TIDMSAN TIDM83WK
RNS Number : 2358H
Santander UK Plc
16 August 2016
Santander UK plc
16 August 2016
2016 Half Yearly Financial Report
The Company announces that a copy of the above document has been
submitted to the National Storage Mechanism and will shortly be
available for inspection at www.Hemscott.com/nsm.do
In fulfilment of its obligations under the Disclosure and
Transparency Rules, Santander UK plc hereby releases the unedited
full text of its 2016 Half Yearly Financial Report. Accordingly,
page references in the text refer to page numbers in the 2016 Half
Yearly Financial Report.
A printer-friendly PDF version of the accounts will also be made
available on the Company's website:
Contacts
Head of Investor
Bojana Flint Relations 020 7756 6474
Andy Smith Head of Media Relations 020 7756 4212
For more information: www.aboutsantander.co.uk ir@santander.co.uk
The full text of the accounts follows:
Half Yearly Financial Report 2016
Santander UK plc
PART OF THE SANTANDER GROUP
Santander UK plc
Half Yearly Financial Report 2016
2 Introduction
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4 Financial review
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18 Risk review
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57 Governance
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60 Financial statements
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84 Shareholder information
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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.
Introduction
The Company sets out in this report a fair review of its
business and a description of its principal risks and
uncertainties, including a balanced and comprehensive analysis of
the development and performance of the business in the first half
of the year and of its position at the end of the period.
Principal activities and business review
Santander UK plc (the Company) and its subsidiaries
(collectively, Santander UK or the Santander UK group) is a major
financial services provider, offering a wide range of personal
financial products and services, and is a growing participant in
the corporate banking market. The Company is authorised and
regulated by the Financial Conduct Authority (FCA) and the
Prudential Regulation Authority (PRA).
Economic environment
The UK economy has entered a period of significant uncertainty.
Santander UK is well prepared to serve the needs of our retail and
business customers as they steer their way through the
opportunities and challenges ahead.
The UK banking sector is facing some serious headwinds as the
economy deals with external pressures in the short and medium term.
In addition, against the backdrop of large scale regulatory change
already underway, the sector has to navigate the loss of regulatory
certainty as the UK negotiates new trade relationships with the
European Union.
The economic backdrop for most of the first half of the year
continued to be positive and largely supportive of our business.
The UK referendum on EU membership on 23 June 2016 marked the end
of a period of relative stability for the UK banking sector.
With GDP growth of about 2% in the first half of 2016, the UK
economy has grown for 13 consecutive quarters. Despite recent
market volatility, concerns about economic uncertainty and some
headwinds from slow global growth, labour market prospects remain
positive. The unemployment rate is close to 5% and its level before
the crisis of 2008-2009.
Inflation is currently 0.5% and, although likely to rise, is
expected to remain relatively low through 2016. This should provide
some continued support for household real income growth as nominal
earnings growth has remained relatively subdued despite the fall in
unemployment. Low inflation also underpins the financial market
expectation that the low interest rate environment will
continue.
Overall these have been supportive trends for our business and,
together with continued annual house price growth, contributed to
lower mortgage arrears. The low interest rate environment - with
little prospect for increases in the short term - does however
create a challenging environment for income growth.
We have seen continued growth in our main lending markets
against a background of steady market deposit growth. Mortgage
market lending growth ended the first quarter of 2016 at 3.4%. This
was the strongest since late 2008, boosted by relatively high
buy-to-let borrowing - ahead of April's stamp duty changes - that
eased in the second quarter. Bank lending growth to companies has
continued to show the signs of gradual recovery that emerged in
late 2015 following an extended period of contraction.
Demanding regulatory agenda
The most significant regulatory change which we face is the
requirement introduced by the Banking Reform Act for major UK banks
to ring-fence their retail banking operations. Our progress to date
is a result of extensive efforts across the bank, and with a
significant investment of management time. We submitted our plans
to the PRA and FCA in January 2016 and anticipate further feedback
from them later this year.
Most other policy changes to support the wider regulatory change
agenda have now been agreed in principle. However, implementation
of these changes and compliance with the new regime remains a major
undertaking across the sector.
Development and performance of our business in H116
Information on the development and performance of our business
in H116 is set out in the 'Income statement review' section of the
Financial review.
Preparation for ring-fencing
In the first half of the year we began repositioning the
structure of our funding vehicles in preparation for ring-fencing.
On 1 June 2016, Santander UK plc became the issuer of all existing
medium-term wholesale securities previously issued by Abbey
National Treasury Services plc.
We believe that, in the past, holders of our debt and capital
made their decision to invest in Santander UK based on our position
as a major retail bank. As such it is appropriate that we transfer
those holdings into the entity which will become our ring-fenced
bank.
Our position at 30 June 2016
Information on our position at the end of the period is set out
in the 'Balance sheet review' section of the Financial review.
2016 outlook
We expect the slowdown of the UK economy, which began in the run
up to the EU referendum, to continue as economic and political
uncertainties prevail.
In a period of significant macroeconomic uncertainty with a wide
range of possible economic outcomes, some downside risks are likely
to be mitigated by monetary policy actions by the Bank of England
and the capital and liquidity strength of the banking sector.
We expect net interest margin and Banking NIM for 2016 to
decline further, driven by continued competitive pressures on asset
margins as well as SVR attrition. We will keep asset and liability
pricing under review to look for opportunities to offset some of
the net interest income pressure and we also see opportunities
across our customer business segments to drive fee income
growth.
Cost management remains a key focus as we continue to invest and
grow, while capturing future operational efficiencies.
We expect our net mortgage lending to be broadly in line with
the market, and the decline in SVR balances to be slightly lower
than the net GBP8.1bn reduction in 2015. In August 2016, we
announced changes to the 1I2I3 Current Account. These changes were
made in response to the lower for longer bank rate environment, as
evidenced by the Bank of England's recent monetary policy actions
and the continuing challenges in the market. We will monitor the
impact of these changes on customer acquisition but nonetheless we
are confident that the 1I2I3 World continues to offer significant
value to many.
Despite the uncertainties we face, we believe we have the
resilience and capabilities to sustain profitability and deliver on
our strategy.
Our principal risks and uncertainties
Information on our principal risks and uncertainties is set out
in the Risk review by type of risk, with more detail by business
segment. Our Risk factors are set out in the Shareholder
information section. Except where noted, there has been no
significant change to the description of these risks or key
mitigating actions as set out in the 2015 Annual Report.
When reading the Risk review, the Risk factors and the other
sections of this report, you should refer to the 'Forward-looking
statements' section in the Shareholder information section.
Key performance indicators
The directors of Santander UK Group Holdings plc manage the
Santander UK group's operations on a business division basis. As a
result, the Company's Directors believe that analysis using key
performance indicators for the Company or the Santander UK plc
group is not necessary or appropriate for an understanding of the
development, performance or position of the Company. The
development and performance of the business of the Santander UK plc
group, mainly at a consolidated level, is set out in the Financial
Review. The Key Performance Indicators of Santander UK Group
Holdings plc can be found on page 5 of its 2016 Half Yearly
Financial Report, which do not form part of this report.
By Order of the Board
Nathan Bostock
Director
15 August 2016
Financial review
5 Income statement review
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5 Summarised Consolidated Income Statement
--- -----------------------------------------
6 Profit before tax by segment
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7 - Retail Banking
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9 - Commercial Banking
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11 - Global Corporate Banking
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12 - Corporate Centre
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13 Balance sheet review
--- -----------------------------------------
13 Summarised Condensed Consolidated
Balance Sheet
--- -----------------------------------------
15 Short-term borrowings
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16 Average balance sheet
--- -----------------------------------------
17 Cash flows
--- -----------------------------------------
Income statement review
SUMMARISED CONSOLIDATED INCOME STATEMENT
Half Half
year year
to to
30 June 30 June
2016 2015
GBPm GBPm
----------------------------------------- --------- ---------
Net interest income 1,773 1,783
Non-interest income(1) 671 500
----------------------------------------- --------- ---------
Total operating income 2,444 2,283
----------------------------------------- --------- ---------
Operating expenses before impairment
losses, provisions and charges (1,205) (1,200)
----------------------------------------- --------- ---------
Impairment losses on loans and advances (63) (57)
Provisions for other liabilities
and charges (97) (97)
----------------------------------------- --------- ---------
Total operating impairment losses,
provisions and charges (160) (154)
----------------------------------------- --------- ---------
Profit before tax 1,079 929
----------------------------------------- --------- ---------
Tax on profit (307) (195)
----------------------------------------- --------- ---------
Profit after tax for the period 772 734
----------------------------------------- --------- ---------
Attributable to:
Equity holders of the parent 756 722
Non-controlling interests 16 12
----------------------------------------- --------- ---------
(1) Comprised of Net fee and commission income and Net trading
and other income.
H116 compared to H115
Profit before tax increased by GBP150m to GBP1,079in H116 (2015:
GBP929m). By income statement line, the movements were:
- Net interest income was lower due to continued
SVR attrition and asset margin pressure, driven
by the competitive environment for new business
lending. This was partially offset by increased
lending and retail liability margin improvement,
resulting in a net interest margin of 1.50% down
3 basis points from 2015, and Banking NIM of 1.78%
down 2 basis points from Q415.
- Non-interest income was up 34% at GBP671m, driven
by higher 1I2I3 Current Account fees and a GBP119m
gain on the sale of our Visa Europe Ltd shareholding.
- Operating expenses before impairment losses, provisions
and charges were flat, as we continue to absorb
investment in business growth, regulatory costs,
and the continued enhancements to our digital
channels.
- Impairment losses on loans and advances increased
to GBP63m, in part due to the impairment of a
single loan in Global Corporate Banking that moved
to non-performance. Overall, retail and corporate
loans continue to perform well, with Retail Banking
also benefitting from a GBP58m release in mortgage
provisions.
- Provisions for other liabilities and charges were
steady at GBP97m, with a lower FSCS charge offset
by a restructuring provision.
Tax on profit increased 57% to GBP307m, driven by the 8% bank
corporation tax surcharge and higher profits. The effective tax
rate is now 28%, up from 21% in H115.
Critical factors affecting results
The preparation of our Condensed Consolidated Interim Financial
Statements requires management to make estimates and judgements
that affect the reported amount of assets and liabilities at the
balance sheet date and the reported amount of income and expenses
during the reporting period. Management evaluates its estimates and
judgements on an ongoing basis. Management bases its estimates and
judgements on historical experience and other factors believed to
be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
Estimates and judgements that are considered important to the
portrayal of our financial condition including, where applicable,
quantification of the effects of reasonably possible ranges of such
estimates are set out in 'Critical Accounting Policies and Areas of
Significant Management Judgement' in Note 1 to the Consolidated
Financial Statements in the 2015 Annual Report.
The rest of this section contains a summary of the results, and
commentary thereon, by income statement line item for each
segment.
Basis of results presentation
The segmental information in this Half Yearly Financial Report
reflects the reporting structure in place at the reporting date in
accordance with which the segmental information in Note 2 to the
Condensed Consolidated Interim Financial Statements has been
presented. The Company's board of directors (the Board) is the
chief operating decision maker for Santander UK. The segmental
information below is presented on the basis used by the Board to
evaluate performance and allocate resources. The Board reviews
discrete financial information for each segment of the business
which follows our normal accounting policies and principles,
including measures of operating results, assets and
liabilities.
As described in Note 2 to the Condensed Consolidated Interim
Financial Statements, the internal UK transfer pricing mechanism
used to calculate the cost and risks associated with funding and
liquidity in each business segment was refined in the fourth
quarter of 2015 for Retail Banking and Corporate Centre to reflect
the current market environment and rates. The segmental analyses
for Retail Banking and Corporate Centre have been adjusted to
reflect these changes for prior periods.
PROFIT BEFORE TAX BY SEGMENT
Global
Retail Commercial Corporate Corporate
Half year to 30 June Banking Banking Banking Centre Total
2016 GBPm GBPm GBPm GBPm GBPm
-------------------------------- --------- ------------ ----------- ---------- --------
Net interest income 1,489 245 39 - 1,773
Non-interest income(1) 275 49 184 163 671
-------------------------------- --------- ------------ ----------- ---------- --------
Total operating income 1,764 294 223 163 2,444
-------------------------------- --------- ------------ ----------- ---------- --------
Operating expenses before
impairment losses, provisions
and charges (865) (170) (141) (29) (1,205)
-------------------------------- --------- ------------ ----------- ---------- --------
Impairment (losses)/releases
on loans and advances (30) (15) (21) 3 (63)
Provisions for other
liabilities and charges (76) (1) - (20) (97)
-------------------------------- --------- ------------ ----------- ---------- --------
Total operating impairment
losses, provisions and
charges (106) (16) (21) (17) (160)
-------------------------------- --------- ------------ ----------- ---------- --------
Profit before tax 793 108 61 117 1,079
-------------------------------- --------- ------------ ----------- ---------- --------
Half year to 30 June
2015
-------------------------------- --------- ------------ ----------- ---------- --------
Net interest income 1,497 221 39 26 1,783
Non-interest income(1) 264 58 165 13 500
-------------------------------- --------- ------------ ----------- ---------- --------
Total operating income 1,761 279 204 39 2,283
-------------------------------- --------- ------------ ----------- ---------- --------
Operating expenses before
impairment losses, provisions
and charges (890) (165) (145) - (1,200)
-------------------------------- --------- ------------ ----------- ---------- --------
Impairment (losses)/releases
on loans and advances (85) (20) 21 27 (57)
Provisions for other
liabilities and charges (95) (2) - - (97)
-------------------------------- --------- ------------ ----------- ---------- --------
Total operating impairment
losses, provisions and
(charges)/releases (180) (22) 21 27 (154)
-------------------------------- --------- ------------ ----------- ---------- --------
Profit before tax 691 92 80 66 929
-------------------------------- --------- ------------ ----------- ---------- --------
(1) Comprised of Net fee and commission income and Net trading
and other income.
RETAIL BANKING
Retail Banking offers a wide range of products and financial
services to individuals and small businesses (with less than two
directors, owners or partners), through a network of branches and
ATMs, as well as through telephony, digital, mobile and
intermediary channels. Retail Banking also includes Santander
Consumer Finance, predominantly a vehicle finance business. Its
main products are residential mortgage loans, savings and current
accounts, credit cards (excluding the co-branded cards business)
and personal loans as well as insurance policies.
Summarised income statement
Half year Half
to year
30 June to
2016 30 June
GBPm 2015
GBPm
----------------------------------------- ---------- ---------
Net interest income 1,489 1,497
Non-interest income 275 264
----------------------------------------- ---------- ---------
Total operating income 1,764 1,761
----------------------------------------- ---------- ---------
Operating expenses before impairment
losses, provisions and charges (865) (890)
----------------------------------------- ---------- ---------
Impairment losses on loans and advances (30) (85)
Provisions for other liabilities and
charges (76) (95)
----------------------------------------- ---------- ---------
Total operating impairment losses,
provisions and charges (106) (180)
----------------------------------------- ---------- ---------
Profit before tax 793 691
----------------------------------------- ---------- ---------
H116 compared to H115
Profit before tax increased by GBP102m to GBP793m in H116 (2015:
GBP691m). By income statement line, the movements were:
- Net interest income decreased 1%, driven by
reduced margins on mortgage stock, continued
SVR attrition and pressure on new lending margins
partially offset by higher asset volumes.
- Non-interest income increased 4%, with higher
1I2I3 Current Account fees offset by reduced
investment fees and lower credit card income
from interchange.
- Operating expenses before impairment losses,
provisions and charges fell slightly with network
efficiencies offset by continued investment
in the growth of the business, digital enhancements
and absorbing regulatory compliance costs.
- Impairment losses on loans and advances decreased
65%, mainly due to a GBP58m release in mortgages
driven by the growth in house prices and the
continued strong credit quality of the portfolio
with lower write-offs and charges.
- Provisions for other liabilities and charges
decreased 20%, mainly due to a lower FSCS charge.
Balances and ratios
30 June 2016 31 December
GBPbn 2015
GBPbn
---------------------------------- ------------- ------------
Total assets 172.6 171.9
Customer loans 165.5 164.8
- of which mortgages 153.4 152.8
- of which consumer finance 6.6 6.3
- of which other unsecured
lending 5.5 5.7
Risk-weighted assets 42.8 42.4
Customer deposits 141.1 137.3
- of which savings 66.4 70.3
- of which current accounts 61.0 53.2
- of which other retail products 13.7 13.8
NPL ratio(1) (2) 1.39% 1.44%
Coverage ratio(1) (3) 30% 32%
Mortgage NPL ratio(1)(4) 1.42% 1.47%
Mortgage coverage ratio(1)(5) 16% 19%
---------------------------------- ------------- ------------
(1) The balances include interest charged to the customer's
account, but exclude interest accrued but not yet charged to the
account.
(2) NPLs as a percentage of customer loans.
(3) Impairment loss allowance as a percentage of NPLs.
(4) Mortgage NPLs as a percentage of mortgage assets.
(5) Mortgage impairment loss allowance as a percentage of
mortgage NPLs.
30 June 2016 compared to 31 December 2015
- Mortgage net lending was GBP0.6bn, with the total stock balance up at GBP153.4bn. This was
driven by steady approval volumes and mortgage retention, with c.80% of maturing Santander
UK mortgages retained.
- Consumer finance balances increased 5%, driven by higher retail customer loans and car dealer
funding. Other unsecured lending balances, which include bank overdrafts, UPL, and credit
cards, decreased 4% in an increasingly competitive market.
