCB, and a number of smaller business lines transferring from CIB to Corporate Centre. For H120, this resulted in an increase in profit before tax in Retail Banking of £28m, a decrease in CCB of £31m, a decrease in CIB of £4m, and an increase of £7m in Corporate Centre. The net impact for Santander UK was nil.
Following a hearing held on 23 June 2021, the High Court of England and Wales has sanctioned the transfer of substantially all the CIB business of Santander UK to SLB by way of a Part VII banking business transfer scheme. The transfers of CIB business to SLB under the scheme are scheduled to take place before the end of 2021.
Management considered the related business transfers to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the assets and liabilities relating to the CIB business. For more details, see Note 33.
At 30 June 2021, the CIB business met the requirements for presentation as discontinued operations. For more details, see Note 33.
| Corporate & Commercial |
Corporate & Investment |
Corporate | |||
|---|---|---|---|---|---|
| Half year to | Retail Banking | Banking | Banking | Centre | Total |
| 30 June 2021 | £m | £m | £m | £m | £m |
| Net interest income/(expense) | 1,741 | 203 | — | (39) | 1,905 |
| Non-interest income | 189 | 51 | — | 46 | 286 |
| Total operating income | 1,930 | 254 | — | 7 | 2,191 |
| Operating expenses before credit impairment losses, provisions and charges | (922) | (177) | — | (229) | (1,328) |
| Credit impairment losses | 48 | 22 | — | — | 70 |
| Provisions for other liabilities and charges | (67) | (5) | — | (118) | (190) |
| Total operating credit impairment losses, provisions and charges | (19) | 17 | — | (118) | (120) |
| Profit/(loss) from continuing operations before tax | 989 | 94 | — | (340) | 743 |
| Revenue from external customers | 2,197 | 273 | — | (279) | 2,191 |
| Inter-segment revenue | (267) | (19) | — | 286 | — |
| Total operating income | 1,930 | 254 | — | 7 | 2,191 |
| Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) |
|||||
| – Current account and debit card fees | 185 | 23 | — | — | 208 |
| – Insurance, protection and investments | 33 | — | — | — | 33 |
| – Credit cards | 29 | — | — | — | 29 |
| – Non-banking and other fees(2) | 6 | 29 | — | — | 35 |
| Total fee and commission income | 253 | 52 | — | — | 305 |
| Fee and commission expense | (140) | (10) | — | (4) | (154) |
| Net fee and commission income/(expense) | 113 | 42 | — | (4) | 151 |
| 30 June 2021 | |||||
| Customer loans | 186,706 | 17,055 | 1,913 | 2,673 | 208,347 |
| Total assets(3) | 195,480 | 17,055 | 2,057 | 71,022 | 285,614 |
| Of which assets held for sale | 608 | — | 2,037 | — | 2,645 |
| Customer deposits | 156,713 | 25,244 | 3,817 | 3,596 | 189,370 |
| Total liabilities | 157,268 | 25,263 | 3,912 | 82,463 | 268,906 |
| Of which liabilities held for sale | — | — | 3,912 | — | 3,912 |
(1) The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2) Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3) Includes customer loans, net of credit impairment loss allowances.
| Corporate & Commercial |
Corporate & Investment |
Corporate | |||
|---|---|---|---|---|---|
| Half year to(4)(5) | Retail Banking | Banking | Banking | Centre | Total |
| 30 June 2020 | £m | £m | £m | £m | £m |
| Net interest income/(expense) | 1,369 | 181 | — | (22) | 1,528 |
| Non-interest income | 227 | 49 | — | 24 | 300 |
| Total operating income/(expense) | 1,596 | 230 | — | 2 | 1,828 |
| Operating expenses before credit impairment losses, provisions and charges | (983) | (161) | — | (68) | (1,212) |
| Credit impairment losses | (214) | (150) | — | — | (364) |
| Provisions for other liabilities and charges | (56) | 3 | — | (11) | (64) |
| Total operating credit impairment losses, provisions and charges | (270) | (147) | — | (11) | (428) |
| Profit/(loss) from continuing operations before tax | 343 | (78) | — | (77) | 188 |
| Revenue from external customers | 1,973 | 278 | — | (424) | 1,827 |
| Inter-segment revenue | (377) | (48) | — | 426 | 1 |
| Total operating income/(expense) | 1,596 | 230 | — | 2 | 1,828 |
| Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) |
|||||
| – Current account and debit card fees | 245 | 21 | — | — | 266 |
| – Insurance, protection and investments | 31 | — | — | — | 31 |
| – Credit cards | 35 | — | — | — | 35 |
| – Non-banking and other fees(2) | 20 | 24 | — | 4 | 48 |
| Total fee and commission income | 331 | 45 | — | 4 | 380 |
| Fee and commission expense | (164) | (12) | — | (4) | (180) |
| Net fee and commission income | 167 | 33 | — | — | 200 |
| 31 December 2020 | |||||
| Customer loans | 183,404 | 17,626 | 2,784 | 3,196 | 207,010 |
| Total assets(3) | 192,070 | 17,626 | 2,784 | 79,852 | 292,332 |
| Customer deposits | 152,167 | 24,985 | 6,506 | 2,049 | 185,707 |
| Total liabilities | 152,715 | 25,011 | 6,517 | 92,153 | 276,396 |
(1) The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2) Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3) Includes customer loans, net of credit impairment loss allowances
(4) Restated, as reflected in Note 2 to the Consolidated Financial Statements in the 2020 Annual Report, following a management review of our structure.
(5) Restated to reflect the presentation of discontinued operations, as set out in Note 33.
Geographical information is not provided, as substantially all of Santander UK's activities are in the UK.
At 30 June 2021, Santander UK was in the process of selling a portfolio of Retail Banking residential mortgage assets and expected to complete the transaction in August 2021. Management considered the sale to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the mortgage assets. For more details, see Note 33.
In H121, the Santander UK group repurchased certain debt securities as part of ongoing liability management exercises, resulting in a loss of £27m. In H120, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £17m.
In H121, the Santander UK group sold its UK head office site in Triton Square, London to a wholly owned subsidiary of its parent, Banco Santander SA, given the decision to invest in a new Milton Keynes campus. Other operating income includes a £71m gain on sale of the UK head office site. The net gain reflects a sale price based on independent valuations.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial | S | |||
| statements | a |
| Half year to | Half year to(1) | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Staff costs | 577 | 576 |
| Other administration expenses | 431 | 367 |
| Depreciation, amortisation and impairment | 320 | 269 |
| Total | 1,328 | 1,212 |
(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.