- RWAs increased by 1% to GBP42.8bn at 30 June 2016 (2015: GBP42.4bn).
- Customer deposits increased GBP3.8bn as current account balances continued to grow strongly,
mainly through our 1I2I3 Current Account with a net inflow of GBP7.8bn in total current account
balances. This growth was offset by lower demand for savings products with balances reducing
GBP3.9bn.
Business volumes
Half year to Half
30 June 2016 year
GBPbn to
30 June
2015
GBPbn
-------------------------------- -------------- ---------
Mortgage gross lending 12.7 11.9
Mortgage net lending 0.6 0.6
Consumer finance gross lending 1.6 1.5
Consumer finance net lending 0.3 0.4
Other unsecured net lending (0.2) 0.5
-------------------------------- -------------- ---------
H116 compared to H115
- Mortgage gross lending was GBP12.7bn and we helped
12,000 first-time buyers (GBP2.0bn of gross lending)
purchase their new home. Interest-only mortgage
balances decreased GBP1.1bn to GBP54.0bn while
buy-to-let mortgage balances increased GBP1.1bn
to GBP6.1bn.
- Consumer finance gross lending was GBP1,634m
and net lending GBP266m, driven by growth in
retail loans and car dealer funding that benefitted
from the PSA cooperation.
- Other unsecured net lending balances, which include
bank overdrafts, UPL, and credit cards, decreased
due to lower new credit card sales in an increasingly
competitive environment.
Business development in H116
- 1I2I3 World customers increased to 4.9 million,
with 276,000 new customers in the period. Although
the fee changes to the 1I2I3 current account
took effect in Jan16, we continued to be a net
gainer in the current account switcher market
and customer deposit growth remained strong.
- Our digital transformation programme continues
to make it easier for customers to see, service
and open products via digital platforms. In Mar16,
we became the first UK bank to introduce voice
banking technology to our SmartBank mobile app.
We are also working with a number of Fintech
companies to identify innovative solutions. One
such example is our partnership with Kabbage,
who provide the technology platform for our Working
Capital Loans solution that gives UK SMEs access
to same day funding. In addition, we simplified
our customer processes to enhance the digital
customer experience, with a mobile feature that
makes it easier for customers to restore a forgotten
password or locked credentials.
- We continued to grow our digital customer base
in H116, gaining an average of 1,350 new active
mobile users every day and have more than 1 million
customers who only use our mobile app. In the
same period 42% of our mortgages were retained
online, 36% of total openings of current accounts
and 46% of credit cards were made through digital
channels. Additionally, 25% of Business Current
Accounts were opened via a digital channel in
the second quarter, which represents a 3.4% increase
on last quarter, following the successful launch
of a shorter and digitalised application form
for SMEs.
- We are growing our Wealth Management business,
building on existing foundations, and expanding
our digital proposition to further improve customer
loyalty. In Jun16 we launched the Investment
Hub, a new digital platform which enables customers
to service their investments online and gives
them access to over 1,700 funds from Santander
Asset Management and other leading fund managers.
The investment platform complements our Financial
Planning service that offers investment advice
to customers on a range of products via our branch
network.
COMMERCIAL BANKING
Commercial Banking offers a wide range of products and financial
services to customers through a network of regional Corporate
Business Centres (CBCs) and through telephony and digital channels.
The management of our customers is organised according to their
annual turnover (GBP250,000 to GBP50m for SMEs, and GBP50m to
GBP500m for mid corporates), enabling us to offer a differentiated
service to SMEs and mid corporate customers. Commercial Banking
products and services include loans, bank accounts, deposits,
treasury services, invoice discounting, cash transmission, trade
finance and asset finance. Commercial Banking also includes
specialist commercial real estate and Social Housing lending
businesses.
Summarised income statement
Half Half
year year
to to
30 June 30 June
2016 2015
GBPm GBPm
----------------------------------------------- --------- ---------
Net interest income 245 221
Non-interest income 49 58
----------------------------------------------- --------- ---------
Total operating income 294 279
----------------------------------------------- --------- ---------
Operating expenses before impairment
losses, provisions and charges (170) (165)
----------------------------------------------- --------- ---------
Impairment losses on loans and advances (15) (20)
Provisions for other liabilities and
charges (1) (2)
----------------------------------------------- --------- ---------
Total operating impairment losses, provisions
and charges (16) (22)
----------------------------------------------- --------- ---------
Profit before tax 108 92
----------------------------------------------- --------- ---------
H116 compared to H115
Profit before tax increased by GBP16m to GBP108m in H116 (2015:
GBP92m). By income statement line, the movements were:
- Net interest income increased 11%, resulting from
continued growth in customer lending and higher
deposits driven by the enhanced franchise and
broader range of services.
- Non-interest income decreased 16%, with lower
asset restructuring and rates management fees
partially offset by growth in international fees,
up 14%, and digital and payment fees, up 26%,
the latter two driven by more loyal customer relationships.
- Operating expenses before impairment losses, provisions
and charges rose 3%, reflecting the investment
in our expanded footprint and network of CBCs.
- Impairment losses on loans and advances decreased
to GBP15m. Overall, the loan book continues to
perform well and is supported by our prudent lending
policy.
- Provisions for other liabilities and charges decreased
to GBP1m.
Balances and ratios
30 June 2016 31 December
GBPbn 2015
GBPbn
-------------------------- ------------- ------------
Total assets 21.6 20.9
Customer loans 21.6 20.9
- of which SMEs 13.4 13.6
- of which mid corporate 8.2 7.3
Risk-weighted assets 21.3 20.9
Customer deposits 19.7 18.1
NPL ratio(1) (2) 2.93% 2.80%
Coverage ratio(1) (3) 40% 44%
-------------------------- ------------- ------------
(1) The balances include interest charged to the customer's
account, but exclude interest accrued but not yet charged to the
account.
(2) NPLs as a percentage of customer loans.
(3) Impairment loss allowance as a percentage of NPLs.
30 June 2016 compared to 31 December 2015
- Customer loans increased GBP0.7bn to GBP21.6bn,
despite an increasingly competitive environment,
macroeconomic uncertainty and the resulting slowdown
in activity relating to the UK referendum on EU
membership.
- RWAs increased in line with asset growth.
- We continue to attract deposit balances through
our strong customer relationships, supported by
a comprehensive product range and competitive
pricing.
Business volumes
Half
Half year year
to to
30 June 2016 30 June
2015
--------------------------------- --------------- ---------
New facilities (GBPbn) 4.6 4.5
Bank account openings (No.) 3,820 4,020
Online banking (Connect) active
users (No.) 26,100 22,910
--------------------------------- --------------- ---------
H116 compared to H115
- New facilities and bank account openings were
broadly stable, in a competitive environment with
increased macroeconomic uncertainty. Our Relationship
Managers (RMs) continue to build their portfolios,
extending new facilities and opening new bank
accounts, while leveraging our comprehensive suite
of products and services. We expect our RMs to
grow their portfolios and improve returns, following
the productivity curve achieved in our more mature
CBCs.
- There was a continuation in the pickup of our
corporate banking platform 'Connect', with active
users increasing 14% year on year.
Business development in H116
- Building on the expertise and presence of Banco
Santander, we offer clients international solutions
to develop and manage their business through our
global network. Target clients, of which c.70%
(1) engage in international trade, can use platforms
such as Connect, Trade Portal, Trade Club and
the Santander Passport service, to expand and
manage their business internationally. These clients
are less exposed to macroeconomic events, have
a lower rate of default and tend to have a single
banking relationship. By focusing on specific
sectors, we continue to develop expertise in meeting
our clients' needs and increase customer advocacy
- The Breakthrough programme gives our clients the
tools to develop and grow their business. In the
first half of the year, Breakthrough Talent supported
1,572 work placements and internships and Breakthrough
Growth Capital assisted 14 businesses in accessing
GBP51m of facilities. Since inception, the Growth
Capital team has completed 104 loans for 80 companies,
providing GBP305m of facilities, which will create
over 6,100 jobs. In addition, our Breakthrough
International programme organised trade and virtual
trade missions, and International Round Table
events for clients to speak with country experts.
- Our continued efforts and innovative offering
was recognised at the 2016 Business Moneyfacts
Awards, winning a number of prestigious awards
including: 'Business Bank of the Year' for the
second consecutive year and the 'Innovation in
the SME Finance Sector' to name a few. The industry
recognition is a testament to Santander UK's commitment
to become the bank of choice for UK companies
and shows the strength of our overall value proposition
for businesses, built on our relationship banking
approach.
(1) Source: Office for National Statistics. Proportion of
businesses trading internationally with annual turnover between
GBP10m to GBP500m.
GLOBAL CORPORATE BANKING
Global Corporate Banking services corporate clients and
financial institutions that, because of their size, complexity or
sophistication, require specially-tailored services or value-added
wholesale products. It offers risk management and other value-added
financial services to large corporates with a turnover above
GBP500m per annum, and financial institutions, as well as to the
rest of Santander UK's businesses. The main businesses areas
include: working capital management (trade and export finance and
cash management), financing (Debt Capital Markets, and corporate
and specialised lending) and risk management (foreign exchange,
rates and liability management).
Summarised income statement
Half Half
year year
to to
30 June 30
2016 June
GBPm 2015
GBPm
----------------------------------------------- --------- ------
Net interest income 39 39
Non-interest income 184 165
----------------------------------------------- --------- ------
Total operating income 223 204
----------------------------------------------- --------- ------
Operating expenses before impairment
losses, provisions and charges (141) (145)
----------------------------------------------- --------- ------
Impairment (losses)/releases on loans
and advances (21) 21
Total operating impairment (losses)/releases,
provisions and charges (21) 21
----------------------------------------------- --------- ------
Profit before tax 61 80
----------------------------------------------- --------- ------
H116 compared to H115
Profit before tax decreased by GBP19m to GBP61m in H116 (2015:
GBP80m). By income statement line, the movements were:
- Net interest income was unchanged at GBP39m, with
continued margin compression offset by ongoing
demand for project and acquisition finance, transactional
services and factoring products.
- Non-interest income increased 12% to GBP184m,
underpinned by ongoing demand for derivative and
cash sales activities.
- Operating expenses before impairment losses, provisions
and charges decreased 3% to GBP141m, mainly due
to the timing of projects as we continue to implement
our target operating model.
- Impairment losses on loans and advances increased
due to the impairment of a single loan that moved
to non-performance.
- There were no provisions for other liabilities
and charges in the period.
Balances and ratios
30 June 2016 31 December
GBPbn 2015
GBPbn
----------------------- ------------- ------------
Total assets 44.7 36.6
Customer loans 6.8 5.5
Other assets 37.9 31.1
Risk-weighted assets 17.1 15.4
Customer deposits 3.2 3.0
NPL ratio(1) (2) 0.78% 0.18%
Coverage ratio(1) (3) 104% 330%
----------------------- ------------- ------------
(1) The balances include interest charged to the customer's
account, but exclude interest accrued but not yet charged to the
account.
(2) NPLs as a percentage of customer loans.
(3) Impairment loss allowance as a percentage of NPLs. The
impairment loan loss allowance includes provisions against both
NPLs and other loans where a provision is required. As a result the
ratio can exceed 100%.
30 June 2016 compared to 31 December 2015
- Customer loans increased to GBP6.8bn, with two
sizeable client drawdowns, in addition to other
refinancing and origination activities relating
to project and acquisition finance and transactional
services.
- RWAs were significantly impacted by market volatility
which increased credit, counterparty and market
risk. RWAs attributable to customer loans equated
to GBP8.4bn (Dec15: GBP7.8bn), reflecting reductions
in undrawn facilities partially offset by new
lending.
- Customer deposits were broadly stable at GBP3.2bn.
Business development in H116
- We continue to develop our franchise by improving
client coverage and products. Our coverage teams
are now organised by industry sectors, to provide
sector and product expertise that also leverages
Banco Santander SA's international presence in
Latin America, Iberia and other geographies.
Our product mix is focused on core banking activities
that are low risk, with improved capabilities
in transaction banking and foreign exchange,
as well as enhanced debt advisory service.
- The investment in operations and technology will
improve client experience and meet regulatory
requirements. We anticipate further investment
in order to complete a service offering complementary
to the one we now have in place for smaller corporate
customers.
CORPORATE CENTRE
Corporate Centre predominantly consists of the non-core
corporate and treasury legacy portfolios. Corporate Centre is also
responsible for managing capital and funding, balance sheet
composition and structure, and strategic liquidity risk. The
non-core corporate and treasury legacy portfolios include aviation,
shipping, infrastructure, commercial mortgages, Social Housing
loans and structured credit assets, all of which are being run-down
and/or managed for value.
Summarised income statement
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
--------------------------------------------------------------------- -------------- ---------------
Net interest income - 26
Non-interest income 163 13
--------------------------------------------------------------------- -------------- ---------------
Total operating income 163 39
--------------------------------------------------------------------- -------------- ---------------
Operating expenses before impairment losses, provisions and charges (29) -
--------------------------------------------------------------------- -------------- ---------------
Impairment releases on loans and advances 3 27
Provisions for other liabilities and charges (20) -
Total operating impairment releases, provisions and charges (17) 27
--------------------------------------------------------------------- -------------- ---------------
Profit before tax 117 66
--------------------------------------------------------------------- -------------- ---------------
H116 compared to H115
Profit before tax increased by GBP51m to GBP117m in H116 (2015:
GBP66m). By income statement line, the movements were:
- Net interest income decreased, reflecting the repricing of funding of the commercial balance
sheet.
- Non-interest income benefitted from a GBP119m gain on the sale of our Visa Europe Ltd shareholding,
and mark-to-market movements on economic hedges.
- Operating expenses before impairment losses, provisions and charges represent GBP29m of regulatory
compliance and project costs relating to Banking Reform.
- Impairment losses on loans and advances saw a release of GBP3m, with lower releases from asset
disposals than in H115.
- Provisions for other liabilities include restructuring costs.
Balances and ratios
31 December
30 June 2016 2015
GBPbn GBPbn
--------------------------- ------------- ------------
Total assets 60.1 52.0
Customer loans (non-core) 7.1 7.4
- of which Social housing 6.0 6.2
Risk-weighted assets 7.2 7.1
Customer deposits 3.0 3.9
NPL ratio(1) (2) 1.56% 1.18%
Coverage ratio(1) (3) 95% 117%
--------------------------- ------------- ------------
(1) The balances include interest charged to the customer's
account, but exclude interest accrued but not yet charged to the
account.
(2) NPLs as a percentage of customer loans.
(3) Impairment loan loss allowance as a percentage of NPLs. The
impairment loan loss allowance includes provisions against both
NPLs and other loans where a provision is required. As a result the
ratio can exceed 100%.
30 June 2016 compared to 31 December 2015
- Non-core customer loans decreased in the period,
as we continue to implement our ongoing exit strategy
from individual loans and leases to run-down the
non-core corporate and legacy portfolios.
- RWAs remained broadly stable, with the impact
of higher market volatility on counterparty credit
partially offset by the reduction in non-core
customer loans and the Visa Europe Ltd shareholding
sale. RWAs attributable to non-core customer loans
amounted to GBP1.4bn (Dec15: GBP1.5bn).
- Customer deposits decreased GBP0.9bn, as we continue
to rebalance the deposit base tenor.
Balance sheet review
This Financial review describes our significant assets and
liabilities and our strategy and reasons for entering into such
transactions. In this section, references to UK and non-UK, in the
geographical analysis, refer to the location of the office where
the transaction is recorded.
SUMMARISED CONDENSED CONSOLIDATED BALANCE SHEET
30 June 31 December
2016 2015
GBPm GBPm
--------------------------------------- -------- ------------
Assets
Cash and balances at central banks 14,862 16,842
Trading assets 29,273 23,961
Derivative financial instruments 29,943 20,911
Financial assets designated at
fair value 2,534 2,398
Loans and advances to banks 4,470 3,548
Loans and advances to customers 200,555 198,045
Loans and receivables securities 204 52
Available for sale securities 9,836 9,012
Macro hedge of interest rate risk 1,386 781
Interest in other entities 54 48
Property, plant and equipment 1,503 1,597
Retirement benefit assets 377 556
Tax, intangibles and other assets 4,052 3,655
--------------------------------------- -------- ------------
Total assets 299,049 281,406
--------------------------------------- -------- ------------
Liabilities
Deposits by banks 7,744 8,278
Deposits by customers 169,830 164,074
Trading liabilities 14,674 12,722
Derivative financial instruments 27,765 21,508
Financial liabilities designated
at fair value 1,958 2,016
Debt securities in issue 51,544 49,615
Subordinated liabilities 4,214 3,885
Macro hedge of interest rate risk 482 110
Retirement benefit obligations 374 110
Tax, other liabilities and provisions 4,320 3,429
--------------------------------------- -------- ------------
Total liabilities 282,905 265,747
--------------------------------------- -------- ------------
Equity
Total shareholders' equity 15,998 15,524
Non-controlling interests 146 135
--------------------------------------- -------- ------------
Total equity 16,144 15,659
--------------------------------------- -------- ------------
Total liabilities and equity 299,049 281,406
--------------------------------------- -------- ------------
A more detailed consolidated balance sheet is contained in the
Condensed Consolidated Interim Financial Statements.