'Other administration expenses' includes £10m (H120: £4m) expenses related to short-term leases.
In H121, depreciation, amortisation and impairment' included an impairment charge of £105m associated with branch and head office site closures. For more, see Note 17.
| Half year to | Half year to(1) | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Credit impairment loss/(release): | ||
| Loans and advances to customers | (33) | 384 |
| Recoveries of loans and advances, net of collection costs | (13) | (15) |
| Off-balance sheet exposures (See Note 24) | (24) | (5) |
| (70) | 364 | |
| Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 24) | 191 | 64 |
| Provisions for residual value and voluntary termination | (1) | — |
| 190 | 64 | |
| 120 | 428 |
(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.
In H121 and H120 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.
The Santander UK group's effective tax rate for H121 was 27.6% (H120: 25.5%). The tax on profit before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows:
| Half year to | Half year to(1) | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Profit from continuing operations before tax | 743 | 188 |
| Tax calculated at a tax rate of 19% (H120: 19%) | 141 | 36 |
| Bank surcharge on profits | 49 | 9 |
| Non-deductible preference dividends paid | 6 | 3 |
| Non-deductible UK Bank Levy | 14 | 6 |
| Other non-deductible costs and non-taxable income | 14 | 4 |
| Effect of change in tax rate on deferred tax provision | 13 | 7 |
| Tax relief on dividends in respect of other equity instruments | (32) | (13) |
| Adjustment to prior year provisions | — | (4) |
| Tax on profit from continuing operations | 205 | 48 |
(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.
The UK government announced in its budget on 3 March 2021 that it would increase the main rate of corporation tax by 6% to 25% with effect from 1 April 2023. This change was substantively enacted on 24 May 2021 and, as a result, the effect has been reflected in the closing deferred tax position included in these financial statements. The comparative 2020 results reflected an increase in tax rates by 2% following an announcement in the 2020 budget to reverse a previously planned rate reduction from April 2020.
No interim dividend was declared on the Company's ordinary shares in issue (H120: £nil).
The table below includes the notional amounts of transactions outstanding at the balance sheet date; they do not represent actual exposures.
| 30 June 2021 | 31 December 2020 | ||||||
|---|---|---|---|---|---|---|---|
| Fair value | Fair value | ||||||
| Notional amount |
Assets | Liabilities | Notional amount |
Assets | Liabilities | ||
| £m | £m | £m | £m | £m | £m | ||
| Derivatives held for trading: | |||||||
| Exchange rate contracts | 12,227 | 229 | 215 | 14,951 | 395 | 418 | |
| Interest rate contracts | 31,912 | 545 | 440 | 40,160 | 888 | 542 | |
| Equity and credit contracts | 1,106 | 141 | 53 | 1,140 | 123 | 55 | |
| Total derivatives held for trading | 45,245 | 915 | 708 | 56,251 | 1,406 | 1,015 | |
| Derivatives held for hedging | |||||||
| Designated as fair value hedges: | |||||||
| Exchange rate contracts | 598 | 52 | 1 | 789 | 84 | 6 | |
| Interest rate contracts | 84,311 | 981 | 1,319 | 93,748 | 1,225 | 1,885 | |
| 84,909 | 1,033 | 1,320 | 94,537 | 1,309 | 1,891 | ||
| Designated as cash flow hedges: | |||||||
| Exchange rate contracts | 23,756 | 1,131 | 381 | 27,020 | 1,978 | 409 | |
| Interest rate contracts | 26,609 | 307 | 38 | 19,407 | 467 | 23 | |
| 50,365 | 1,438 | 419 | 46,427 | 2,445 | 432 | ||
| Total derivatives held for hedging | 135,274 | 2,471 | 1,739 | 140,964 | 3,754 | 2,323 | |
| Derivative netting(1) | (1,384) | (1,384) | (1,754) | (1,754) | |||
| Total derivatives | 180,519 | 2,002 | 1,063 | 197,215 | 3,406 | 1,584 |
(1) Derivative netting excludes the effect of cash collateral, which is offset against the gross derivative position. The amount of cash collateral received that had been offset against the gross derivative assets was £401m (2020: £330m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £245m (2020: £651m).
Note 32 includes details of the notional value of hedging instruments by benchmark interest rate impacted by IBOR reform and the notional amounts of assets, liabilities and off-balance sheet commitments affected by IBOR reform that have yet to transition to an alternative benchmark interest rate.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Loans and advances to customers: | ||
| Loans to housing associations | 12 | 13 |
| Other loans | 62 | 86 |
| 74 | 99 | |
| Debt securities | 105 | 109 |
| 179 | 208 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Loans and advances to customers | 209,188 | 210,107 |
| Credit impairment loss allowances on loans and advances to customers | (1,141) | (1,303) |
| RV and voluntary termination provisions on finance leases | (49) | (54) |
| Net loans and advances to customers | 207,998 | 208,750 |
For movements in expected credit losses, see the 'Movement in total exposures and the corresponding ECL' table in the Santander UK group level - Credit risk review section of the Risk review.
The balance at 30 June 2021 excludes loans and advances to customers classified as assets held for sale. For more, see Note 33.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial | S | |||
| statements | a |
The information in this Note relates to securitisations and covered bonds for consolidated structured entities, used to obtain funding or collateral. It excludes structured entities relating to credit protection vehicles.
The gross assets securitised, or for the covered bond programme assigned, at 30 June 2021 and 31 December 2020 were:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Mortgage-backed master trust structures: | ||
| – Holmes | 2,566 | 3,073 |
| – Fosse | 2,170 | 2,258 |
| – Langton | — | 2,782 |
| 4,736 | 8,113 | |
| Other asset-backed securitisation structures: | ||
| – Motor | 103 | 189 |
| – Auto ABS UK Loans | 1,325 | 1,460 |
| 1,428 | 1,649 | |
| Total securitisation programmes | 6,164 | 9,762 |
| Covered bond programmes | ||
| – Euro 35bn Global Covered Bond Programme | 19,000 | 23,670 |
| Total securitisation and covered bond programmes | 25,164 | 33,432 |
The following table sets out the internal and external issuances and redemptions in H121 and H120 for each securitisation and covered bond programme.