30 June 2016 compared to 31 December 2015
Assets
Cash and balances at central banks
Cash and balances held at central banks decreased by 12% to
GBP14,862m at 30 June 2016 (2015: GBP16,842m). The decrease was
mainly due to a reduction in balances at central banks reflecting
lower liquidity requirements.
Trading assets
Trading assets increased by 22% to GBP29,273m at 30 June 2016
(2015: GBP23,961m), reflecting changes in the mix of assets held
for liquidity purposes, with higher levels of securities purchased
under resale agreements and debt partially offset by decreased
holdings of equity securities.
Derivative financial instruments - assets
Derivative assets increased by 43% to GBP29,943m at 30 June 2016
(2015: GBP20,911m). The increase was mainly due to increases in the
fair value of interest rate and cross currency derivative assets
principally driven by movements in yield curves and foreign
exchange rates.
Financial assets designated at fair value
Financial assets designated at fair value through profit and
loss increased by 6% to GBP2,534m at 30 June 2016 (2015:
GBP2,398m), mainly driven by the increase in the valuation of
assets partially offset by maturities within the portfolio. In
accordance with our policy, new loans are no longer being
designated at fair value.
Loans and advances to banks
Loans and advances to banks increased 26% to GBP4,470m at 30
June 2016 (2015: GBP3,548m). The increase was mainly driven by an
increase in collateral and deposits held partially offset by
short-term positions with other entities.
Loans and advances to customers
Loans and advances to customers increased by 1% to GBP200,555m
at 30 June 2016 (2015: GBP198,045m) with net increases of GBP0.6bn
in residential mortgage balances and GBP2.0bn in corporate
lending.
Available for sale securities
Available for sale securities increased by 9% to GBP9,836m at 30
June 2016 (2015: GBP9,012m) mainly due to an increase in debt
securities as part of normal liquid asset portfolio management
activity.
Macro hedge of interest rate risk - assets
The macro hedge of interest rate risk increased by 77% to
GBP1,386m at 30 June 2016 (2015: GBP781m), mainly driven by general
movements in yield curves.
Property, plant and equipment
Property, plant and equipment decreased by 6% to GBP1,503m at 30
June 2016 (2015: GBP1,597m). The decrease was mainly driven by the
depreciation charge for the period.
Retirement benefit assets
Retirement benefit assets decreased by 32% to GBP377m at 30 June
2016 (2015: GBP556m). For those sections of the Santander (UK)
Group Pension Scheme which had surpluses, the key driver of the
decrease was actuarial losses caused by a fall in AA corporate bond
rates, which drive the discount rate, without a similar fall in
inflation. This was partially offset by strong asset
performance.
Tax, intangibles and other assets
Tax, intangibles and other assets increased by 11% to GBP4,052m
at 30 June 2016 (2015: GBP3,655m). The increase was primarily
driven by an increase in prepayments and trade and other
receivables relating to settlement of transactions.
Liabilities
Deposits by banks
Deposits by banks decreased by 6% to GBP7,744m at 30 June 2016
(2015: GBP8,278m) driven by a decrease in short term positions with
other entities and securities purchased under resale
agreements.
Deposits by customers
Deposits by customers increased by 4% to GBP169,830m at 30 June
2016 (2015: GBP164,074m) as we focused on retaining and originating
accounts held by more loyal customers and new issuances by
Santander UK Group Holdings plc downstreamed to Santander UK
plc.
Trading liabilities
Trading liabilities increased by 15% to GBP14,674m at 30 June
2016 (2015: GBP12,722m) as a result of an increase in short
positions and short-term deposits and collateral held partially
offset by a reduction in securities sold under resale agreements,
as part of normal trading activity.
Derivative financial instruments - liabilities
Derivative liabilities increased by 29% to GBP27,765m at 30 June
2016 (2015: GBP21,508m). The increase was mainly due to increases
in the fair value of interest rate and cross currency derivative
liabilities mainly driven by movements in yield curves and foreign
exchange rates.
Debt securities in issue
Debt securities in issue increased by 4% to GBP51,544m at 30
June 2016 (2015: GBP49,615m) driven by issuance of senior unsecured
debt, partially offset by certain long dated senior unsecured
instruments.
Macro hedge of interest rate risk - liabilities
Macro hedge of interest rate risk increased to GBP482m at 30
June 2016 (2015: GBP110m) driven by movements in yield curves.
Retirement benefit obligations
Retirement benefit obligations increased by 240% to GBP374m at
30 June 2016 (2015: GBP110m). For those sections of the Santander
(UK) Group Pension Scheme which had deficits, the key driver of the
decrease was actuarial losses caused by a fall in AA corporate bond
rates, which drive the discount rate, without a similar fall in
inflation. This was partially offset by strong asset
performance.
Tax, other liabilities and provisions
Tax, other liabilities and provisions increased by 26% to
GBP4,320m at 30 June 2016 (2015: GBP3,429m). The increase mainly
reflected the increase in dividends payable, increase in current
tax liabilities attributable to the banking corporation tax
surcharge and unsettled financial transactions, partially offset by
provisions utilised in the period.
Equity
Total shareholders' equity
Total shareholders' equity increased by 3% to GBP15,998m at 30
June 2016 (2015: GBP15,524m). The increase was mainly due to the
profit for the period and the valuation of cash flow hedges,
partially offset by actuarial losses on the defined benefit pension
fund and dividends approved.
Non-controlling interests
Non-controlling interests increased by 8% to GBP146m at 30 June
2016 (2015: GBP135m) due to increased profits in PSA Finance UK
Limited.
SHORT-TERM BORROWINGS
We include short-term borrowings in deposits by banks, trading
liabilities, financial liabilities designated at fair value and
debt securities in issue. We do not show short-term borrowings
separately on our balance sheet. Short-term borrowings are amounts
payable for short-term obligations that are US Federal funds
purchased and securities sold under repurchase agreements,
commercial paper, borrowings from banks, borrowings from factors or
other financial institutions and any other short-term borrowings
reflected on the balance sheet. The table below shows short-term
borrowings for 30 June 2016 and 30 June 2015.
30 June 2016 30 June
GBPm 2015
GBPm
--------------------------------------------- ------------ -------
Securities sold under repurchase agreements
- Period-end balance 9,356 11,030
- Period-end interest rate 0.62% 0.50%
- Average balance(1) 14,346 17,230
- Average interest rate(1) 0.52% 0.42%
- Maximum balance(1) 19,052 23,677
--------------------------------------------- ------------ -------
Commercial paper
- Period-end balance 2,506 3,901
- Period-end interest rate 0.76% 0.32%
- Average balance(1) 3,276 3,973
- Average interest rate(1) 0.86% 0.31%
- Maximum balance(1) 3,858 5,066
--------------------------------------------- ------------ -------
Borrowings from banks (Deposits by banks)(2)
- Period-end balance 3,359 2,642
- Period-end interest rate 0.15% 0.05%
- Average balance(1) 3,401 3,021
- Average interest rate(1) 0.14% 0.16%
- Maximum balance(1) 4,861 3,905
--------------------------------------------- ------------ -------
Negotiable certificates of deposit
- Period-end balance 2,841 4,204
- Period-end interest rate 0.55% 0.44%
- Average balance(1) 3,245 4,310
- Average interest rate(1) 0.48% 0.39%
- Maximum balance(1) 4,646 4,431
--------------------------------------------- ------------ -------
Other debt securities in issue
- Period-end balance 7,900 2,212
- Period-end interest rate 1.64% 2.86%
- Average balance(1) 7,794 3,921
- Average interest rate(1) 1.92% 2.94%
- Maximum balance(1) 8,267 4,717
--------------------------------------------- ------------ -------
(1) Calculated using monthly weighted average data.
(2) The period-end deposits by banks balance includes
non-interest bearing items in the course of transmission of GBP297m
(30 June 2015: GBP357m).
AVERAGE BALANCE SHEET
Period-end balances may not reflect activity throughout the
period, so we present average balance sheets below. They show
averages for our significant categories of assets and liabilities,
and the related interest income and expense.
Half year Half year
to 30 June to 30 June
2016 2015
------------ ------------------------ ------------ --------------------------
Average Interest(4,5) Average Average Average
Balance(1) GBPm rate balance(1) Interest(4,5) rate
GBPm % GBPm GBPm %
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Assets
Loans and advances
to banks:
- UK 21,188 52 0.49 21,762 58 0.53
- Non-UK 6,677 15 0.45 7,028 8 0.23
Loans and advances
to customers:(3)
- UK 200,514 3,173 3.16 193,878 3,261 3.36
- Non-UK 357 2 1.12 25 - -
Debt securities:
- UK 9,453 59 1.25 9,239 44 0.95
Total average interest-earning
assets, interest
income(2) 238,189 3,301 2.77 231,932 3,371 2.91
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Impairment loss allowances (1,116) - - (1,394) - -
Trading assets 20,185 - - 21,369 - -
Assets designated
at FVTPL 2,485 - - 2,846 - -
Derivatives and other
non-interest-earning
assets 35,106 - - 33,411 - -
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Total average assets 294,849 - - 288,164 - -
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Non-UK assets as
a % of total 2.39% - - 2.45% - -
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Liabilities
Deposits by banks:
- UK (6,674) (33) 0.99 (7,217) (39) 1.08
- Non-UK (308) (1) 0.65 (17) - -
Deposits by customers
- demand(6) :
- UK (128,346) (721) 1.12 (113,078) (634) 1.12
- Non-UK - - - (2,025) (6) 0.59
Deposits by customers
- time(6) :
- UK (31,321) (225) 1.44 (32,920) (266) 1.62
- Non-UK - - - (1,049) (9) 1.72
Deposits by customers
- other(6) :
- UK (7,601) (53) 1.39 (5,781) (30) 1.04
- Non-UK (139) (3) 4.32 (665) (1) 0.30
Debt securities:
- UK (46,809) (402) 1.72 (47,164) (468) 1.98
- Non-UK (3,844) (17) 0.88 (5,097) (8) 0.31
Subordinated liabilities:
- UK (4,032) (71) 3.52 (3,924) (120) 6.12
Other interest-bearing
liabilities:
- UK (203) (2) 1.97 (390) (7) 3.59
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Total average interest-bearing
liabilities, interest
expense(2) (229,277) (1,528) 1.33 (219,327) (1,588) 1.45
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Trading liabilities (17,251) - - (21,485) - -
Liabilities designated
at FVTPL (2,010) - - (2,614) - -
Derivatives and other
non-interest bearing
liabilities (30,126) - - (30,214) - -
Equity (16,185) - - (14,524) - -
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Total average liabilities
and equity (294,849) - - (288,164) - -
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
Non-UK liabilities
as a % of total(6) 1.46% - - 3.07% - -
-------------------------------- ------------ -------------- -------- ------------ ---------------- --------
(1) Average balances are based on monthly data.
(2) The ratio of average interest-earning assets to
interest-bearing liabilities for H116 was 103.89% (H115:
105.75%).
(3) Loans and advances to customers include non-performing
loans. See the 'Credit risk' section of the Risk review.
(4) The net interest margin for H116 was 1.50% (H115: 1.55%).
Net interest margin is calculated as net interest income divided by
average interest earning assets. This differs from the Banking Net
Interest Margin, discussed in the CFO's review, which is calculated
as net interest income divided by average customer loans.
(5) The interest spread for H116 was 1.44% (H115: 1.46%).
Interest spread is the difference between the rate of interest
earned on average interest-earning assets and the rate of interest
paid on average interest-bearing liabilities.
(6) In the second half of 2015, the presentation of the deposits
by customer categories was changed to align with internal
management reporting. The data has been adjusted to reflect these
changes for prior periods
Cash flows
Half Half
year year
to to
30 June 30 June
2016 2015
GBPm GBPm
--------------------------------- --------- ---------
Net cash inflow/(outflow) from
operating activities 1,811 (4,647)
Net cash outflow from investing
activities (114) (519)
Net cash outflow from financing
activities (688) (2,568)
---------
Increase/(decrease) in cash and
cash equivalents 1,009 (7,734)
--------------------------------- --------- ---------
The major activities and transactions that affected Santander
UK's cash flows during H116 were as follows:
The net cash inflow from operating activities of GBP1,811m
resulted from the increase in customer savings and deposits from
other banks, positive movements in foreign exchange and the
downstreamed funding from Santander UK Group Holdings plc. The net
cash outflow from investing activities of GBP114m principally
reflected the purchase and sale of available-for-sale securities
and purchase of property, plant and equipment and intangible
assets. The net cash outflow from financing activities of GBP688m
principally reflected the repayment of debt securities maturing in
the period of GBP5,082m and the payment of dividends on ordinary
shares and other equity instruments of GBP175m offset by new issues
of debt securities of GBP4,585m. Cash and cash equivalents
increased by GBP1,009m principally from the increase in debt
securities in issue, customer deposits and lower repayment of debt
securities and customer lending.
During H115, the net cash outflow from operating activities of
GBP4,647m resulted from the reduction in trading balances,
increased customer lending partially offset by increased customer
savings and deposits from other banks. The net cash outflow from
investing activities of GBP519m principally reflected the purchase
and sale of available-for-sale securities and acquisition of PSA
Finance UK Limited. The net cash outflow from financing activities
of GBP2,568m reflected the repayment of debt securities maturing in
the period of GBP10,472m offset by new issues of debt securities of
GBP7,599m and the issuance of GBP750m Perpetual Capital Securities.
Further outflows of cash occurred in the payment of interim
dividends of GBP261m on ordinary shares, GBP23m of dividends on
other equity instruments, dividends of GBP32m on the GBP500m
Perpetual Capital Securities and dividends of GBP13m on the GBP300m
Perpetual Capital Securities. Cash and cash equivalents decreased
by GBP7,734m principally from the increase in customer lending and
purchase of available-for-sale securities.
Risk review
19 Top and emerging risks
----------------------------------
20 Risk governance
----------------------------------
21 Credit risk
----------------------------------
21 Santander UK group level
==================================
24 Retail Banking
==================================
31 Commercial Banking
==================================
36 Global Corporate Banking
==================================
39 Corporate Centre
==================================
43 Market risk
----------------------------------
45 Liquidity risk
----------------------------------
51 Capital risk
----------------------------------
53 Pension risk
----------------------------------
54 Other key risks and areas of focus
----------------------------------
Top risks
All our activities involve identifying, assessing, managing and
reporting risks. 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.
Our top risks and their causes are outlined below, as well as
how they link to our 2016-2018 strategic priorities. We also
explain the key developments in H116.
For risk definitions, see 'How we define risk' on page 44 of the
2015 Annual Report.
Risk and indicator Developments in H116
=================== ======================================================
Credit Our NPL ratio was steady at 1.54% at 30
NPL ratio June 2016 (2015: 1.54%) with all loan books
(%) continuing to perform well, supported by
30 June 2016: prudent lending criteria. Our Retail Banking
1.54 portfolio had lower NPL and coverage ratios,
31 December driven by impairment releases in mortgages
2015: 1.54 due to the continued rise in house prices
and improving quality of the portfolio.
The NPL ratio for total lending to corporates
increased to 2.41% at 30 June 2016 (2015:
2.26%) with a moderate increase in NPLs
from two loans partly offset by asset growth.
Total operating impairment losses, provisions
and charges were 4% or GBP6m higher in
the period compared to H115. The increase
was largely due to a single loan in Global
Corporate Banking which moved into non-performance,
partially offset by a release of GBP58m
in mortgage provisions.
=================== ======================================================
Market (Banking Our NIM sensitivity to -50bps decreased
market) to GBP(40)m (2015: GBP39m). The movement
NIM Sensitivity in H116 was largely due to further margin
-50 bps (GBPm) compression as a result of lower levels
30 June 2016: of the yield curve and changes in the underlying
(40) management assumptions we used for risk
31 December measurement purposes. We updated our assumptions
2015: 39 to better reflect the continued low rate
environment. This was partially offset
by an increased volume of net fixed rate
assets left unhedged.
We are also taking actions to be prepared
for the possibility of negative interest
rates in the UK, including a review of
our systems and models, and to ensure we
manage any potential impact on our customers.
=================== ======================================================
Liquidity Our LCR improved to 133% at 30 June 2016
LCR (%) (2015: 120%). Our LCR eligible liquidity
30 June 2016: pool increased GBP3.6bn to GBP42.3bn at
133 30 June 2016 (2015: GBP38.7bn), reflecting
31 December prudent liquidity planning, and an increase
2015: 120 in the collateral received for derivatives,
which are used to hedge our foreign currency
medium-term funding issuance. Wholesale
funding with a residual maturity of less
than one year was slightly lower at GBP20.5bn
(2015: GBP21.1bn).
Our LCR eligible liquidity pool significantly
exceeded wholesale funding of less than
one year, with a 206% coverage ratio (2015:
183%).
=================== ======================================================
Capital The decline in our CET 1 capital ratio
CET 1 capital to 11.2% at 30 June 2016 (2015: 11.6%)
ratio (%) and the PRA end-point Tier 1 leverage ratio
30 June 2016: to 3.9% at 30 June 2016 (2015: 4.0%) reflected
11.2 market-driven accounting impacts in Q216
31 December on defined benefit pension schemes, offsetting
2015: 11.6 retained profits after distributions. There
was also an adverse impact on the available-for-sale
portfolio, prudent valuation adjustments
and RWA levels for credit, counterparty
and market risk including those in the
last week of June.
Our total capital ratio decreased to 17.9%
at 30 June 2016 (2015: 18.2%), due to the
lower CET 1 capital ratio and the transitional
impact of the Capital Requirements Directive
(CRD) IV Minority Interest and grandfathering
rules.
=================== ======================================================
Pension The accounting surplus of the Santander
Funded defined (UK) Group Pension Scheme and other funded
benefit pension arrangements decreased to GBP39m at 30
scheme surplus June 2016 (2015: GBP483m). This was due
(GBPm) to an increase in liabilities caused by
30 June 2016: a fall in AA corporate bond rates, without
39 a similar fall in inflation. This was partially
31 December offset by strong asset performance. In
2015: 483 addition, there were unfunded defined benefit
scheme liabilities of GBP36m at 30 June
2016 (2015: GBP37m).
In H116, the pension Value at Risk (VaR)
(1 year, 95% confidence interval) increased
to GBP1,540m (2015: GBP1,260m) due to significant
falls in long-term interest rates and increased
market volatility, partially offset by
higher interest rate hedging levels in
the Scheme of 58%, up from 50% in 2015.
=================== ======================================================
Operational We continued to improve our systems, processes,
Operational controls and staff training to reduce cyber
risk losses risk and enhance our data security. This
(GBPm) included adding the key findings from the
H116: 52 Bank of England-led programme to improve
H115: 46 and test resilience to cyber attacks in
the financial industry into our cyber security
IT systems plan for 2016. We also continued
to invest in delivering our Operational
Risk Transformation Programme, which will
help us to achieve market best practice
in operational risk management.
In H116, the majority of operational risk
losses were in the 'execution, delivery
and process management' category. This
was mainly due to remediation costs for
historic systems functionality and process
issues.
In addition we continued to improve our
controls, culture and awareness as part
of our Financial Crime Transformation Programme
and our financial crime agenda.
=================== ======================================================
Conduct Our Conduct Risk Strategy Programme has
Remaining delivered improvements across all business
provision areas since it was set up in 2013. In H116,
(GBPm) we continued to enhance the way we report
30 June 2016: and monitor conduct risk. We also improved
532 how we assess conduct risk in our business
31 December decisions.
2015: 637 Our provision for PPI redress and related
costs was GBP404m at 30 June 2016 (2015:
GBP465m). Monthly utilisation, excluding
pro-active customer contact, during the
period was in line with the 2015 average.
Other conduct provisions were GBP128m at
30 June 2016 (2015: GBP172m), relating
mainly to wealth and investment products.
For more, see Note 21 to the Condensed
Consolidated Interim Financial Statements.
=================== ======================================================
Emerging and future risks
An emerging and future 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.
For more on emerging and future risks, see the 2015 Annual
Report.
The UK's referendum on EU membership
Our financial performance is strongly linked to the health of
the UK economy. We are particularly affected by factors that impact
the profitability of our larger credit portfolios, including in our
residential mortgage and commercial real estate portfolios. The
decision to leave the EU has led to further economic uncertainty
and financial market volatility. In the near-term, this could
result in lower consumer confidence that would be negative for
continued economic growth. In addition, the lower value of GBP
sterling, when combined with the pickup in oil prices, is likely to
lead to higher inflation. In a period of significant macroeconomic
uncertainty with a wide range of possible economic outcomes, some
economic downside risks are likely to be mitigated by monetary
policy actions by the Bank of England and the capital and liquidity
strength of the banking sector.
Although the result does not entail any immediate changes to our
current operations and structure, economic uncertainty could
adversely affect our business. Whilst the terms and timing of the
UK's exit from the EU are yet to be confirmed, it is not possible
to determine with any accuracy the full impact that this might
have. In addition, it remains unclear whether, following exit from
the EU, it will be possible for us (and other UK banks) to continue
to provide financial services on a cross-border basis within other
EU member states.
The risks associated with the outcome of the referendum have
been considered by our Board, together with the action plans needed
to ensure the impact on our business is appropriately managed.
Risk governance
As a financial services provider, managing risk is a core part
of our day-to-day activities. To be able to manage our business
effectively, it is critical that we understand and control risk in
everything we do. We aim to use a prudent approach and advanced
risk management techniques to help us deliver robust financial
performance and build sustainable value for our stakeholders.
We aim to keep a predictable medium-low risk profile, consistent
with our business model, and within the limits set out in our Risk
Appetite. This is key to achieving our strategic objectives.
30 June 2016 compared to 31 December 2015
In H116, we continued to make good progress with our risk
culture program, I AM Risk, to continue to embed personal
accountability for managing risk across the business. For all new
and existing employees, we enhanced our mandatory risk training and
we ensured that the updated performance management risk objectives
were used across the business. In a recent survey, 99% of employees
acknowledged their personal responsibility for risk management,
helping to show how we are successfully embedding risk management
in our culture.
Credit risk
Credit risk management
In H116, there were no significant changes in the way we manage
credit risk as described in the 2015 Annual Report, except as set
out below.
Credit risk review
We analyse below our maximum and net exposures to credit risk,
and we also summarise our forbearance activities and credit
performance.
Key metric
The NPL ratio of 1.54% remained steady, with all loan books
continuing to perform well, supported by prudent lending
criteria.
sANTANDER UK GROUP LEVEL - Credit risk review
Our maximum and net exposure to credit risk
The tables below show the main differences between our maximum
and net exposure to credit risk. They show the effects of
collateral, netting, and risk transfer to mitigate our exposure.
The tables only show the financial assets that credit risk
affects.
Maximum exposure Collateral
=================== ========================================= ==================== ========== =========== ========
Balance sheet
asset
=================== ============================ =========== ======= =========== ========== =========== ========
Gross Impairment Net Off-balance Cash(1) Non-cash(1) Netting(2) Risk Net
amounts loss amounts sheet GBPbn GBPbn GBPbn transfer(3) exposure
GBPbn allowances GBPbn GBPbn GBPbn GBPbn
GBPbn
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
30 June 2016
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
Cash and balances
at central banks 14.9 - 14.9 - - - - - 14.9
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Trading assets:
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Loans and
advances
to banks 7.5 - 7.5 - - - (2.0) - 5.5
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Loans and
advances
to customers 9.5 - 9.5 - - (6.9) - - 2.6
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Debt securities 6.5 - 6.5 - - - - - 6.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total trading
assets 23.5 - 23.5 - - (6.9) (2.0) - 14.6
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Derivative
financial
instruments 29.9 - 29.9 - (2.8) - (24.0) - 3.1
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Financial assets
designated at
fair value:
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Loans and
advances
to customers 2.0 - 2.0 0.3 - (2.3) - - -
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Debt securities 0.5 - 0.5 - - - - - 0.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total financial
assets designated
at fair value 2.5 - 2.5 0.3 - (2.3) - - 0.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Loans and advances
to banks 4.5 - 4.5 1.5 - (0.8) (0.5) - 4.7
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Loans and advances
to customers:(4)
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Advances secured
on residential
property 154.0 (0.3) 153.7 12.5 - (165.8)(5) - - 0.4
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Corporate loans 33.2 (0.4) 32.8 16.6 - (23.1) - - 26.3
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Finance leases 6.7 (0.1) 6.6 0.4 (0.1) (5.6) - - 1.3
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Other unsecured
advances 6.3 (0.3) 6.0 11.6 - - - - 17.6
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Amounts due
from fellow
subsidiaries,
associates and
joint ventures 1.5 - 1.5 - - - - - 1.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total loans and
advances to
customers 201.7 (1.1) 200.6 41.1 (0.1) (194.5) - - 47.1
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Loans and
receivables
securities(4) 0.2 - 0.2 - - - - - 0.2
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Available-for-sale
debt securities 9.8 - 9.8 - - - - - 9.8
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total 287.0 (1.1) 285.9 42.9 (2.9) (204.5) (26.5) - 94.9
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
(1) The forms of collateral we take to reduce credit risk
include: residential and commercial property; other physical
assets, including motor vehicles; liquid securities, including
those transferred under reverse repurchase agreements; cash,
including cash used as collateral for derivative transactions; and
receivables. Charges on residential property are most of the
collateral we take.
(2) We can reduce credit risk exposures by applying netting and
set-off. We do this mainly for derivative and repurchase
transactions with financial institutions. For derivatives, we use
standard master netting agreements. They allow us to set off our
credit risk exposure to a counterparty from a derivative against
our obligations to the counterparty in the event of default. This
gives us a lower net credit exposure. They may also reduce
settlement exposure. For more on this, see 'Credit risk mitigation'
in the 'Global Corporate Banking - credit risk management' section
in the 2015 Annual Report.
(3) Certain financial instruments can be used to transfer credit
risk from us to another counterparty. The main form of risk
transfer we use is credit default swaps, mainly transacted with
other banks.
(4) Balances include interest we have charged to the customer's
account and accrued interest that we have not charged to their
account yet.
(5) The collateral value we have shown is limited to the balance
of each associated individual loan. It does not include the impact
of overcollateralisation (where the collateral has a higher value
than the loan balance) and includes collateral we would receive on
draw down of certain off-balance sheet commitments.
Maximum exposure Collateral
=================== ========================================= ==================== ========== =========== ========
Balance sheet
asset
=================== ============================ =========== ======= =========== ========== =========== ========
Gross Impairment Net Off-balance Cash(1) Non-cash(1) Netting(2) Risk Net
amounts loss amounts sheet GBPbn GBPbn GBPbn transfer(3) exposure
GBPbn allowances GBPbn GBPbn GBPbn GBPbn
GBPbn
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
31 December 2015
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
Cash and balances
at central banks 16.8 - 16.8 - - - - - 16.8
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Trading assets:
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Loans and
advances
to banks 5.4 - 5.4 - - - (0.4) - 5.0
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Loans and
advances
to customers 6.0 - 6.0 - - (5.0) - - 1.0
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Debt securities 5.5 - 5.5 - - - - - 5.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total trading
assets 16.9 - 16.9 - - (5.0) (0.4) - 11.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Derivative
financial
instruments 20.9 - 20.9 - (1.1) - (17.3) - 2.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Financial assets
designated at
fair value:
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Loans and
advances
to customers 1.9 - 1.9 0.3 - (2.2) - - -
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Debt securities 0.5 - 0.5 - - - - - 0.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total financial
assets designated
at fair value 2.4 - 2.4 0.3 - (2.2) - - 0.5
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Loans and advances
to banks 3.5 - 3.5 1.3 - (0.8) (0.3) - 3.7
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Loans and advances
to customers:(4)
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Advances secured
on residential
property 153.3 (0.4) 152.9 6.7 - (159.2)(5) - - 0.4
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Corporate loans 31.9 (0.4) 31.5 16.4 (0.1) (23.0) - - 24.8
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Finance leases 6.3 (0.1) 6.2 0.6 (0.1) (5.3) - - 1.4
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Other unsecured
advances 6.3 (0.3) 6.0 12.0 - - - - 18.0
------------------- ------- ---------- ------- ----------- ------- ----------- ---------- ----------- --------
- Amounts due
from fellow
subsidiaries,
associates and
joint ventures 1.4 - 1.4 - - - - - 1.4
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total loans and
advances to
customers 199.2 (1.2) 198.0 35.7 (0.2) (187.5) - - 46.0
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Loans and
receivables
securities(4) 0.1 - 0.1 - - - - - 0.1
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Available-for-sale
debt securities 8.9 - 8.9 - - - - - 8.9
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
Total 268.7 (1.2) 267.5 37.3 (1.3) (195.5) (18.0) - 90.0
=================== ======= ========== ======= =========== ======= =========== ========== =========== ========
(1) The forms of collateral we take to reduce credit risk
include: residential and commercial property; other physical
assets, including motor vehicles; liquid securities, including
those transferred under reverse repurchase agreements; cash,
including cash used as collateral for derivative transactions; and
receivables. Charges on residential property are most of the
collateral we take.
(2) We can reduce credit risk exposures by applying netting and
set-off. We do this mainly for derivative and repurchase
transactions with financial institutions. For derivatives, we use
standard master netting agreements. They allow us to set off our
credit risk exposure to a counterparty from a derivative against
our obligations to the counterparty in the event of default. This
gives us a lower net credit exposure. They may also reduce
settlement exposure. For more on this, see 'Credit risk mitigation'
in the 'Global Corporate Banking - credit risk management' section
in the 2015 Annual Report.
(3) Certain financial instruments can be used to transfer credit
risk from us to another counterparty. The main form of risk
transfer we use is credit default swaps, mainly transacted with
other banks.
(4) Balances include interest we have charged to the customer's
account and accrued interest that we have not charged to their
account yet.
(5) The collateral value we have shown is limited to the balance
of each associated individual loan. It does not include the impact
of overcollateralisation (where the collateral has a higher value
than the loan balance) and includes collateral we would receive on
draw down of certain off-balance sheet commitments.
Forbearance summary
The following table shows customer loans that are subject to
forbearance. For more on forbearance on mortgages in Retail
Banking, as well as forbearance in Commercial Banking, Global
Corporate Banking, and Corporate Centre, see the sections that
follow.
30 June 2016 31 December 2015
============================= ===================== =====================
Customer Forbearance Customer Forbearance
loans GBPm loans GBPm
GBPbn GBPbn
============================= ======== =========== ======== ===========
Retail Banking: 165.5 1,921 164.8 3,708
----------------------------- -------- ----------- -------- -----------
- Residential mortgages 153.4 1,850 152.8 3,668
----------------------------- -------- ----------- -------- -----------
- Consumer finance and other
unsecured lending 12.1 71 12.0 40
----------------------------- -------- ----------- -------- -----------
Commercial Banking 21.6 605 20.9 705
----------------------------- -------- ----------- -------- -----------
Global Corporate Banking 6.8 19 5.5 10
----------------------------- -------- ----------- -------- -----------
Corporate Centre 7.1 82 7.4 120
============================= ======== =========== ======== ===========
201.0 2,627 198.6 4,543
============================= ======== =========== ======== ===========
30 June 2016 compared to 31 December 2015 - Forbearance exit
criteria
In H116, we changed our policy on forbearance so that customer
loans that meet exit criteria will no longer be reported as
forborne. In the past, we reported loans as forborne until they
were fully repaid or written off. In order to exit from forbearance
a loan must now:
Have been forborne at least two years ago or, where the
forbearance was temporary, it must have returned to performing
under normal contractual terms for at least two years,
Have been performing under the forborne terms for at least two
years, and
Not be more than 30 days in arrears.
Applying these exit criteria to our customer loans at 31
December 2015, the loans reported as forborne in the table above
would reduce from GBP4,543m to GBP2,719m.
Credit performance
The customer loans in the tables below and in the remainder of
the 'Credit risk' section are presented differently from the 'Loans
and advances to customers' balance in the Condensed Consolidated
Balance Sheet. The main differences are that the customer loans
below are presented on an amortised cost basis and include loans
classified as 'Trading assets', 'Financial assets designated at
fair value' and 'Loans and advances to customers' in the Condensed
Consolidated Balance Sheet. In addition, the balances below exclude
interest we have accrued but not charged to customers' accounts
yet.
Customer NPLs(1)(2) NPL ratio(3) NPL coverage(4) Gross write-offs(5) Impairment
loans loss
GBPbn GBPm % % GBPm allowances
GBPm
======================== ======== ========== ============ =============== =================== ===========
30 June 2016
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
Retail Banking: 165.5 2,295 1.39 30 98 696
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Residential mortgages 153.4 2,174 1.42 16 18 354
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Consumer finance
and other unsecured
lending 12.1 121 1.00 283 80 342
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
Lending to corporates: 28.4 685 2.41 45 15 309
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Commercial Banking 21.6 632 2.93 40 15 254
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Global Corporate
Banking 6.8 53 0.78 104 - 55
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
Corporate Centre 7.1 111 1.56 95 5 106
======================== ======== ========== ============ =============== =================== ===========
201.0 3,091 1.54 36 118 1,111
======================== ======== ========== ============ =============== =================== ===========
31 December 2015
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
Retail Banking: 164.8 2,373 1.44 32 212 762
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Residential mortgages 152.8 2,252 1.47 19 40 424
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Consumer finance
and other unsecured
lending 12.0 121 1.01 279 172 338
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
Lending to corporates: 26.4 596 2.26 49 111 293
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Commercial Banking 20.9 586 2.80 44 83 260
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
- Global Corporate
Banking 5.5 10 0.18 330 28 33
------------------------ -------- ---------- ------------ --------------- ------------------- -----------
Corporate Centre 7.4 87 1.18 117 45 102
======================== ======== ========== ============ =============== =================== ===========
198.6 3,056 1.54 38 368 1,157
======================== ======== ========== ============ =============== =================== ===========
(1) We define NPLs in the 'Credit risk management' section in
the 2015 Annual Report.
(2) All NPLs are in the UK and continue accruing interest.
(3) NPLs as a percentage of customer loans.
(4) Impairment loss allowances as a percentage of NPLs.
Impairment loss allowances relate to early arrears and performing
assets (i.e. the IBNO provision) as well as NPLs, so the ratio can
exceed 100%.
(5) 30 June 2016 reflects 6 months of gross write-offs and 31
December 2015 reflects 12 months of gross write-offs.
30 June 2016 compared to 31 December 2015
The NPL ratio remained steady at 1.54% (2015: 1.54%), with all
loan books performing well, supported by prudent lending
criteria.
The Retail Banking portfolio had a lower NPL ratio and coverage
ratio, driven by impairment releases in mortgages due to the
continued rise in house prices and improving quality of the
portfolio.