| Internal issuances | External issuances | Internal redemptions | External redemptions | |||||
|---|---|---|---|---|---|---|---|---|
| H121 | H120 | H121 | H120 | H121 | H120 | H121 | H120 | |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |
| Mortgage-backed master trust structures: | ||||||||
| – Holmes | — | — | — | — | — | 0.1 | 0.3 | 0.5 |
| – Langton | — | — | — | — | 2.4 | — | — | — |
| Other asset-backed securitisation structures: | ||||||||
| – Motor | — | — | — | — | 0.1 | 0.1 | — | 0.1 |
| – Auto ABS UK Loans | — | — | — | — | 0.1 | — | 0.1 | 0.1 |
| Covered bond programme | — | — | — | 3.0 | — | — | 4.5 | 1.8 |
| — | — | — | 3.0 | 2.6 | 0.2 | 4.9 | 2.5 |
In H121, the remaining Langton bonds were redeemed and the associated mortgages were repurchased by Santander UK plc.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Agreements with banks | 1,250 | 1,258 |
| Agreements with customers | 16,947 | 18,341 |
| 18,197 | 19,599 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Asset backed securities | 467 | 491 |
| Debt securities | 63 | 672 |
| 530 | 1,163 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Debt securities | 6,348 | 8,929 |
| Loans and advances to customers | 20 | 21 |
| 6,368 | 8,950 |
There have been no significant changes to the Santander UK group's interests in subsidiaries, associates, joint ventures and unconsolidated structured entities, as set out in Note 19 to the Consolidated Financial Statements in the 2020 Annual Report.
Intangible assets comprise goodwill and computer software.
The following CGUs include in their carrying values goodwill that comprises the goodwill reported by Santander UK. The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives. For key assumptions used in the value in use (VIU) calculation, as the basis of the recoverable amount of each CGU, see Note 20 to the Consolidated Financial Statements in the 2020 Annual Report. At 30 June 2021 a review was performed to identify any potential impairment indicators. No indicators of impairment were identified and so a full impairment test was not performed for the half year. The key assumptions are set out in the table below.
| Growth rate beyond initial cash flow | |||||||
|---|---|---|---|---|---|---|---|
| Goodwill | Discount rate | projections | |||||
| 30 June 2021 | 31 December 2020 | 30 June 2021 | 31 December 2020 | 30 June 2021 | 31 December 2020 | ||
| CGU | £m | £m | % | % | % | % | |
| Personal financial services | 1,169 | 1,169 | 14.6 | 13.6 | 1.6 | 1.6 | |
| Private banking | 30 | 30 | 11.0 | 8.9 | 1.6 | 1.6 | |
| Other | 4 | 4 | 14.6 | 13.6 | 1.6 | 1.6 | |
| 1,203 | 1,203 |
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial | S |
statements
a n
| Office fixtures and | Operating lease | |||||
|---|---|---|---|---|---|---|
| Property | equipment | Computer software | assets | Right-of-use assets | Total(2) | |
| £m | £m | £m | £m | £m | £m | |
| Cost: | ||||||
| At 1 January 2021 | 1,272 | 1,375 | 436 | 720 | 218 | 4,021 |
| Additions | 23 | 12 | — | 194 | 59 | 288 |
| Disposals | (306) | (267) | — | (122) | (20) | (715) |
| At 30 June 2021 | 989 | 1,120 | 436 | 792 | 257 | 3,594 |
| Accumulated depreciation: | ||||||
| At 1 January 2021 | 489 | 1,068 | 434 | 178 | 118 | 2,287 |
| Charge for the period(1) | 17 | 46 | — | 48 | 10 | 121 |
| Impairment during the period | 57 | 29 | — | — | 19 | 105 |
| Disposals | (210) | (236) | — | (50) | (19) | (515) |
| At 30 June 2021 | 353 | 907 | 434 | 176 | 128 | 1,998 |
| Net book value | 636 | 213 | 2 | 616 | 129 | 1,596 |
| Cost: | ||||||
| At 1 January 2020 | 1,270 | 1,436 | 439 | 738 | 212 | 4,095 |
| Additions | 61 | 43 | 2 | 185 | 8 | 299 |
| Disposals | (59) | (104) | (5) | (203) | (2) | (373) |
| At 31 December 2020 | 1,272 | 1,375 | 436 | 720 | 218 | 4,021 |
| Accumulated depreciation: | ||||||
| At 1 January 2020 | 454 | 1,016 | 434 | 164 | 60 | 2,128 |
| Charge for the year(1) | 55 | 111 | — | 92 | 58 | 316 |
| Impairment during the year | 24 | — | — | — | — | 24 |
| Disposals | (44) | (59) | — | (78) | — | (181) |
| At 31 December 2020 | 489 | 1,068 | 434 | 178 | 118 | 2,287 |
| Net book value | 783 | 307 | 2 | 542 | 100 | 1,734 |
(1) Following a review of the estimated useful lives of property as part of Santander UK's transformation program, the charge for the period includes accelerated property depreciation of £4m (2020: £9m). (2) Property, plant and equipment includes assets under construction of £72m (2020: £55m).
Property, office fixtures and equipment and right-of-use assets were impaired in the period as a result of our multi-year transformation project. The impairment relates to leasehold properties within the scope of our branch network restructuring programme and head office sites which are either closing or consolidating.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| US\$30bn Euro Medium Term Note Programme | 96 | 102 |
| Structured Notes Programmes | 431 | 805 |
| Eurobonds | 144 | 150 |
| Structured deposits | 347 | 375 |
| Collateral and associated financial guarantees | 5 | 2 |
| 1,023 | 1,434 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Demand and time deposits(1) | 185,179 | 185,879 |
| Amounts due to other Santander UK Group Holdings plc subsidiaries | 67 | 59 |
| Amounts due to Santander UK Group Holdings plc(2) | 6,912 | 7,883 |
| Amounts due to fellow Banco Santander subsidiaries and joint ventures | 1,159 | 1,314 |
| 193,317 | 195,135 |
(1) Includes equity index-linked deposits of £578m (2020: £577m). The capital amount guaranteed/protected and the amount of return guaranteed in respect of the equity index-linked deposits were £578m and £2m (2020: £577m and £2m) respectively.
(2) Includes downstreamed funding from our immediate parent company Santander UK Group Holdings plc.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Items in the course of transmission | 497 | 375 |
| Deposits held as collateral | 1,034 | 2,063 |
| Other deposits(1) | 18,951 | 18,519 |
| Amounts due to Santander UK subsidiaries | 20 | 1 |
| 20,502 | 20,958 |
(1) Includes drawdown from the TFS of £3.3bn (2020: £6.3bn) and drawdown from the TFSME of £15.2bn (2020: £11.7bn).