The NPL ratio for total lending to corporates increased to 2.41%
(2015: 2.26%), with a moderate increase in NPLs from two loans,
partially offset by asset growth. In Commercial Banking, a loan of
GBP50m moved to non-performance, but with high quality collateral
held against it. In Global Corporate Banking, a loan of GBP43m
moved to non-performance.
For more on the credit performance of our key portfolios by
business segment, see the 'Retail Banking - credit risk review',
'Commercial Banking - credit risk review', 'Global Corporate
Banking - credit risk review', and 'Corporate Centre - credit risk
review' sections.
Commercial Real Estate
Customer NPLs(1)(2) NPL ratio(3) NPL coverage(4) Gross write-offs(5) Impairment
loans loss
GBPbn GBPm % % GBPm allowances
GBPm
======== ========== ============ =============== =================== ===========
30 June 2016 9.4 191 2.03 33 163
------------- --- --- ----
31 December 2015 9.2 168 1.83 43 13 72
================= === === ====
(1) We define NPLs in the 'Credit risk management' section in
the 2015 Annual Report.
(2) All NPLs are in the UK and continue accruing interest.
(3) NPLs as a percentage of customer loans.
(4) Impairment loss allowances as a percentage of NPLs.
Impairment loss allowances relate to early arrears and performing
assets (i.e. the IBNO provision) as well as NPLs, so the ratio can
exceed 100%.
(5) 30 June 2016 reflects 6 months of gross write-offs and 31
December 2015 reflects 12 months of gross write-offs.
The Commercial Real Estate portfolio of GBP9.4bn represents 33%
of our lending to corporates and 5% of total customer loans.
Despite an increase in NPLs in H116, the portfolio remains well
covered with an NPL coverage ratio of 33% and low write-offs of
GBP1m.
For more on the credit performance of our Commercial Real Estate
portfolio, see the 'Commercial Banking - credit risk review'
section.
retail banking - credit risk review
Residential mortgages
We offer mortgages to people who want to buy a house, and offer
additional borrowing (known as further advances) to existing
mortgage customers. The property must be in the UK (except for a
small amount of lending in the Isle of Man).
Lending
We analyse movements in H116 in the table below. In this
table:
Gross lending includes new business, further advances and any
flexible mortgage drawdown against available limits
Redemptions and paydowns refer to customer payments,
over-payments, clearing mortgage balances or re-financing away from
us
The data does not include accrued interest and we have presented
it before deducting impairment loss allowances.
Mortgage movements GBPm
========================= ========
At 1 January 2016 152,819
----------------------------- --------
Gross lending:
------------------------- --------
- New business 12,086
----------------------------- --------
- Further advances/Flexi
drawdowns 645
----------------------------- --------
Redemptions/paydowns (12,105)
============================= ========
At 30 June 2016 153,445
============================= ========
In H116, there were also GBP9.1bn (H115: GBP9.2bn) of internal
transfers where we retained existing customers with maturing
products on new mortgage loans or products.
Borrower profile
In the table below '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.
'Re-mortgagers' are external customers who are re-mortgaging with
us. We have not included internal re-mortgages, further advances
and any flexible mortgage drawdowns in the new business
figures.
New business Half year Half year
to to
30 June 2016 30 June 2015
GBPm GBPm
================== ============= =============
First-time buyers 1,970 2,279
------------------ ------------- -------------
Home movers 5,487 5,240
------------------ ------------- -------------
Re-mortgagers 3,361 2,815
------------------ ------------- -------------
Buy-to-let 1,268 894
================== ============= =============
12,086 11,228
================== ============= =============
30 June 2016 compared to 31 December 2015
We have continued to build our buy-to-let book by focusing on
non-professional landlords, as this segment is more closely aligned
with residential mortgages, and also accounts for the majority of
the buy-to-let market. In H116, we completed 7,200 buy-to-let
mortgages, representing 11% of new business flow, at an average LTV
of 70%. In line with the market, we saw a spike in buy-to-let
mortgages ahead of the April 2016 stamp duty increase.
The mortgage borrower mix remained broadly unchanged in H116,
driven by underlying stability in target market segments, product
pricing and our distribution strategy. Home movers and
re-mortgagers represented 44% and 33% of total stock, respectively,
at 30 June 2016 (2015: 45% and 33%, respectively), with first-time
buyers at 19% (2015: 19%) and buy-to-let at 4% (2015: 3%).
Interest rate profile
The interest rate profile of our mortgage asset stock was:
30 June 2016 31 December 2015
============================= ============== ==================
GBPm % GBPm %
============================= ========= === ============ ====
Fixed rate 87,078 57 82,570 54
----------------------------- --------- --- ------------ ----
Variable rate 33,984 22 34,402 23
----------------------------- --------- --- ------------ ----
Standard Variable Rate (SVR) 32,383 21 35,847 23
============================= ========= === ============ ====
153,445 100 152,819 100
============================= ========= === ============ ====
30 June 2016 compared to 31 December 2015
In H116, the proportion of SVR loan balances decreased to 21%
(2015: 23%), variable rate was broadly stable at 22% (2015: 23%),
and fixed rate mortgages increased to 57% (2015: 54%). The SVR
attrition was driven by customer refinancing, either internally or
through re-mortgaging, and customer sentiment over expected future
interest rate movements. The SVR attrition was GBP3,464m (H115:
GBP3,854m).
Geographical distribution
The Santander UK new business data in these tables cover H116
compared with FY15. The Council of Mortgage Lenders (CML) new
business data for H116 covers the three months ended 31 March 2016
(2015: nine months ended 30 September 2015) because that was the
only data available for H116 when we went to print. The percentages
are calculated on a value weighted basis.
UK region 30 June 2016 31 December 2015
========================= ================================== ==================================
Santander UK Santander UK
========================= =================== ============= =================== =============
Stock New business CML Stock New business CML
% % New business % % New business
% %
========================= ===== ============ ============= ===== ============ =============
East Anglia 3 3 4 3 3 4
------------------------- ----- ------------ ------------- ----- ------------ -------------
London 23 29 20 23 28 21
------------------------- ----- ------------ ------------- ----- ------------ -------------
Midlands 10 9 13 10 10 12
------------------------- ----- ------------ ------------- ----- ------------ -------------
North and North West 10 8 10 10 8 10
------------------------- ----- ------------ ------------- ----- ------------ -------------
Northern Ireland 3 1 1 3 1 1
------------------------- ----- ------------ ------------- ----- ------------ -------------
Scotland 5 3 7 5 4 7
------------------------- ----- ------------ ------------- ----- ------------ -------------
South East excluding
London 30 33 27 30 32 27
------------------------- ----- ------------ ------------- ----- ------------ -------------
South West and Wales 11 10 12 11 10 12
------------------------- ----- ------------ ------------- ----- ------------ -------------
Yorkshire and Humberside 5 4 6 5 4 6
========================= ===== ============ ============= ===== ============ =============
100 100 100 100 100 100
========================= ===== ============ ============= ===== ============ =============
30 June 2016 compared to 31 December 2015
At 30 June 2016, the lending profile of the portfolio
represented a geographical footprint across the UK, while
continuing to reflect a concentration around London and the South
East.
Average loan size for new business
In H116, the average loan size for new business increased, to
GBP199,000 for the UK overall, GBP264,000 for the South East
including London and GBP142,000 for the rest of the UK. The
loan-to-income multiple of mortgage lending in H116 was 3.13 (FY15:
3.10).
Loan-to-value analysis
This table shows the LTV distribution for mortgage asset stock,
NPL stock and new business. We have included fees added to the loan
in the calculation. If the product is on flexible terms, the
calculation only includes the drawn loan amount, not undrawn
limits. The new business data below covers H116 compared with
FY15.
LTV 30 June 2016 31 December 2015
================================= ==================================== ====================================
of which: of which:
================================= =========== ======================= =========== =======================
Stock NPL stock New business Stock NPL stock New business
% % % % % %
================================= =========== ========= ============ =========== ========= ============
up to 50% 45 37 17 40 33 16
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>50-75% 41 36 43 42 36 41
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>75-80% 5 5 17 6 6 16
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>80-85% 4 4 8 4 5 11
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>85-90% 2 4 10 3 4 12
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>90-95% 1 3 5 2 3 4
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>95-100% 1 2 - 1 3 -
--------------------------------- ----------- --------- ------------ ----------- --------- ------------
>100% i.e. negative
equity 1 9 - 2 10 -
================================= =========== ========= ============ =========== ========= ============
100 100 100 100 100 100
================================= =========== ========= ============ =========== ========= ============
Collateral value GBP153,113m GBP2,121m GBP12,086m GBP152,432m GBP2,190m GBP25,228m
of residential properties(1)(2)
================================= =========== ========= ============ =========== ========= ============
% % % % % %
==========================
Simple average(3)
LTV (indexed) 44 47 65 45 50 65
==========================
Value weighted average(4)
LTV (indexed) 40 40 60 41 44 60
==========================
(1) Includes collateral against loans in negative equity of
GBP1,908m at 30 June 2016 (2015: GBP2,285m).
(2) The collateral value we have shown is limited to the balance
of each associated individual loan. It does not include the impact
of overcollateralisation (where the collateral has a higher value
than the loan balance).
(3) Unweighted average of LTV of all accounts.
(4) Total of all loan values divided by the total of all
valuations.
30 June 2016 compared to 31 December 2015
In H116, we maintained our prudent lending criteria, with an
average LTV of 65% on new lending (FY15: 65%). Our lending with an
LTV of over 85% accounted for 15% of new business flow (FY15:
16%).
At 30 June 2016, stock LTV was broadly unchanged at 44% (2015:
45%).
At 30 June 2016 the parts of the loans in negative equity which
were effectively uncollateralised (before taking account of
impairment loss allowances) reduced to GBP332m (2015: GBP387m).
Credit performance
30 June 31 December
2016 2015
GBPm GBPm
============================== ======= ===========
Mortgage loans and advances
to customers of which: 153,445 152,819
--------------------------------- ------- -----------
Performing(1) 149,837 148,963
--------------------------------- ------- -----------
Early arrears: 1,434 1,604
--------------------------------- ------- -----------
- 31 to 60 days 883 979
--------------------------------- ------- -----------
- 61 to 90 days 551 625
================================= ======= ===========
NPLs:(2)(3) 2,174 2,252
--------------------------------- ------- -----------
- By arrears 1,698 1,826
--------------------------------- ------- -----------
- By bankruptcy 24 34
--------------------------------- ------- -----------
- By maturity default 298 263
--------------------------------- ------- -----------
- By forbearance 102 83
--------------------------------- ------- -----------
- By properties in possession
(PIPs) 52 46
================================= ======= ===========
(1) Excludes mortgages where the customer did not pay for
between 31 and 90 days, arrears, bankruptcy, maturity default,
forbearance and PIPs NPLs. Includes GBP3,277m of mortgages (2015:
GBP3,486m) where the customer did not pay for 30 days or less.
(2) We define NPLs in the 'Credit risk management' section in
the 2015 Annual Report.
(3) All NPLs are in the UK and continue accruing interest.
Forbearance
Forbearance started in the period(1)
The balances that entered forbearance in H116 and H115 were:
Half year to 30 June Half year to 30 June
2016 2015
=============== ========================= ======================
GBPm % GBPm %
=============== ============== ========= ============ ========
Capitalisation 125 48 177 53
--------------- -------------- --------- ------------ --------
Term extension 137 52 137 41
--------------- -------------- --------- ------------ --------
Interest-only - - 22 6
=============== ============== ========= ============ ========
262 100 336 100
=============== ============== ========= ============ ========
(1) The figures reflect the forbearance activity in the period,
regardless of whether there was any forbearance on the accounts
before.
Forbearance total position(1)
The balances at 30 June 2016 and 31 December 2015, analysed by
their payment status at the period-end and the forbearance we
applied, were:
Capitalisation Term extension Interest-only Total Impairment
GBPm GBPm GBPm GBPm loss allowances
GBPm
======================== ============== ============== ============= ===== ================
30 June 2016
------------------------ -------------- -------------- ------------- ----- ----------------
In arrears 316 91 259 666 26
------------------------ -------------- -------------- ------------- ----- ----------------
Performing 405 253 526 1,184 12
======================== ============== ============== ============= ===== ================
721 344 785 1,850 38
======================== ============== ============== ============= ===== ================
Proportion of portfolio 0.5% 0.2% 0.5% 1.2%
======================== ============== ============== ============= ===== ================
31 December 2015
------------------------ -------------- -------------- ------------- ----- ----------------
In arrears 412 123 305 840 34
------------------------ -------------- -------------- ------------- ----- ----------------
Performing 1,278 711 839 2,828 27
======================== ============== ============== ============= ===== ================
1,690 834 1,144 3,668 61
======================== ============== ============== ============= ===== ================
Proportion of portfolio 1.1% 0.5% 0.7% 2.4%
======================== ============== ============== ============= ===== ================
(1) We base forbearance type on the first forbearance we
applied. Tables only show accounts that were open at the
period-end.
30 June 2016 compared to 31 December 2015
The forbearance started in H116 was lower than in H115. We also
changed our forbearance policy in March 2015, so we no longer offer
interest-only concessions to customers in financial difficulties.
Instead, we offer reduced repayment arrangements for a time. Their
account stays on capital and interest terms and any shortfall in
capital repayment is added to the arrears.
At 30 June 2016, the total stock of forbearance reduced by 50%
to GBP1,850m (2015: GBP3,668m). This decrease was mainly due to the
application of exit criteria to our forbearance policy in H116 as
described in the 'Forbearance summary' of the 'Santander UK group
level - credit risk review' section. Applying these exit criteria
to our forbearance stock at 31 December 2015, the loans reported as
forborne would reduce by GBP1,652m to GBP2,016m.
At 30 June 2016, the proportion of accounts in forbearance for
more than six months that had made their last six months'
contractual payments decreased to 78% (2015: 85%). Accounts in
forbearance that were performing decreased to GBP1.2bn or 64% by
value (2015: GBP2.8bn or 77% by value) mainly due to the
application of exit criteria as described above. The weighted
average LTV of all accounts in forbearance was 36% (2015: 35%)
compared to the weighted average portfolio LTV of 40% (2015:
41%).
At 30 June 2016, impairment loss allowances as a percentage of
the overall mortgage portfolio were 0.23% (2015: 0.28%). The
equivalent ratio for performing accounts in forbearance was 1.01%
(2015: 0.95%), and for accounts in arrears in forbearance was 3.90%
(2015: 4.07%). The higher ratios for accounts in forbearance
reflect the higher levels of impairment loss allowances we hold on
these accounts. This reflects the higher risk on them.
At 30 June 2016, the carrying value of mortgages classified as
multiple forbearance decreased to GBP93m (2015: GBP98m).
Other changes in contract terms
At 30 June 2016, there were GBP5.4bn (2015: GBP5.7bn) of other
mortgages on the balance sheet that we had modified since January
2008. We agreed these modifications in order to keep a good
relationship with the customer. The customers were not showing any
signs of financial difficulty at the time, so we don't classify
these changes as forbearance.
We keep the performance and profile of the accounts under
review. At 30 June 2016:
The average LTV was 37% (2015: 39%) and 94% (2015: 94%) of
accounts had made their last six months' contractual payments
The proportion of accounts that were 90 days or more in arrears
was 1.61% (2015: 1.60%).
Higher risk loans and other segments of particular interest
We are mainly a residential prime lender and we do not originate
sub-prime or second charge mortgages. Despite that, some types of
mortgages have higher risks and others stand out for different
reasons. These are:
Interest-only loans
Flexible loans
Loans with LTV >100%
Buy-to-let loans.
The arrears performance of these mortgages has continued to be
relatively stable with arrears and loss rates remaining low.
Higher risk loans - borrower profile(1)
The new business data below covers H116 compared with FY15.
30 June 2016 31 December 2015
=================================== ==================== ====================
Stock New business Stock New business
GBPm GBPm GBPm GBPm
=================================== ====== ============ ====== ============
Full interest-only loans 43,109 1,901 44,050 4,178
----------------------------------- ------ ------------ ------ ------------
Part interest-only, part repayment
loans(2) 14,934 808 15,299 1,996
----------------------------------- ------ ------------ ------ ------------
Flexi loans 13,265 125 13,951 508
----------------------------------- ------ ------------ ------ ------------
Other flexible loans(3) 4,730 - 5,156 -
----------------------------------- ------ ------------ ------ ------------
Loans with LTV >100% 2,240 - 2,672 -
----------------------------------- ------ ------------ ------ ------------
Buy-to-let 5,987 1,268 4,956 2,393
----------------------------------- ------ ------------ ------ ------------
Interest-only and LTV >100% 1,656 - 1,980 1
=================================== ====== ============ ====== ============
(1) Where a loan falls into more than one category, we have
included it in all the categories that apply.
(2) Mortgage balances include both the interest-only part of
GBP10,748m (2015: GBP10,918m) and the non-interest-only part of the
loan.
(3) Legacy Alliance & Leicester flexible loans that work in
a more limited way than our current Flexi loan product.
30 June 2016 compared to 31 December 2015
In H116, the value and proportion of interest-only loans
together with part interest-only, part repayment loans reduced,
reflecting our strategy to manage down the overall exposure to this
lending profile.
Buy-to-let lending in H116 increased to 11% (FY15: 9%) of new
business flow as described in the 'Borrower profile' section. From
a mortgage asset stock perspective, loans with a current LTV
>100% at 30 June 2016 decreased to 1% (2015: 2%) driven by
rising house prices.