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Agreements with banks | 2,898 | 6,358 |
| Agreements with customers | 11,191 | 9,490 |
| 14,089 | 15,848 |
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Medium-term notes | 6,908 | 8,212 |
| Euro 35bn Global Covered Bond Programme | 14,677 | 19,285 |
| US\$20bn Commercial Paper Programmes | 3,052 | 2,824 |
| Certificates of deposit | 2,466 | 2,858 |
| Credit linked notes | 58 | 57 |
| Securitisation programmes | 1,979 | 2,330 |
| 29,140 | 35,566 |
| 30 June 2021 | 31 December 2020 |
|---|---|
| £m | £m |
| 2,513 | 2,556 |
In H121, the Santander UK group repurchased certain debt securities as part of ongoing liability management exercises, resulting in a loss of £27m. In H120, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £17m.
| Conduct remediation | |||||||
|---|---|---|---|---|---|---|---|
| PPI | Other products |
Bank Levy | Property | Off balance sheet ECL |
Regulatory and other |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2021 | 76 | 8 | 34 | 45 | 75 | 226 | 464 |
| Additional provisions (See Note 5) | — | — | — | 43 | — | 148 | 191 |
| Provisions released (See Note 5) | — | — | — | — | (24) | — | (24) |
| Utilisation and other | (39) | — | (34) | (9) | — | (105) | (187) |
| At 30 June 2021 | 37 | 8 | — | 79 | 51 | 269 | 444 |
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial | S | |||
| statements | a | |||
| n |
Payment Protection Insurance (PPI) At 30 June 2021, the remaining provision for PPI redress and related costs was £37m (2020: £76m). There was no additional provision in H121.
At 30 June 2021, the outstanding activities which drive the ongoing provision requirement relate to the final aspects of complaints close down activity and the commercial settlement with the Official Receiver.
Customers continue to commence litigation concerning the historical sale of PPI. Provision has been made for the best estimate of any obligation to pay compensation in respect of current stock and estimated future claims. The extent of the potential liability and amount of any compensation to be paid remains uncertain.
The provision for conduct remediation recognised represents management's best estimate of Santander UK's liability in respect of mis-selling of PPI policies.
Property provisions were impacted by £43m of transformation charges in H121. These relate to a multi-year project to deliver on our strategic priorities and enhance efficiency in order for us to better serve our customers and meet our medium-term targets. These charges consist of costs relating to leasehold properties within the scope of our branch network restructuring programme and decommissioning costs relating to head office sites which are either closing or consolidating.
In H121 there was a charge of £69m as part of our multi-year transformation programme to improve future returns, focused on simplifying, digitising and automating the bank, comprising mainly of redundancy costs of £57m relating to branch and head office site closures. There was also a charge for operational risk provisions of £50m, due to an increase in Push Payment fraud volumes and losses, £13m for legal provisions and smaller charges for other provisions.
In H121 we did not experience any material operational risk losses. The losses were in line with H120 and remained comfortably within our forecast and 2021 risk appetite. Aligned to the rest of the industry, we continue to experience losses related to Push Payment fraud. In addition, provisions are being managed to cover existing customer remediation programmes and associated costs.
The amounts recognised in the balance sheet were as follows:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Assets/(liabilities) | ||
| Funded defined benefit pension scheme - surplus | 1,083 | 495 |
| Funded defined benefit pension scheme - deficit | (113) | (361) |
| Unfunded pension and post retirement medical benefits | (39) | (42) |
| Total net assets | 931 | 92 |
An expense of £33m (H120: £33m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 4).
The total amount charged to the income statement was £23m (H120: £17m).
The amounts recognised in other comprehensive income were as follows:
| 30 June 2021 | 30 June 2020 | |
|---|---|---|
| £m | £m | |
| Return on plan assets (excluding amounts included in net interest expense) | 383 | (1,115) |
| Actuarial losses arising from changes in demographic assumptions | — | 38 |
| Actuarial gains arising from experience adjustments | (30) | (10) |
| Actuarial (gains)/losses arising from changes in financial assumptions | (1,098) | 1,463 |
| Pension remeasurement | (745) | 376 |
The net assets recognised in the balance sheet were determined as follows:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Present value of defined benefit obligations | (12,675) | (13,887) |
| Fair value of scheme assets | 13,606 | 13,979 |
| Net defined benefit assets | 931 | 92 |
The principal actuarial assumptions used for the defined benefit schemes were:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| % | % | |
| To determine benefit obligations: | ||
| – Discount rate for scheme liabilities | 1.9 | 1.3 |
| – General price inflation | 3.2 | 3.0 |
| – General salary increase | 1.0 | 1.0 |
| – Expected rate of pension increase | 3.1 | 2.9 |
| Years | Years | |
| Longevity at 60 for current pensioners, on the valuation date: | ||
| – Males | 27.5 | 27.5 |
| – Females | 30.1 | 30.0 |
| Longevity at 60 for future pensioners currently aged 40, on the valuation date: | ||
| – Males | 29.1 | 29.0 |
In March 2021, the Trustee entered into a longevity swap. Approximately 85% of pensioner liabilities were covered by the longevity swap at inception. The value of the swap at 30 June 2021 was nil.
The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.
| (Decrease)/increase | |||
|---|---|---|---|
| 30 June 2021 | 31 December 2020 | ||
| Assumption | Change in pension obligation at period end from | £m | £m |
| Discount rate | 25 bps increase | (573) | (662) |
| General price inflation(1) | 25 bps increase | 411 | 480 |
| Mortality | Each additional year of longevity assumed | 453 | 515 |
(1) The comparative figure for general price inflation sensitivity of £365m as at 31 December 2020 has been restated. This was due to an error and does not impact the actual reported assumption value.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Guarantees given to third parties | 739 | 939 |
| Formal standby facilities, credit lines and other commitments | 40,957 | 42,221 |
| 41,696 | 43,160 |
Where the items set out below can be reliably estimated, they are disclosed in the table above.
Santander UK engages in discussion, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.
In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition, where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made.
In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is in its early stages. The dispute relates to the liability for PPI misselling complaints relating to pre-2005 PPI policies underwritten by AXA France IARD and AXA France Vie (together, AXA France - previously Financial Insurance Company Ltd and Financial Assurance Company Ltd respectively) and involves Santander Cards UK Limited (a former GE Capital Corporation entity and distributor of pre-2005 PPI known as GE Capital Bank Limited which was acquired by Banco Santander SA in 2008 and subsequently transferred to Santander UK plc) and a Banco Santander SA subsidiary Santander Insurance Services UK Limited (together the Santander Entities). During the relevant period, AXA France were owned by Genworth Financial International Holdings, Inc (Genworth).
In September 2015 AXA S.A. acquired AXA France from Genworth. In July 2017, the Santander Entities notified AXA France that they did not accept liability for losses on PPI policies relating to this period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with AXA France pursuant to which it agreed to handle complaints on their behalf, and AXA France agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis. A standstill agreement was entered into between the Santander Entities and AXA France as a condition of the CHA.
In July 2020, Genworth announced that it had agreed to pay AXA circa £624m in respect of PPI mis-selling losses in settlement of the related dispute concerning obligations under the sale and purchase agreement pursuant to which Genworth sold AXA France to AXA. The CHA between Santander UK plc and AXA France terminated on 26 December 2020. On 30 December 2020, AXA France provided written notice to the Santander Entities to terminate the standstill agreement.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial | S | |||
| statements | a n |
During H121, AXA France commenced litigation against the Santander Entities seeking recovery of £636m and any further losses relating to pre-2005 PPI. The Santander Entities acknowledged service indicating their intention to defend the claim in full and have now issued an application for AXA France's claim to be struck out/summarily dismissed. This dispute is at an early stage and there are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is difficult to reliably predict the outcome or the timing of the resolution of the matter. The regulatory and other provision in Note 24 includes our best estimate of the Santander Entities' liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial to the Santander Entities' interests in connection with the dispute.
In addition, and in relation to PPI more generally the PPI provision includes an amount relating to legal claims challenging the FCA's industry guidance on the treatment of Plevin / recurring non-disclosure assessments. This provision is based on current stock levels, future projected claims, and average redress. There remains a risk that volumes received in future may be higher than forecast. The provision in Note 24 includes our best estimate of Santander UK's liability for the specific issue. The actual cost of customer compensation could differ from the amount provided. It is not currently practicable to provide an estimate of the risk and amount of any further financial impact.
In June 2018 the Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a loophole of a specific German settlement mechanism through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.
During H121 we continued to cooperate with the German authorities and, with the assistance of external experts, to progress an internal investigation into the matters in question. From Santander UK plc's perspective, the investigation is focused principally on the period 2009-2011 and remains on-going. There remain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact. Any potential losses, claims or expenses suffered or incurred by Santander Financial Services plc in respect of these matters have been fully indemnified by Santander UK plc, as part of the ring-fencing transfer scheme between Santander UK plc, Santander Financial Services plc and Banco Santander SA.
The Santander UK group's unsecured lending and other consumer credit business is governed by consumer credit law and related regulations, including the CCA. Claims brought by customers in relation to these requirements, including potential breaches, could result in costs to the Santander UK group where such potential breaches are not found to be de minimis. The CCA includes very detailed and prescriptive requirements for lenders, including in relation to post contractual information.
Other provisions include an amount of £41m (2020: £47m) arising from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice. The Regulatory and other provision in Note 24 includes our best estimate of Santander UK's liability for the specific issue. The actual cost of customer compensation could differ from the amount provided. It is not practicable to provide an estimate of the risk and amount of any further financial impact.
Santander UK plc is cooperating with an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. The FCA's investigation focuses primarily on the period 2012 to 2017 and includes consideration of high risk customers including Money Service Businesses. It is not currently possible to make a reliable assessment of any liability resulting from the investigation including any financial penalty.
The Santander UK group engages in discussion, and co-operates, with HM Revenue & Customs (HMRC) in their oversight of the Santander UK group's tax matters. The Santander UK group adopted the UK's Code of Practice on Taxation for Banks in 2010.
Certain leases in which the Santander UK group is or was the lessor have been under review by HMRC in connection with claims for tax allowances. Under the terms of the lease agreements, the Santander UK group is fully indemnified in all material respects by the respective lessees for any liability arising from the disallowance of tax allowances plus accrued interest.
During H121, an outline agreement in principle in respect of a number of these lease arrangements was reached directly between the lessee and HMRC.
Certain other lease arrangements, where the tax liabilities are considered immaterial, remain under review. Whilst legal opinions have been obtained to support the Santander UK group's position, the matter remains uncertain pending formal resolution with HMRC and any subsequent litigation. These matters moved to formal litigation in 2020, as required under the terms of the leases, and it is currently anticipated that hearings will be held at the First Tier Tax Tribunal in 2022.
On 2 November 2015, Visa Europe Ltd agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Ltd, Santander UK received upfront consideration made up of cash and convertible preferred stock. The convertible preferred stock is now held by Santander Equity Investments Limited (SEIL), outside the ring fenced bank. Conversion of the preferred stock into Class A Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK & Ireland (UK&I) multilateral interchange fees (MIFs). In June 2020, the Supreme Court issued a judgement finding that MIFs restricted competition.
In addition, Santander UK and certain other UK&I banks have agreed to indemnify Visa Inc. in the event that the preferred stock is insufficient to meet the costs of this litigation. Visa Inc. has recourse to this indemnity once more than €1bn of losses relating to UK&I MIFs have arisen or once the total value of the preferred stock issued to UK&I banks on closing has been reduced to nil. Whilst Santander UK's liability under this indemnity is capped at €39.85m, Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism. At this stage, it is unclear whether the litigation will give rise to more than €1bn of losses relating to UK&I MIFs which means it is difficult to predict the resolution of the matter including the timing or the significance of the possible impact.
As part of the sale of subsidiaries, businesses and other entities, and as is normal in such circumstances, Santander UK has given warranties and indemnities to the purchasers.
| Interest rate | 30 June 2021 | 31 December 2020 | ||
|---|---|---|---|---|
| % | 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 |
| - £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 5.18 | n/a | — | 210 |
| - £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.30 | March 2025 | 500 | 500 |
| - £210m Fixed Rate Reset Perpetual AT1 Capital Securities | 4.25 | March 2026 | 210 | — |
| 2,191 | 2,191 |
In March 2021, Santander UK plc purchased and redeemed the remaining £210m of the original £500m 5.18%Fixed Rate Reset Perpetual AT1 Capital Securities and issued £210m 4.25% Fixed Rate Reset Perpetual AT1 Capital Securities, which were fully subscribed by the Company's immediate parent company, Santander UK Group Holdings plc.