Higher risk loans - credit performance
Segment of particular interest(1)
=================== ======= ================================================================== =============
Total Interest-only Part Flexible(2) LTV >100% Buy-to-let Other
GBPm GBPm interest-only, GBPm GBPm GBPm portfolio(3)
part GBPm
repayment
GBPm
=================== ======= ============= =============== =========== ========= ========== =============
30 June 2016
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
Mortgage portfolio 153,445 43,109 14,934 17,995 2,240 5,987 87,350
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
Performing 149,837 41,432 14,427 17,596 1,980 5,962 86,193
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
Early arrears:
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
- 31 to 60 days 883 400 113 76 37 6 337
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
- 61 to 90 days 551 261 84 56 30 3 209
=================== ======= ============= =============== =========== ========= ========== =============
NPLs 2,174 1,016 310 267 193 16 611
=================== ======= ============= =============== =========== ========= ========== =============
NPL ratio 1.42% 2.36% 2.08% 1.48% 8.62% 0.27% 0.70%
=================== ======= ============= =============== =========== ========= ========== =============
PIPs 52 22 14 6 22 - 11
=================== ======= ============= =============== =========== ========= ========== =============
31 December
2015
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
Mortgage portfolio 152,819 44,050 15,299 19,107 2,672 4,956 84,786
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
Performing 148,963 42,280 14,742 18,711 2,358 4,929 83,537
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
Early arrears:
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
- 31 to 60 days 979 441 143 81 48 7 382
------------------- ------- ------------- --------------- ----------- --------- ---------- -------------
- 61 to 90 days 625 289 87 52 38 5 238
=================== ======= ============= =============== =========== ========= ========== =============
NPLs 2,252 1,040 327 263 228 15 629
=================== ======= ============= =============== =========== ========= ========== =============
NPL ratio 1.47% 2.36% 2.14% 1.38% 8.53% 0.30% 0.74%
=================== ======= ============= =============== =========== ========= ========== =============
PIPs 46 23 9 6 22 1 9
=================== ======= ============= =============== =========== ========= ========== =============
(1) Where a loan falls into more than one category, we have
included it in all the categories that apply. As a result, the sum
of the mortgages in the segments of particular interest and the
other portfolio does not agree to the total mortgage portfolio.
(2) Includes legacy Alliance & Leicester flexible loans that
work in a more limited way than our current Flexi loan product.
(3) Includes other loans that are not in any segment of
particular interest.
30 June 2016 compared to 31 December 2015
At 30 June 2016, interest-only loans, part interest-only, part
repayment loans, and loans with an LTV >100% had a higher than
average NPL ratio. However, NPLs for these portfolios reduced in
H116 in line with wider portfolio trends.
Of the interest-only portfolio of GBP43,109m (2015: GBP44,050m),
GBP1,914m (2015: GBP1,840m) was due to mature in two years. GBP504m
(2015: GBP429m) was term expired, 91% (2015: 91%) of which
continued to pay the interest due under the expired contract
terms.
At 30 June 2016, there were 108,619 (2015: 113,232) flexible
mortgage customers, with undrawn facilities of GBP6,453m (2015:
GBP6,608m) and a utilisation rate of 67% (2015: 68%). The
portfolio's value weighted LTV (indexed) was 31% (2015: 32%).
At 30 June 2016 the stock of PIPs of GBP52m (2015: GBP46m)
remained low.
Higher risk loans - forbearance(1)(2)
The forbearance arrangements which started in H116 and H115
were:
Interest-only(3) Flexible LTV >100% Buy-to-let
=========================== ================ ======== ========= ==========
Half year to 30 June 2016
--------------------------- ---------------- -------- --------- ----------
Total value GBP192m GBP27m - GBP4m
=========================== ================ ======== ========= ==========
Proportion of portfolio(4) 73% 10% - 2%
=========================== ================ ======== ========= ==========
Half year to 30 June 2015
--------------------------- ---------------- -------- --------- ----------
Total value GBP222m GBP35m - GBP4m
=========================== ================ ======== ========= ==========
Proportion of portfolio(4) 66% 10% - 1%
=========================== ================ ======== ========= ==========
(1) The figures reflect the forbearance activity in the period,
regardless of whether there was any forbearance on the accounts
before.
(2) Where a loan falls into more than one category, we have
included it in all the categories that apply.
(3) Comprises full interest-only loans and part interest-only,
part repayment loans.
(4) Proportion of total forbearance arrangements which commenced
during the period.
30 June 2016 compared to 30 June 2015
The forbearance started in H116 was lower than in H115, in line
with the overall reductions seen in flows into forbearance in
H116.
Consumer finance and other unsecured lending
We provide vehicle consumer and other unsecured finance for
personal and business banking customers. This includes personal
loans, credit cards, business banking and bank account
overdrafts.
Lending
We analyse movements in H116 and FY15 in the tables below.
Other unsecured
===================== ========= ======================================= ======
Vehicle Personal Credit Business Overdrafts Total
consumer loans cards banking GBPm GBPm
finance GBPm GBPm GBPm
GBPm
===================== ========= ========= ====== ======== ========== ======
Half year to 30 June
2016
--------------------- --------- --------- ------ -------- ---------- ------
At 1 January 2016 6,290 2,201 2,834 150 536 12,011
--------------------- --------- --------- ------ -------- ---------- ------
Net lending in the
period(1) 266 33 (267) 6 (11) 27
===================== ========= ========= ====== ======== ========== ======
At 30 June 2016 6,556 2,234 2,567 156 525 12,038
===================== ========= ========= ====== ======== ========== ======
Year to 31 December
2015
--------------------- --------- --------- ------ -------- ---------- ------
At 1 January 2015 3,303 2,208 2,247 155 544 8,457
--------------------- --------- --------- ------ -------- ---------- ------
Net lending in the
year(1) 526 (7) 587 (5) (8) 1,093
--------------------- --------- --------- ------ -------- ---------- ------
Acquisitions 2,461 - - - - 2,461
===================== ========= ========= ====== ======== ========== ======
At 31 December 2015 6,290 2,201 2,834 150 536 12,011
===================== ========= ========= ====== ======== ========== ======
(1) Includes vehicle consumer finance gross lending of GBP1,634m
in H116 (FY15: GBP2,958m).
Credit performance
Other unsecured
=========================== ========= ======================================= ======
Vehicle Personal Credit Business Overdrafts Total
consumer loans cards banking GBPm GBPm
finance GBPm GBPm GBPm
GBPm
=========================== ========= ========= ====== ======== ========== ======
30 June 2016
--------------------------- --------- --------- ------ -------- ---------- ------
Loans and advances
to customers of which: 6,556 2,234 2,567 156 525 12,038
--------------------------- --------- --------- ------ -------- ---------- ------
Performing(1) 6,480 2,191 2,502 141 470 11,784
--------------------------- --------- --------- ------ -------- ---------- ------
Early arrears 46 26 26 6 29 133
--------------------------- --------- --------- ------ -------- ---------- ------
NPLs(2) 30 17 39 9 26 121
=========================== ========= ========= ====== ======== ========== ======
Impairment loss allowances 142 61 84 13 42 342
=========================== ========= ========= ====== ======== ========== ======
NPL ratio(3) 1.00%
--------------------------- --------- --------- ------ -------- ---------- ------
Coverage ratio(4) 283%
=========================== ========= ========= ====== ======== ========== ======
31 December 2015
--------------------------- --------- --------- ------ -------- ---------- ------
Loans and advances
to customers of which: 6,290 2,201 2,834 150 536 12,011
--------------------------- --------- --------- ------ -------- ---------- ------
Performing(1) 6,217 2,157 2,771 138 483 11,766
--------------------------- --------- --------- ------ -------- ---------- ------
Early arrears 45 27 23 4 25 124
--------------------------- --------- --------- ------ -------- ---------- ------
NPLs(2) 28 17 40 8 28 121
=========================== ========= ========= ====== ======== ========== ======
Impairment loss allowances 136 60 86 14 42 338
=========================== ========= ========= ====== ======== ========== ======
NPL ratio(3) 1.01%
--------------------------- --------- --------- ------ -------- ---------- ------
Coverage ratio(4) 279%
=========================== ========= ========= ====== ======== ========== ======
(1) Excludes loans and advances to customers where the customer
did not pay for between 31 and 90 days and NPLs.
(2) We define NPLs in the 'Credit risk management' section in
the 2015 Annual Report.
(3) NPLs as a percentage of loans and advances to customers.
(4) Impairment loss allowances as a percentage of NPLs.
Impairment loss allowances relate to early arrears and performing
assets (i.e. the IBNO provision) as well as NPLs, so the ratio
exceeds 100%.
30 June 2016 compared to 31 December 2015
Consumer finance balances increased 5% to GBP6,556m (2015:
GBP6,290m), driven by higher retail customer loans and car dealer
funding. Other unsecured lending balances, which include bank
overdrafts, unsecured personal loans (UPL), and credit cards,
decreased 4% to GBP5,482m (2015: GBP5,721m) in an increasingly
competitive market.
Commercial Banking - Credit risk review
In Commercial Banking, credit risk arises on asset balances and
off-balance sheet transactions such as credit facilities or
guarantees. As a result, committed exposures are typically higher
than asset balances.
Commercial Banking - committed exposures
Rating distribution
These tables show our credit risk exposure according to our
internal rating scale (see the 'Credit quality' section in the 2015
Annual Report) for each portfolio. On this scale, the higher the
rating, the better the quality of the counterparty.
Mid Corporate Commercial Social Total
and SME Real Estate Housing GBPm
GBPm GBPm GBPm
================ ============= ============ ======== ======
30 June 2016
---------------- ------------- ------------ -------- ------
9 14 - 911 925
---------------- ------------- ------------ -------- ------
8 116 - 1,433 1,549
---------------- ------------- ------------ -------- ------
7 319 449 246 1,014
---------------- ------------- ------------ -------- ------
6 2,716 6,332 - 9,048
---------------- ------------- ------------ -------- ------
5 4,337 3,173 - 7,510
---------------- ------------- ------------ -------- ------
4 4,403 714 - 5,117
---------------- ------------- ------------ -------- ------
1 to 3 663 186 - 849
---------------- ------------- ------------ -------- ------
Other(1) 241 34 - 275
================ ============= ============ ======== ======
12,809 10,888 2,590 26,287
================ ============= ============ ======== ======
31 December 2015
---------------- ------------- ------------ -------- ------
9 14 - 970 984
---------------- ------------- ------------ -------- ------
8 116 1 892 1,009
---------------- ------------- ------------ -------- ------
7 335 659 257 1,251
---------------- ------------- ------------ -------- ------
6 2,440 5,555 50 8,045
---------------- ------------- ------------ -------- ------
5 4,396 3,486 - 7,882
---------------- ------------- ------------ -------- ------
4 4,214 574 - 4,788
---------------- ------------- ------------ -------- ------
1 to 3 536 215 - 751
---------------- ------------- ------------ -------- ------
Other(1) 292 56 - 348
================ ============= ============ ======== ======
12,343 10,546 2,169 25,058
================ ============= ============ ======== ======
(1) Consists of smaller exposures mainly in the commercial
mortgages portfolio. We use scorecards for them, instead of a
rating model.
Geographical distribution
Almost all our lending is to customers in the UK. We classify
geographical location according to country of risk - in other
words, the country where each counterparty has its main business
activity or assets unless there is a full risk transfer guarantee
in place, in which case we use the guarantor's country of domicile
instead. If our clients have operations in many countries, we use
their country of incorporation.
30 June 2016 compared to 31 December 2015
Our lending to customers has grown consistently since 2008, and
we continue to operate within our prudent Risk Appetite. At 30 June
2016, 99.8% (2015: 99.7%) of our portfolio was with UK
counterparties.
In H116, our committed exposures increased by 5% to GBP26.3bn
(2015: GBP25.1bn), despite an increasingly competitive environment,
macro-economic uncertainty and the resulting slowdown in activity
relating to the UK referendum on EU membership. Our Mid Corporate
and SME exposures increased by 4% to GBP12.8bn (2015: GBP12.3bn)
due to growth in the Mid Corporate portfolio. This more than offset
a slight reduction in SME exposures. Our Commercial Real Estate
portfolio increased by 3% to GBP10.9bn (2015: GBP10.5bn), with new
business levels more than offsetting repayments.
Our Social Housing portfolio increased by 19% to GBP2.6bn (2015:
GBP2.2bn), driven by refinancing of longer-dated loans previously
managed in Corporate Centre onto shorter maturities and on current
market terms.
Commercial Banking - credit risk mitigation
At 30 June 2016, the collateral we held against impaired loans
was 43% (2015: 43%) of the carrying amount of the impaired loan
balances.
Commercial Banking - credit performance
We monitor exposures that show potentially higher risk
characteristics using our Watchlist process (described in 'Risk
monitoring' in the 'Credit risk management' section in the 2015
Annual Report). The table below shows the exposures we monitor, and
those we classify as non-performing by portfolio at 30 June 2016
and 31 December 2015.
Mid Corporate Commercial Social Total
and SME Real Estate Housing GBPm
GBPm GBPm GBPm
====================================== ============= ============ ======== ======
30 June 2016
-------------------------------------- ------------- ------------ -------- ------
Total committed exposure of which:(1) 12,809 10,888 2,590 26,287
-------------------------------------- ------------- ------------ -------- ------
- Performing (Non-Watchlist) 10,872 10,543 2,529 23,944
-------------------------------------- ------------- ------------ -------- ------
- Watchlist: Enhanced monitoring 1,056 66 50 1,172
-------------------------------------- ------------- ------------ -------- ------
- Watchlist: Proactive management 436 70 11 517
-------------------------------------- ------------- ------------ -------- ------
- Non-performing exposure(2) 445 209 - 654
====================================== ============= ============ ======== ======
Observed impairment loss allowances 158 57 - 215
====================================== ============= ============ ======== ======
IBNO(3) 39
====================================== ============= ============ ======== ======
Total impairment loss allowances 254
====================================== ============= ============ ======== ======
31 December 2015
-------------------------------------- ------------- ------------ -------- ------
Total committed exposure of which:(1) 12,343 10,546 2,169 25,058
-------------------------------------- ------------- ------------ -------- ------
- Performing (Non-Watchlist) 10,617 10,083 2,162 22,862
-------------------------------------- ------------- ------------ -------- ------
- Watchlist: Enhanced monitoring 969 150 7 1,126
-------------------------------------- ------------- ------------ -------- ------
- Watchlist: Proactive management 341 123 - 464
-------------------------------------- ------------- ------------ -------- ------
- Non-performing exposure(2) 416 190 - 606
====================================== ============= ============ ======== ======
Observed impairment loss allowances 162 56 - 218
====================================== ============= ============ ======== ======
IBNO(3) 42
====================================== ============= ============ ======== ======
Total impairment loss allowances 260
====================================== ============= ============ ======== ======
(1) Includes committed facilities and derivatives. We define
'enhanced monitoring' and 'proactive management' in the 'Risk
monitoring' section in the 2015 Annual Report.
(2) Non-performing exposure includes committed facilities and
derivative exposures. So it can exceed the NPLs in the table on
page 23 which only include drawn balances.
(3) Allowance for incurred but not observed (IBNO) losses as
described in Note 1 to the Consolidated Financial Statements in the
2015 Annual Report.
30 June 2016 compared to 31 December 2015
In our Mid Corporate and SME portfolio, exposures subject to
enhanced monitoring increased by 9% to GBP1,056m (2015: GBP969m),
whilst exposures subject to proactive management increased by 28%
to GBP436m (2015: GBP341m). These increases were across a number of
sectors and related mainly to trading concerns for certain
customers.
In our Commercial Real Estate portfolio, exposures subject to
proactive management decreased by 43% to GBP70m (2015: GBP123m),
driven by the reclassification of a single legacy case to NPL,
where the collateral currently exceeds the value of the loan.
Exposures subject to enhanced monitoring decreased by 56% to GBP66m
(2015: GBP150m) due to successful refinancings.
In our Social Housing portfolio, exposures subject to enhanced
monitoring increased to GBP50m (2015: GBP7m), due to the addition
of one customer following governance issues. One case of GBP11m
(2015: GBPnil) is subject to proactive management due to further
governance issues.
Commercial Banking - forbearance
We only made forbearance arrangements for lending to customers.
We have not made any forbearance arrangements with our Social
Housing counterparties.
Forbearance started in the period(1)
The exposures that entered forbearance in H116 and H115
were:
Half year to 30 June Half year to 30 June 2015
2016
=========================== ================================= ===================================
Mid Corporate Commercial Total Mid Corporate Commercial Total
and SME Real GBPm and SME Real Estate GBPm
GBPm Estate GBPm GBPm
GBPm
=========================== ============= =========== ===== ============= ============= =====
Term extension 57 12 69 33 11 44
--------------------------- ------------- ----------- ----- ------------- ------------- -----
Interest-only 45 1 46 57 4 61
--------------------------- ------------- ----------- ----- ------------- ------------- -----
Other payment rescheduling 77 7 84 54 8 62
=========================== ============= =========== ===== ============= ============= =====
179 20 199 144 23 167
=========================== ============= =========== ===== ============= ============= =====
(1) The figures reflect the forbearance activity in the period,
regardless of whether there was any forbearance on the accounts
before.