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| PSA Finance UK Limited | 180 | 162 |
| 180 | 162 |
As described in Note 14 to the Consolidated Financial Statements in the 2020 Annual Report, Santander UK plc and certain of its subsidiaries issue securitisations and covered bonds. At 30 June 2021, there were £25,164m (2020: £33,432m) of gross assets in these secured programmes, of which £130m (2020: £2,294m) related to internally retained issuances that were available for use as collateral for liquidity purposes in the future.
At 30 June 2021, a total of £2,011m (2020: £4,530m) of notes issued under securitisation and covered bond programmes had been retained internally, a proportion of which had been used as collateral via third party bilateral secured funding transactions, which totalled £500m at 30 June 2021 (2020: £1,114m), or for use as collateral for liquidity purposes in the future.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial statements |
S a |
The financial position and performance of the Santander UK group have not been materially affected in H121 by any related party transactions, or changes to related party transactions, except for the classification of the assets and liabilities of the CIB business as held for sale and its results as discontinued operations, given the transfer of the CIB business to SLB, as set out in Note 33. 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 30 to the Consolidated Financial Statements in the 2020 Annual Report.
n
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 to the Consolidated Financial Statements in the 2020 Annual Report describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.
Disclosures relating to fair value measurement and hierarchy, valuation techniques and the control framework and related aspects pertaining to financial instruments at fair value are included in the 2020 Annual Report. Valuation, sensitivity methodologies and inputs at 30 June 2021 are consistent with those described in Note 40 to the Consolidated Financial Statements in the 2020 Annual Report.
The following tables analyse the fair value of the financial instruments carried at amortised cost at 30 June 2021 and 31 December 2020. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Details of the valuation methodology of the financial assets and financial liabilities carried at amortised cost can be found in Note 40(e) to the Consolidated Financial Statements in the 2020 Annual Report.
| 30 June 2021 | 31 December 2020 | |||
|---|---|---|---|---|
| Carrying | Carrying | |||
| Fair value | value | Fair value | value | |
| £m | £m | £m | £m | |
| Assets | ||||
| Loans and advances to customers | 210,815 | 207,998 | 211,279 | 208,750 |
| Loans and advances to banks | 1,312 | 1,312 | 1,682 | 1,682 |
| Reverse repurchase agreements - non trading | 18,198 | 18,197 | 19,608 | 19,599 |
| Other financial assets at amortised cost | 539 | 530 | 1,192 | 1,163 |
| Assets held for sale(1) | 2,493 | 2,486 | — | — |
| 233,357 | 230,523 | 233,761 | 231,194 | |
| Liabilities | ||||
| Deposits by customers | 193,389 | 193,317 | 195,242 | 195,135 |
| Deposits by banks | 20,503 | 20,502 | 20,967 | 20,958 |
| Repurchase agreements - non trading | 14,088 | 14,089 | 15,847 | 15,848 |
| Debt securities in issue | 29,890 | 29,140 | 36,397 | 35,566 |
| Subordinated liabilities | 3,080 | 2,513 | 3,069 | 2,556 |
| Liabilities held for sale(1) | 3,790 | 3,790 | — | — |
| 264,740 | 263,351 | 271,522 | 270,063 |
(1) Assets and liabilities classified as held for sale are measured in accordance with IFRS 9. Any assets and liabilities held for sale which are measured at fair value are included in the fair value table in section (c) below.
The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 30 June 2021 and 31 December 2020, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.
| 30 June 2021 | 31 December 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Valuation | ||
| £m | £m | £m | £m | £m | £m | £m | £m technique | |||
| Assets | ||||||||||
| Derivative financial instruments | Exchange rate contracts | — | 1,403 | 1 | 1,404 | — | 2,455 | 2 | 2,457 | A |
| Interest rate contracts | — | 1,841 | — | 1,841 | — | 2,566 | 14 | 2,580 | A & C | |
| Equity and credit contracts | — | 93 | 48 | 141 | — | 71 | 52 | 123 | B & D | |
| Netting | — | (1,384) | — | (1,384) | — | (1,754) | — | (1,754) | ||
| — | 1,953 | 49 | 2,002 | — | 3,338 | 68 | 3,406 | |||
| Other financial assets at FVTPL | Loans and advances to customers | — | — | 74 | 74 | — | — | 99 | 99 | A |
| Debt securities | — | — | 105 | 105 | — | — | 109 | 109 | A, B & D | |
| — | — | 179 | 179 | — | — | 208 | 208 | |||
| Financial assets at FVOCI | Debt securities | 6,160 | 188 | — | 6,348 | 8,501 | 428 | — | 8,929 | D |
| Loans and advances to customers | — | — | 20 | 20 | — | — | 21 | 21 | D | |
| 6,160 | 188 | 20 | 6,368 | 8,501 | 428 | 21 | 8,950 | |||
| Assets held for sale(1) | — | 143 | 16 | 159 | — | — | — | — | ||
| Total assets at fair value | 6,160 | 2,284 | 264 | 8,708 | 8,501 | 3,766 | 297 | 12,564 | ||
| Liabilities | ||||||||||
| Derivative financial instruments | Exchange rate contracts | — | 565 | — | 565 | — | 833 | — | 833 | A |
| Interest rate contracts | — | 1,827 | 2 | 1,829 | — | 2,447 | 3 | 2,450 | A & C | |
| Equity and credit contracts | — | 23 | 30 | 53 | — | 26 | 29 | 55 | B & D | |
| Netting | — | (1,384) | — | (1,384) | — | (1,754) | — | (1,754) | ||
| — | 1,031 | 32 | 1,063 | — | 1,552 | 32 | 1,584 | |||
| Other financial liabilities at FVTPL Debt securities in issue | — | 666 | 5 | 671 | — | 1,051 | 6 | 1,057 | A | |
| Structured deposits | — | 347 | — | 347 | — | 375 | — | 375 | A | |
| Collateral and associated financial | ||||||||||
| guarantees | — | 3 | 2 | 5 | — | — | 2 | 2 | D | |
| — | 1,016 | 7 | 1,023 | — | 1,426 | 8 | 1,434 | |||
| Liabilities held for sale(1) | — | 122 | — | 122 | — | — | — | — | ||
| Total liabilities at fair value | — | 2,169 | 39 | 2,208 | — | 2,978 | 40 | 3,018 |
(1) Includes assets and liabilities held for sale which are measured at fair value.
In H121 there were no significant (H120: no significant) transfers of financial instruments between levels of the fair value hierarchy.
The main valuation techniques employed in internal models to measure the fair value of the financial instruments are disclosed in Note 40(c) to the Consolidated Financial Statements in the 2020 Annual Report. The Santander UK group did not make any material changes to the valuation techniques and internal models it used during H121.