Forbearance total position(1)
The exposures at 30 June 2016 and 31 December 2015, analysed by
their payment status at the period-end and the forbearance we
applied, were:
Term Other payment Impairment
extension Interest-only rescheduling Total loss allowances
GBPm GBPm GBPm GBPm GBPm
======================== ========== ============= ============= ===== ================
30 June 2016
------------------------ ---------- ------------- ------------- ----- ----------------
Non-performing 99 157 133 389 148
------------------------ ---------- ------------- ------------- ----- ----------------
Performing 70 45 101 216 1
======================== ========== ============= ============= ===== ================
169 202 234 605 149
======================== ========== ============= ============= ===== ================
Proportion of portfolio 0.6% 0.8% 0.9% 2.3%
======================== ========== ============= ============= ===== ================
31 December 2015
------------------------ ---------- ------------- ------------- ----- ----------------
Non-performing 95 169 141 405 144
------------------------ ---------- ------------- ------------- ----- ----------------
Performing 72 138 90 300 2
======================== ========== ============= ============= ===== ================
167 307 231 705 146
======================== ========== ============= ============= ===== ================
Proportion of portfolio 0.7% 1.2% 0.9% 2.8%
======================== ========== ============= ============= ===== ================
(1) We base forbearance type on the first forbearance we
applied. Tables only show accounts that were open at the
period-end.
30 June 2016 compared to 31 December 2015
The forbearance started in H116 was higher than in H115 due to
an increase in forbearance activity mainly in our Mid Corporate and
SME portfolio.
At 30 June 2016, the cumulative forbearance stock reduced by 14%
to GBP605m (2015: GBP705m). This decrease was mainly due to the
application of exit criteria to our forbearance policy in H116 as
described in the 'Forbearance summary' of the 'Santander UK group
level - credit risk review' section. Applying these exit criteria
to our forbearance stock at 31 December 2015, the loans reported as
forborne would reduce by GBP166m to GBP539m. The accounts in
forbearance as a percentage of the portfolio reduced to 2.3% (2015:
2.8%).
At 30 June 2016, 82% (2015: 87%) of the cumulative forbearance
stock had entered forbearance before default. 36% (2015: 43%) of
these exposures were keeping to the forbearance terms showing that
much of the action had been effective.
Debt-for-equity swaps
At 30 June 2016, we also had equity securities that arose from
debt-for-equity swaps in respect of loans of GBP10m (2015:
GBP10m).
Higher risk loans and other segments of particular interest
Commercial Real Estate is lending to UK customers, primarily on
tenanted property assets, with a focus on the office, retail,
industrial and residential sectors. The Commercial Real Estate
market experienced a challenging environment in the immediate years
after the last financial crisis and has previously seen regular
cyclical downturns. In addition to the disclosures on the
Commercial Real Estate portfolio earlier in this section, we
include below more detail on credit management, credit performance,
and sector and LTV analyses.
Commercial Real Estate - credit management
We have a clearly defined Commercial Real Estate credit risk
policy and risk appetite, both of which we review regularly in
light of market conditions and our exposure to separate asset
classes. We assess risk appetite on a deal-by-deal basis taking
into account transaction risks and the risk profile. We structure
transactions on a case-by-case basis to give us a clear exit
strategy at loan maturity. The repayment schedule is driven by a
number of factors, including the exit strategy, the opening debt
position, the nature of the asset class, the weighted average lease
length, the tenant profile and the re-letting risk. All Commercial
Real Estate loans benefit from senior positions in the creditor
hierarchy.
Commercial Real Estate - credit performance
The table below shows the Commercial Real Estate total committed
exposures, non-performing exposure ratios and weighted average LTVs
at 30 June 2016 and 31 December 2015:
30 June 2016 31 December
2015
================================= ============ ===========
Total committed exposure GBP10,888m GBP10,546m
--------------------------------- ------------ -----------
Non-performing exposure ratio(1) 1.9% 1.8%
--------------------------------- ------------ -----------
Weighted average LTV 52% 52%
================================= ============ ===========
(1) Non-performing exposures as a percentage of total committed
exposures.
30 June 2016 compared to 31 December 2015
At 30 June 2016, our non-performing exposure ratio was 1.9%
(2015: 1.8%) reflecting our conservative credit risk policy.
Commercial Real Estate loans written before 2009 totalled GBP750m
(2015: GBP876m), with a non-performing exposure ratio of 24.2%
(2015: 16.6%), the increase in the ratio being driven by a
continued reduction in the pre-2009 exposures. The pre-2009 loans
were written on market terms which, compared with more recent times
and following a significant tightening in our lending criteria,
included higher original LTVs, lower interest coverage and exposure
to development risk.
Commercial Real Estate - sector analysis
The table below shows the sector analysis of the Commercial Real
Estate portfolio at 30 June 2016 and 31 December 2015:
30 June 2016 31 December 2015
========================== ================= ==================
Sector GBPm % GBPm %
========================== ========== ===== =========== =====
Office 2,819 26 2,430 23
-------------------------- ---------- ----- ----------- -----
Retail 2,198 20 2,093 20
-------------------------- ---------- ----- ----------- -----
Industrial 1,439 13 1,472 14
-------------------------- ---------- ----- ----------- -----
Residential 1,203 11 1,124 11
-------------------------- ---------- ----- ----------- -----
Mixed use 1,254 12 1,219 11
-------------------------- ---------- ----- ----------- -----
Student accommodation 245 2 272 3
-------------------------- ---------- ----- ----------- -----
Hotels and leisure 498 5 509 5
-------------------------- ---------- ----- ----------- -----
Other 249 2 353 3
-------------------------- ---------- ----- ----------- -----
Standardised portfolio(1) 983 9 1,074 10
========================== ========== ===== =========== =====
10,888 100 10,546 100
========================== ========== ===== =========== =====
(1) Consists of smaller value transactions, mainly commercial
mortgages.
Commercial Real Estate - LTV analysis
The table below shows the LTVs of the Commercial Real Estate
portfolio at 30 June 2016 and 31 December 2015:
30 June 2016 31 December 2015
============= ====================================================== ======================================================
Total Non-performing Total Non-performing
exposure exposure exposure exposure
============= --------------------------- ------------------------- --------------------------- -------------------------
GBPm % GBPm % GBPm % GBPm %
============= ============== =========== ============== ========= ============== =========== ============== =========
Up to 50% 4,105 38 - - 3,807 36 8 4
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
50% to 60% 3,813 35 2 1 3,437 33 - -
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
60% to 70% 1,093 10 3 1 1,443 14 - -
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
70% to 80% 143 1 50 24 147 1 16 8
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
80% to 90% 55 1 6 3 119 1 29 15
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
90% to 100% 31 - 19 9 72 1 48 26
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
>100% i.e.
negative
equity 102 1 100 48 56 - 55 29
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
Standardised
portfolio(1) 983 9 11 5 1,074 10 16 9
============= ============== =========== ============== ========= ============== =========== ============== =========
Total with
collateral 10,325 95 191 91 10,155 96 172 91
------------- -------------- ----------- -------------- --------- -------------- ----------- -------------- ---------
Development
loans 563 5 18 9 391 4 18 9
============= ============== =========== ============== ========= ============== =========== ============== =========
10,888 100 209 100 10,546 100 190 100
============= ============== =========== ============== ========= ============== =========== ============== =========
(1) Consists of smaller value transactions, mainly commercial
mortgages.
30 June 2016 compared to 31 December 2015
The Commercial Real Estate portfolio was well diversified by
sector at 30 June 2016 and 31 December 2015. The portfolio also
represented a diverse geographical footprint across the UK, while
continuing to reflect a slight concentration around London and the
South East.
At 30 June 2016, the LTV profile of the portfolio remained
conservative with GBP7,918m (2015: GBP7,244m) of the
non-standardised portfolio at or below 60% LTV. This reflects the
vintage of the portfolio as 93% (2015: 92%) was originated in 2009
or later. Most higher LTV deals are older deals still in the
portfolio.
At 30 June 2016, loans with development risk were only 5% (2015:
4%) of the total Commercial Real Estate portfolio. All development
lending is on a non-speculative basis with significant pre-lets in
place.
In H116, no new business was written above 70% LTV, and 96% was
written at or below 60% LTV. At 30 June 2016, the average LTV of
the non-standardised portfolio, weighted by exposure, was 52%
(2015: 52%). The weighted average LTV of new deals in H116 was 50%
(FY15: 52%).
The average loan size at 30 June 2016 was GBP4.8m (2015:
GBP4.1m) and the top ten exposures made up 8% (2015: 8%) of the
total Commercial Real Estate portfolio exposure.
Commercial Real Estate - refinancing risk
As part of our annual review process, for Commercial Real Estate
loans approaching maturity, we look at the prospects of refinancing
the loan on current market terms and applicable credit policy. We
also look at other aspects (such as covenant compliance) which
could mean we have to put the case on our Watchlist. In addition,
if we do not receive an acceptable refinancing proposal six months
before the loan matures, we put it on our Watchlist.
At 30 June 2016, Commercial Real Estate loans of GBP1,452m
(2015: GBP1,471m) were due to mature within 12 months. Of these,
GBP190m, i.e. 13% (2015: GBP144m, i.e. 10%) had an LTV ratio higher
than is acceptable under our current credit policy. At 30 June
2016, GBP181m of this (2015: GBP139m) had been put on our Watchlist
or recorded as NPL and had an impairment loss allowance of GBP40m
(2015: GBP20m).
global Corporate Banking - Credit risk review
In Global Corporate Banking, credit risk arises on asset
balances and off-balance sheet transactions such as credit
facilities or guarantees. As a result, committed exposures are
typically higher than asset balances. But in the committed
exposures tables below, we show Sovereigns and Supranationals net
of short positions. They also include Sovereign and Supranational
exposures that form part of our liquidity management strategy,
managed by Short Term Markets on behalf of Corporate Centre.
Large Corporate reverse repurchase agreement exposures are shown
net of repurchase agreement liabilities and include OTC
derivatives. As a result, the committed exposures can be smaller
than the asset balances on the balance sheet.
The derivative and other treasury product exposures (which are
classified as 'Financial Institutions') shown are also typically
lower than the asset balances. This is because we show our overall
risk exposure which takes into account our procedures to mitigate
credit risk. The asset balances on our balance sheet only reflect
the more restrictive netting permitted by IAS 32.
Global Corporate Banking - committed exposures
Rating distribution
These tables show our credit risk exposure according to our
internal rating scale (see the 'Credit quality' section in the 2015
Annual Report) for each portfolio. On this scale, the higher the
rating, the better the quality of the counterparty.
Sovereign Large Financial Total
and Corporate Institutions GBPm
Supranational GBPm GBPm
GBPm
================ ============== ========== ============= ======
30 June 2016
---------------- -------------- ---------- ------------- ------
9 1,267 20 516 1,803
---------------- -------------- ---------- ------------- ------
8 3,120 1,736 3,138 7,994
---------------- -------------- ---------- ------------- ------
7 980 6,240 2,879 10,099
---------------- -------------- ---------- ------------- ------
6 - 8,683 711 9,394
---------------- -------------- ---------- ------------- ------
5 - 4,149 131 4,280
---------------- -------------- ---------- ------------- ------
4 - 131 - 131
---------------- -------------- ---------- ------------- ------
1 to 3 - 64 1 65
================ ============== ========== ============= ======
5,367 21,023 7,376 33,766
================ ============== ========== ============= ======
31 December 2015
---------------- -------------- ---------- ------------- ------
9 889 3 266 1,158
---------------- -------------- ---------- ------------- ------
8 2,889 1,769 3,811 8,469
---------------- -------------- ---------- ------------- ------
7 789 5,963 2,982 9,734
---------------- -------------- ---------- ------------- ------
6 - 8,351 446 8,797
---------------- -------------- ---------- ------------- ------
5 - 3,823 10 3,833
---------------- -------------- ---------- ------------- ------
4 - 123 - 123
---------------- -------------- ---------- ------------- ------
1 to 3 - 32 - 32
================ ============== ========== ============= ======
4,567 20,064 7,515 32,146
================ ============== ========== ============= ======
Geographical distribution
We classify geographical location according to country of risk -
in other words, the country where each counterparty has its main
business activity or assets unless there is a full risk transfer
guarantee in place, in which case we use the guarantor's country of
domicile instead. If our clients have operations in many countries,
we use their country of incorporation.
Sovereign Large Financial Total
and Corporate Institutions GBPm
Supranational GBPm GBPm
GBPm
==================== ============== ========== ============= ======
30 June 2016
-------------------- -------------- ---------- ------------- ------
UK 1,122 17,776 3,441 22,339
--------------------- -------------- ---------- ------------- ------
Peripheral eurozone 980 789 611 2,380
--------------------- -------------- ---------- ------------- ------
Rest of Europe 48 2,047 1,534 3,629
--------------------- -------------- ---------- ------------- ------
US 74 80 1,062 1,216
--------------------- -------------- ---------- ------------- ------
Rest of world 3,143 331 728 4,202
===================== ============== ========== ============= ======
5,367 21,023 7,376 33,766
==================== ============== ========== ============= ======
31 December 2015
-------------------- -------------- ---------- ------------- ------
UK - 16,858 3,647 20,505
--------------------- -------------- ---------- ------------- ------
Peripheral eurozone 789 762 775 2,326
--------------------- -------------- ---------- ------------- ------
Rest of Europe 872 1,926 1,170 3,968
--------------------- -------------- ---------- ------------- ------
US - 171 1,277 1,448
--------------------- -------------- ---------- ------------- ------
Rest of world 2,906 347 646 3,899
===================== ============== ========== ============= ======
4,567 20,064 7,515 32,146
==================== ============== ========== ============= ======
30 June 2016 compared to 31 December 2015
In H116, our committed exposures increased by 5% to GBP33.8bn
(2015: GBP32.1bn) mainly due to increases in our Sovereign and
Supranational and Large Corporate portfolios.
Sovereign and Supranational exposures increased by 18% to
GBP5.4bn (2015: GBP4.6bn). Increased holdings, primarily in UK
Government securities, were partly offset by decreases in European
government securities as part of normal liquid asset portfolio
management and short-term markets trading activity. The portfolio
profile stayed mainly short-term (up to one year), reflecting the
purpose of the holdings.
Large Corporate exposures increased by 5% to GBP21.0bn (2015:
GBP20.1bn) with two sizeable client drawdowns, in addition to other
refinancing and origination activities relating to project
acquisition finance and transactional services. At 30 June 2016,
our direct lending committed exposure to oil and gas customers was
GBP1.6bn (2015: GBP1.7bn) and to mining customers was GBP0.9bn
(2015: GBP1.2bn). Credit quality remained broadly stable. The
portfolio profile stayed mainly short to medium-term (up to five
years), reflecting the type of finance we provided to support our
clients' needs.
Exposures in our Financial Institutions portfolio reduced
marginally to GBP7.4bn (2015: GBP7.5bn).
Global Corporate Banking - credit risk mitigation
At 30 June 2016 the top 20 clients with derivative exposure made
up 67% (2015: 70%) of our total derivative exposure, all of which
were banks and central counterparties (CCPs). The weighted-average
credit rating was 7.3 (2015: 7.4). At 30 June 2016 and 31 December
2015, we held no collateral against impaired loans in the Large
Corporate portfolio.
Global Corporate Banking - credit performance
We monitor exposures that show potentially higher risk
characteristics using our Watchlist process (described in 'Risk
monitoring' in the 'Credit risk management' section in the 2015
Annual Report). The table below shows the exposures we monitor, and
those we classify as non-performing by portfolio at 30 June 2016
and 31 December 2015.
Sovereign Large Financial Total
and Corporate Institutions GBPm
Supranational GBPm GBPm
GBPm
================================= ============== ========== ============= ======
30 June 2016
--------------------------------- -------------- ---------- ------------- ------
Total committed exposure
of which:(1) 5,367 21,023 7,376 33,766
---------------------------------- -------------- ---------- ------------- ------
- Performing (Non-Watchlist) 5,367 19,614 6,933 31,914
---------------------------------- -------------- ---------- ------------- ------
- Watchlist: Enhanced monitoring - 1,131 442 1,573
---------------------------------- -------------- ---------- ------------- ------
- Watchlist: Proactive
management - 214 1 215
---------------------------------- -------------- ---------- ------------- ------
- Non-performing exposure(2) - 64 - 64
================================== ============== ========== ============= ======
Observed impairment loss
allowances - 31 - 31
================================== ============== ========== ============= ======
IBNO(3) 24
================================== ============== ========== ============= ======
Total impairment loss allowances 55
================================== ============== ========== ============= ======
31 December 2015
--------------------------------- -------------- ---------- ------------- ------
Total committed exposure
of which:(1) 4,567 20,064 7,515 32,146
---------------------------------- -------------- ---------- ------------- ------
- Performing (Non-Watchlist) 4,567 18,176 7,459 30,202
---------------------------------- -------------- ---------- ------------- ------
- Watchlist: Enhanced monitoring - 1,758 4 1,762
---------------------------------- -------------- ---------- ------------- ------
- Watchlist: Proactive
management - 120 52 172
---------------------------------- -------------- ---------- ------------- ------
- Non-performing exposure(2) - 10 - 10
================================== ============== ========== ============= ======
Observed impairment loss
allowances - 9 - 9
================================== ============== ========== ============= ======
IBNO(3) 24
================================== ============== ========== ============= ======
Total impairment loss allowances 33
================================== ============== ========== ============= ======
(1) Includes committed facilities and derivatives. We define
'enhanced monitoring' and 'proactive management' in the 'Risk
monitoring' section in the 2015 Annual Report.