The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model.
Santander UK classifies fair value adjustments as either 'risk-related' or 'model-related'. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table:
| 30 June 2021 | 31 December 2020 | |
|---|---|---|
| £m | £m | |
| Risk-related: | ||
| - Bid-offer and trade specific adjustments | (7) | (8) |
| - Uncertainty | 21 | 23 |
| - Credit risk adjustment | 7 | 11 |
| - Funding fair value adjustment | 2 | 3 |
| 23 | 29 |
Risk-related adjustments are driven, in part, by the magnitude of Santander UK's market or credit risk exposure, and by external market factors, such as the size of market spreads. For more details, see 'Risk-related adjustments' in Note 40(g) to the Consolidated Financial Statements in the 2020 Annual Report.
| Strategic report | Financial review | Risk review | Financial statements | Shareholder information |
|---|---|---|---|---|
| Notes to the financial statements |
S a n |
There have been no significant changes to the valuation techniques as set out in Note 40(h) to the Consolidated Financial Statements in the 2020 Annual Report.
The following table sets out the movements in Level 3 financial instruments in H121 and H120:
| Assets | Liabilities | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Other financial assets at |
Financial assets at |
Assets held for |
Other financial liabilities |
Liabilities held for |
|||||
| Derivatives | FVTPL | FVOCI | sale | Total | Derivatives | at FVTPL | sale | Total | |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2021 | 68 | 208 | 21 | — | 297 | (32) | (8) | — | (40) |
| Total (losses)/gains recognised: | |||||||||
| - Fair value movements | (1) | (7) | (1) | — | (9) | — | 3 | — | 3 |
| Transfers to held for sale | — | (16) | — | 16 | — | — | (2) | — | (2) |
| Netting(1) | — | 5 | — | — | 5 | — | — | — | — |
| Settlements | (18) | (11) | — | — | (29) | — | — | — | — |
| At 30 June 2021 | 49 | 179 | 20 | 16 | 264 | (32) | (7) | — | (39) |
| Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period |
(1) | (7) | (1) | — | (9) | — | 3 | — | 3 |
| At 1 January 2020 | 75 | 386 | 56 | — | 517 | (32) | (61) | — | (93) |
| Total gains/(losses) recognised: | |||||||||
| - Fair value movements | 6 | (2) | 1 | — | 5 | (1) | 15 | — | 14 |
| - Foreign exchange and other movements | — | (2) | — | — | (2) | — | 2 | — | 2 |
| Transfers out | — | — | — | — | — | — | 28 | — | 28 |
| Netting(1) | — | (37) | — | — | (37) | — | — | — | — |
| Additions | — | — | — | — | — | — | (1) | — | (1) |
| Sales | — | (11) | (19) | — | (30) | — | — | — | — |
| Settlements | (17) | (110) | (8) | — | (135) | 3 | 1 | — | 4 |
| At 30 June 2020 | 64 | 224 | 30 | — | 318 | (30) | (16) | — | (46) |
| Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period |
6 | (4) | 1 | — | 3 | (1) | 17 | — | 16 |
(1) This relates to the effect of netting on the fair value of the credit linked notes due to a legal right of set-off between the principal amounts of the senior notes and the associated cash deposits. For more, see 'ii) Credit protection entities' in Note 19 to the Consolidated Financial Statements in the 2020 Annual Report.
There has been no significant change to the unobservable inputs and sensitivities used in Level 3 fair values as set out in Note 40(h) to the Consolidated Financial Statements in the 2020 Annual Report.
The following tables show the notional amounts of assets, liabilities and off-balance sheet commitments at 30 June 2021 and 31 December 2020 affected by IBOR reform that have yet to transition to an alternative benchmark interest rate as provided internally to key management personnel.
| 30 June 2021 | ||||
|---|---|---|---|---|
| GBP(2) | USD(2) | |||
| LIBOR | LIBOR | Other(2) | Total | |
| £m | £m | £m | £m | |
| Assets | ||||
| Derivatives(1) | 21,893 | 2,580 | 653 | 25,126 |
| Other financial assets at fair value through profit and loss | 808 | 20 | — | 828 |
| Financial assets at amortised cost | 12,706 | 157 | 83 | 12,946 |
| Financial assets at fair value through comprehensive income | 189 | — | — | 189 |
| Assets held for sale | 1,602 | 161 | — | 1,763 |
| 37,198 | 2,918 | 736 | 40,852 | |
| Liabilities | ||||
| Derivatives(1) | 26,227 | 2,558 | 56 | 28,841 |
| Other financial liabilities at fair value through profit and loss | 967 | 41 | — | 1,008 |
| Financial liabilities at amortised cost | 895 | 567 | — | 1,462 |
| Liabilities held for sale | — | 27 | — | 27 |
| 28,089 | 3,193 | 56 | 31,338 | |
| Off-balance sheet commitments given | 10,277 | 803 | 198 | 11,278 |
| 31 December 2020 | ||||
|---|---|---|---|---|
| Assets | ||||
| Derivatives(1) | 33,486 | 4,514 | 2,149 | 40,149 |
| Other financial assets at fair value through profit and loss | 968 | 22 | — | 990 |
| Financial assets at amortised cost | 15,062 | 1,191 | 90 | 16,343 |
| Financial assets at fair value through comprehensive income | 428 | — | — | 428 |
| 49,944 | 5,727 | 2,239 | 57,910 | |
| Liabilities | ||||
| Derivatives(1) | 35,217 | 5,205 | 88 | 40,510 |
| Other financial liabilities at fair value through profit and loss | 1,129 | 69 | — | 1,198 |
| Financial liabilities at amortised cost | 2,354 | 1,319 | — | 3,673 |
| 38,700 | 6,593 | 88 | 45,381 | |
| Off-balance sheet commitments given | 11,400 | 2,126 | 573 | 14,099 |
(1) Many of the Santander UK group's derivatives subject to IBOR reform are governed by ISDA definitions. In October 2020 ISDA issued an IBOR fallbacks supplement setting out how the amendments to new alternative benchmark rates will be accomplished, the effect of which is to create fallback provisions in derivatives that describe what floating rates will apply on the permanent discontinuation of certain key IBORs or upon ISDA declaring a non-representative determination of an IBOR. The Santander UK group has adhered to the protocol to implement the fallbacks to derivative contracts that were entered into before the effective date of the supplement (25 January 2021). If derivative counterparties also adhere to the protocol, new fallbacks will automatically be implemented in existing derivative contracts when the supplement becomes effective. Following the announcement by the FCA on 5 March 2021 that certain LIBOR settings will permanently cease immediately after 31 December 2021 (and for overnight and 12-month US dollar LIBOR after 30 June 2023), the ISDA fallback spread adjustment is fixed as of the date of the FCA announcement.
(2) Cessation dates are: GBP, JPY, NOK LIBOR 31/12/21, USD LIBOR 30/06/23, EONIA 3/1/22
The table below shows the notional amount of derivatives in hedging relationships directly affected by uncertainties related to IBOR reform.
| 30 June 2021 | 31 December 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| GBP LIBOR |
USD LIBOR |
Other | Total | GBP LIBOR |
USD LIBOR |
Other | Total | |
| £m | £m | £m | £m | £m | £m | £m | £m | |
| Total notional value of hedging instruments: | ||||||||
| – Cash flow hedges | 11,610 | 2,894 | — | 14,504 | 15,198 | 5,119 | — | 20,317 |
| – Fair value hedges | 20,758 | 160 | 696 | 21,614 | 32,223 | 1,077 | 778 | 34,078 |
| 32,368 | 3,054 | 696 | 36,118 | 47,421 | 6,196 | 778 | 54,395 | |
| Maturing after cessation date(1) | ||||||||
| – Cash flow hedges | 9,788 | 2,533 | — | 12,321 | 10,553 | 2,562 | — | 13,115 |
| – Fair value hedges | 16,232 | 160 | 696 | 17,088 | 12,477 | 162 | 720 | 13,359 |
| 26,020 | 2,693 | 696 | 29,409 | 23,030 | 2,724 | 720 | 26,474 |
(1) Cessation dates are: GBP, JPY, NOK LIBOR 31/12/21, USD LIBOR 30/06/23, EONIA 3/1/22
Following a hearing held on 23 June 2021, the High Court of England and Wales has sanctioned the transfer of substantially all the CIB business of Santander UK to SLB by way of a Part VII banking business transfer scheme. The transfers of CIB business to SLB under the scheme are scheduled to take place before the end of 2021.
At 30 June 2021, the CIB business met the requirements for presentation as discontinued operations. The financial performance and cash flow information relating to the discontinued operations were as follows:
| Half year to | Half year to | |
|---|---|---|
| 30 June 2021 | 30 June 2020 | |
| £m | £m | |
| Net interest income | 24 | 25 |
| Net fee and commission income | 27 | 22 |
| Total operating income | 51 | 47 |
| Operating expenses before credit impairment losses, provisions and charges | (22) | (33) |
| Credit impairment losses | 7 | (12) |
| Provisions for other liabilities and charges | (3) | (4) |
| Total operating credit impairment losses, provisions and charges | 4 | (16) |
| Profit/(loss) from discontinued operations before tax | 33 | (2) |
| Tax on profit/(loss) from discontinued operations | (9) | 1 |
| Profit/(loss) from discontinued operations after tax | 24 | (1) |
There were no gains or losses recognised on the measurement to fair value less costs to sell or on the disposal of the asset groups constituting the discontinued operations.
In H121, the net cash flows attributable to the operating activities, investing activities and financing activities in respect of discontinued operations were £1,754m outflow (H120: £524m inflow), £nil (H120: £nil) and £nil (H120: £nil), respectively.
| Strategic report Financial review Risk review Financial statements |
Shareholder information |
|---|---|
| Notes to the financial | S |
| statements | a |
Management considered the related business transfers to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the assets and liabilities relating to the CIB business.
These business transfers will be made for a cash consideration equivalent to the book value of the associated assets and liabilities, which represents a fair value for the Santander UK group. Costs to sell are expected to be immaterial.
At 30 June 2021, Santander UK was in the process of selling a portfolio of Retail Banking residential mortgage assets and expected to complete the transaction on 16 August 2021. Management considered the sale to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the mortgage assets.
The sale is expected to be made for a cash consideration exceeding the book value of the mortgage assets, resulting in a gain on disposal. Costs to sell are expected to be immaterial.
At 30 June 2021, the assets and liabilities held for sale comprised of:
| Net assets/liabilities held for sale | ||||
|---|---|---|---|---|
| CIB business | ||||
| transfer to SLB | mortgages | Total | ||
| £m | £m | £m | ||
| Assets | ||||
| Derivative financial instruments | 143 | — | 143 | |
| Other financial assets at fair value through profit or loss | 16 | — | 16 | |
| Loans and advances to customers | 1,878 | 608 | 2,486 | |
| Total assets held for sale | 2,037 | 608 | 2,645 | |
| Liabilities | ||||
| Derivative financial instruments | 95 | — | 95 | |
| Other financial liabilities at fair value through profit or loss | 27 | — | 27 | |
| Deposits by customers | 3,769 | — | 3,769 | |
| Deposits by banks | 21 | — | 21 | |
| Total liabilities held for sale | 3,912 | — | 3,912 | |
There have been no significant events between 30 June 2021 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except for the following non-adjusting event:
On 30 July 2021, the Santander UK group through Santander Consumer (UK) plc sold its entire 50% shareholding in PSA Finance UK Limited (PSA) to PSA Financial Services Spain EFC SA, a joint venture between Santander Consumer Finance SA, a fellow subsidiary of Banco Santander SA, and Banque PSA Finance SA, the auto finance arm of Group PSA Peugeot Citroën. The impact of the sale was to derecognise total assets of £3.2bn, total liabilities of £2.9bn and a non-controlling interest of £0.15bn. No material gain or loss arose on sale. For more information on PSA, including summary financial information, see Note 19 to the Consolidated Financial Statements in the 2020 Annual Report.
Glossary 79 Forward looking statements 79
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 Company and its subsidiaries (together Santander UK) may from time to time make written or oral forward-looking statements. The Company makes written forward-looking statements in this Half Yearly Financial Report and may also make forward-looking statements in its periodic reports to the SEC on Forms 20-F and 6-K, in its offering circulars and prospectuses, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.
By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors, such as the Covid-19 pandemic and ongoing challenges and uncertainties posed by the Covid-19 pandemic for businesses and governments around the world, 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 2020 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 2020) 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 2020 Annual Report, as well as the magnitude and duration of the Covid-19 pandemic and its impact on the global economy, financial market conditions and our business, results of operations and financial conditions. Forwardlooking 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 forwardlooking statement, whether as a result of new information, future events or otherwise.
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