(2) Non-performing exposure includes committed facilities and
derivative exposures. So it can exceed the NPLs in the table on
page 23 which only include drawn balances.
(3) Allowance for incurred but not observed (IBNO) losses as
described in Note 1 to the Consolidated Financial Statements in the
2015 Annual Report.
30 June 2016 compared to 31 December 2015
In our Large Corporate portfolio, exposures subject to proactive
management increased by 78% to GBP214m at 30 June 2016 (2015:
GBP120m) driven by a single customer in our mining portfolio which
was moved from enhanced monitoring. Exposures subject to enhanced
monitoring decreased by 36% to GBP1,131m at 30 June 2016 (2015:
GBP1,758m) driven by this customer move as well as some customers
returning to performing status due to improved trading.
In our Financial Institutions portfolio, exposures subject to
enhanced monitoring increased to GBP442m (2015: GBP4m) due to a
secured loan transaction to an existing Watchlist customer. This
loan was over-collateralised with high quality assets and is
puttable on a quarterly basis.
In our Sovereign and Supranational portfolio, no exposures were
subject to proactive management or enhanced monitoring.
Non-performing exposures increased to GBP64m (2015: GBP10m) due
to the movement of a single exposure to non-performing in our Large
Corporate portfolio.
Global Corporate Banking - forbearance
At 30 June 2016, there were two forborne cases totalling GBP19m
(2015: one case totalling GBP10m), of which GBP10m (2015: GBP10m)
was classified as NPL.
corporate centre - Credit risk review
In Corporate Centre, credit risk arises on assets in the balance
sheet and in off-balance sheet transactions such as credit
facilities or guarantees. As a result, committed exposures are
typically higher than asset balances. It also excludes Sovereign
exposures managed by Short Term Markets in Global Corporate
Banking.
Corporate Centre - committed exposures
Rating distribution
These tables show our credit risk exposure according to our
internal rating scale (see the 'Credit quality' section in the 2015
Annual Report) for each portfolio. On this scale, the higher the
rating, the better the quality of the counterparty.
Sovereign Structured Derivatives Legacy Portfolios Social Total
and Products GBPm in run-off(1) Housing GBPm
Supranational GBPm GBPm GBPm
GBPm
================ ============== ========== =========== ================= ======== ======
30 June 2016
---------------- -------------- ---------- ----------- ----------------- -------- ------
9 23,061 1,542 - - 3,222 27,825
---------------- -------------- ---------- ----------- ----------------- -------- ------
8 - 1,581 619 1 3,335 5,536
---------------- -------------- ---------- ----------- ----------------- -------- ------
7 - 620 302 31 675 1,628
---------------- -------------- ---------- ----------- ----------------- -------- ------
6 - - - 559 45 604
---------------- -------------- ---------- ----------- ----------------- -------- ------
5 - - - 257 - 257
---------------- -------------- ---------- ----------- ----------------- -------- ------
4 - - - 159 - 159
---------------- -------------- ---------- ----------- ----------------- -------- ------
1 to 3 - - - 108 - 108
---------------- -------------- ---------- ----------- ----------------- -------- ------
Other(2) - - - 527 - 527
================ ============== ========== =========== ================= ======== ======
23,061 3,743 921 1,642 7,277 36,644
================ ============== ========== =========== ================= ======== ======
31 December 2015
---------------- -------------- ---------- ----------- ----------------- -------- ------
9 24,153 1,437 - - 3,423 29,013
---------------- -------------- ---------- ----------- ----------------- -------- ------
8 - 1,394 484 1 2,940 4,819
---------------- -------------- ---------- ----------- ----------------- -------- ------
7 - 761 268 6 1,072 2,107
---------------- -------------- ---------- ----------- ----------------- -------- ------
6 - - 21 702 213 936
---------------- -------------- ---------- ----------- ----------------- -------- ------
5 - - - 164 - 164
---------------- -------------- ---------- ----------- ----------------- -------- ------
4 - - - 146 - 146
---------------- -------------- ---------- ----------- ----------------- -------- ------
1 to 3 - - - 84 - 84
---------------- -------------- ---------- ----------- ----------------- -------- ------
Other(2) - - - 596 - 596
================ ============== ========== =========== ================= ======== ======
24,153 3,592 773 1,699 7,648 37,865
================ ============== ========== =========== ================= ======== ======
(1) Consists of commercial mortgages and residual structured and
asset finance loans (shipping, aviation, and structured
finance).
(2) Consists of smaller exposures mainly in the commercial
mortgage portfolio. We use scorecards for them, instead of a rating
model.
Geographical distribution
We classify geographical location according to country of risk -
in other words, the country where each counterparty has its main
business activity or assets unless there is a full risk transfer
guarantee in place, in which case we use the guarantor's country of
domicile instead. If our clients have operations in many countries,
we use their country of incorporation.
Sovereign Structured Derivatives Legacy Portfolios Social Total
and Products GBPm in run-off Housing GBPm
Supranational GBPm GBPm GBPm
GBPm
==================== ============== ========== =========== ================= ======== ======
30 June 2016
-------------------- -------------- ---------- ----------- ----------------- -------- ------
UK 15,641 1,224 302 1,373 7,277 25,817
-------------------- -------------- ---------- ----------- ----------------- -------- ------
Peripheral eurozone - 5 - 7 - 12
-------------------- -------------- ---------- ----------- ----------------- -------- ------
Rest of Europe 1,432 1,505 145 29 - 3,111
-------------------- -------------- ---------- ----------- ----------------- -------- ------
US 4,426 - 474 21 - 4,921
-------------------- -------------- ---------- ----------- ----------------- -------- ------
Rest of world 1,562 1,009 - 212 - 2,783
==================== ============== ========== =========== ================= ======== ======
23,061 3,743 921 1,642 7,277 36,644
==================== ============== ========== =========== ================= ======== ======
31 December 2015
-------------------- -------------- ---------- ----------- ----------------- -------- ------
UK 19,354 1,202 289 1,420 7,648 29,913
-------------------- -------------- ---------- ----------- ----------------- -------- ------
Peripheral eurozone - 2 - 8 - 10
-------------------- -------------- ---------- ----------- ----------------- -------- ------
Rest of Europe 1,093 1,546 194 27 - 2,860
-------------------- -------------- ---------- ----------- ----------------- -------- ------
US 2,526 50 290 21 - 2,887
-------------------- -------------- ---------- ----------- ----------------- -------- ------
Rest of world 1,180 792 - 223 - 2,195
==================== ============== ========== =========== ================= ======== ======
24,153 3,592 773 1,699 7,648 37,865
==================== ============== ========== =========== ================= ======== ======
30 June 2016 compared to 31 December 2015
In H116, committed exposures decreased by 3% to GBP36.6bn (2015:
GBP37.9bn) mainly in our Sovereign and Supranational portfolio.
Exposures in our Sovereign and Supranational portfolio are
mainly cash at central banks and highly-rated liquid assets we hold
as part of normal liquid asset portfolio management. The decrease
of 5% in the overall exposure to GBP23.1bn (2015: GBP24.2bn) was
driven by a reduction in deposits in the UK, offset in part by an
increase in US deposits, as part of normal liquidity
management.
Legacy Portfolios in run-off reduced slightly in H116 at
GBP1.6bn (2015: GBP1.7bn). Social Housing exposures reduced in H116
as we continued to refinance longer-dated loans onto shorter
maturities (and on current market terms) that are then managed in
Commercial Banking.
Corporate Centre - credit risk mitigation
We reduce credit risk in derivatives with netting agreements,
collateralisation and the use of CCPs. For details of our approach
to credit risk mitigation, see the 'Global Corporate Banking -
credit risk management' section in the 2015 Annual Report.
At 30 June 2016 we had cash collateral of GBP460m (2015:
GBP551m) held against our Legacy Portfolios in run-off. The
collateral we held against impaired loans was 100% (2015: 100%) of
the impaired loan balances.
Corporate Centre - credit performance
We monitor exposures that show potentially higher risk
characteristics using our Watchlist process (described in 'Risk
monitoring' in the 'Credit risk management' section in the 2015
Annual Report). The table below shows the exposures we monitor, and
those we classify as non-performing by portfolio at 30 June 2016
and 31 December 2015.
Sovereign Structured Derivatives Legacy Portfolios Social Total
and Products GBPm in run-off Housing GBPm
Supranational GBPm GBPm GBPm
GBPm
============================= ============== ========== =========== ================= ======== ======
30 June 2016
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
Total committed exposure
of which:(1) 23,061 3,743 921 1,642 7,277 36,644
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Performing (Non-Watchlist) 23,061 3,743 921 1,448 7,099 36,272
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Watchlist: Enhanced
monitoring - - - 61 178 239
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Watchlist: Proactive
management - - - 11 - 11
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Non-performing
exposure(2) - - - 122 - 122
============================= ============== ========== =========== ================= ======== ======
Observed impairment
loss allowances - - - 70 - 70
============================= ============== ========== =========== ================= ======== ======
IBNO(3) 36
============================= ============== ========== =========== ================= ======== ======
Total impairment
loss allowances 106
============================= ============== ========== =========== ================= ======== ======
31 December 2015
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
Total committed exposure
of which:(1) 24,153 3,592 773 1,699 7,648 37,865
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Performing (Non-Watchlist) 24,153 3,592 773 1,493 7,574 37,585
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Watchlist: Enhanced
monitoring - - - 102 74 176
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Watchlist: Proactive
management - - - 10 - 10
----------------------------- -------------- ---------- ----------- ----------------- -------- ------
- Non-performing
exposure(2) - - - 94 - 94
============================= ============== ========== =========== ================= ======== ======
Observed impairment
loss allowances - - - 55 - 55
============================= ============== ========== =========== ================= ======== ======
IBNO(3) 47
============================= ============== ========== =========== ================= ======== ======
Total impairment
loss allowances 102
============================= ============== ========== =========== ================= ======== ======
(1) Includes committed facilities and derivatives. We define
'enhanced monitoring' and 'proactive management' in the 'Risk
monitoring' section in the 2015 Annual Report.
(2) Non-performing exposure includes committed facilities and
derivative exposures. So it can exceed the NPLs in the table on
page 23 which only include drawn balances.
(3) Allowance for incurred but not observed (IBNO) losses as
described in Note 1 to the Consolidated Financial Statements in the
2015 Annual Report.
30 June 2016 compared to 31 December 2015
Watchlist exposures increased by 34% to GBP250m at 30 June 2016
(2015: GBP186m). The increase was driven by a single Social Housing
group added to enhanced monitoring due to governance issues.
Non-performing exposures increased slightly to GBP122m at 30
June 2016 (2015: GBP94m) due to further stress in our aviation
portfolio.
Corporate Centre - forbearance
We have only made forbearance arrangements for the Legacy
Portfolios in run-off.
Forbearance started in the period(1)
The exposures that entered forbearance in H116 and H115
were:
Half year Half year
to to
30 June 2016 30 June 2015
=========================== ============= =============
GBPm GBPm
=========================== ============= =============
Term extension 22 -
--------------------------- ------------- -------------
Interest-only 4 9
--------------------------- ------------- -------------
Other payment rescheduling 14 3
=========================== ============= =============
40 12
=========================== ============= =============
(1) The figures reflect the forbearance activity in the period,
regardless of whether there was any forbearance on the accounts
before.
Forbearance total position(1)
The exposures at 30 June 2016 and 31 December 2015, analysed by
their payment status at the period-end and the forbearance we
applied, were:
Term Other payment Impairment
extension Interest-only rescheduling Total loss allowances
GBPm GBPm GBPm GBPm GBPm
================================ ========== ============= ============= ===== ================
30 June 2016
-------------------------------- ---------- ------------- ------------- ----- ----------------
Non-performing 21 9 17 47 33
-------------------------------- ---------- ------------- ------------- ----- ----------------
Performing 14 11 10 35 1
================================ ========== ============= ============= ===== ================
35 20 27 82 34
================================ ========== ============= ============= ===== ================
Proportion of Legacy Portfolios
in run-off 2.2% 1.2% 1.6% 5.0%
================================ ========== ============= ============= ===== ================
31 December 2015
-------------------------------- ---------- ------------- ------------- ----- ----------------
Non-performing 21 8 7 36 26
-------------------------------- ---------- ------------- ------------- ----- ----------------
Performing 15 43 26 84 2
================================ ========== ============= ============= ===== ================
36 51 33 120 28
================================ ========== ============= ============= ===== ================
Proportion of Legacy Portfolios
in run-off 2.1% 3.0% 1.9% 7.0%
================================ ========== ============= ============= ===== ================
(1) We base forbearance type on the first forbearance we
applied. Tables only show accounts open at the period-end.
30 June 2016 compared to 31 December 2015
The forbearance started in H116 was higher than in H115 due to a
single aviation case that entered forbearance in H116 and a further
term extension on a shipping transaction.
At 30 June 2016, the cumulative forbearance stock in our Legacy
Portfolios in run-off reduced by 32% to GBP82m (2015: GBP120m).
This decrease was due to the application of an exit criteria to our
forbearance policy in H116 as described in the 'Forbearance
summary' of the 'Santander UK group level - credit risk review'
section. Applying these exit criteria to our forbearance stock at
31 December 2015, the loans reported as forborne would reduce by
GBP39m to GBP81m.
Market risk
Market risk management
In H116, there were no significant changes in the way we manage
market risk as described in the 2015 Annual Report.
Market risk review
We analyse below our key trading and banking market risk
metrics.
Key metrics
-- NIM sensitivity to +50bps decreased to GBP43m and to -50bps decreased to GBP(40)m
-- Economic Value of Equity (EVE) sensitivity to +50bps
increased to GBP145m and to -50bps decreased to GBP(78)m.
The movement in NIM sensitivities in H116 was largely due to
further margin compression and changes in the underlying management
assumptions.
Trading market risk review
This table shows our Internal VaR for 30 June 2016 and 31
December 2015, as defined in the 'Trading market risk' section of
the 2015 Annual Report. There are figures for exposure to each of
the main classes of risk. And for each period, we show the highest
figures, the lowest, the average, and those at the period-end.
The VaR figures show how much the fair values of all our
tradeable instruments (like shares or bonds) could have changed.
Since trading instruments are recorded at fair value, these are
also the amounts by which they could have increased or reduced our
income.
Trading instruments Period-end Average Highest Lowest
exposure exposure exposure exposure
========================= ================ ================ ================ ================
30 31 30 31 30 31 30 31
June December June December June December June December
2016 2015 2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
========================= ===== ========= ===== ========= ===== ========= ===== =========
Interest rate risks(1) 2.4 2.0 2.3 2.8 3.0 4.6 1.7 1.7
------------------------- ----- --------- ----- --------- ----- --------- ----- ---------
Equity risks(2) 0.9 0.8 0.8 0.7 1.1 1.1 0.6 0.5
------------------------- ----- --------- ----- --------- ----- --------- ----- ---------
Credit (spread) risks(3) - - - - - 0.2 - -
------------------------- ----- --------- ----- --------- ----- --------- ----- ---------
Foreign exchange risks 2.1 0.1 1.0 0.1 2.1 0.1 0.1 -
========================= ===== ========= ===== ========= ===== ========= ===== =========
Correlation offsets(4) (3.4) (0.9) (1.6) (0.9) - - - -
========================= ===== ========= ===== ========= ===== ========= ===== =========
Total correlated one-day
VaR 2.0 2.0 2.5 2.7 3.0 4.7 1.7 1.6
========================= ===== ========= ===== ========= ===== ========= ===== =========
(1) This measures the effect of changes in interest rates and
how volatile they are. The effects are on cash instruments,
securities and derivatives. This includes swap spread risk (the
difference between swap rates and government bond rates), basis
risk (changes in interest rate tenor basis) and inflation risk
(changes in inflation rates).
(2) This measures the effect of equity prices, volatility and
dividends on stock and derivatives.
(3) This measures the effect of changes in the credit spread of
corporate bonds or credit derivatives.
(4) The highest and lowest exposures for each risk type did not
necessarily happen on the same day as the highest and lowest total
correlated one-day VaR. It is impossible to calculate a
corresponding correlation offset effect, so we have not included it
in the table.
Banking market risk review
Interest rate risk
Yield curve risk
The table below shows how our base case income and valuation
would be affected by a 50 basis point parallel shift (both upwards
and downwards) applied instantaneously to the yield curve at 30
June 2016 and 31 December 2015. 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 shifts.
30 June 2016 31 December 2015
================ ============== ==================
+50bps -50bps +50bps -50bps
GBPm GBPm GBPm GBPm
================ ====== ====== ======== ========
NIM sensitivity 43 (40) 131 39
---------------- ------ ------ -------- --------
EVE sensitivity 145 (78) 86 (54)
================ ====== ====== ======== ========
The movement in NIM sensitivities in H116 was largely due to
further margin compression as a result of lower levels of the yield
curve and changes in the underlying management assumptions we used
for risk measurement purposes. We updated our assumptions to better
reflect the continued low rate environment. This was partially
offset by an increased volume of net fixed rate assets left
unhedged.
We are also taking actions to be prepared for the possibility of
negative interest rates in the UK, including a review of our
systems and models, and to ensure any potential impact on our
customers is appropriately managed.
Basis risk
We measure basis risk using various risk measures, including
VaR. The VaR measure uses the same VaR methodology as our trading
book. The basis risk VaR at 30 June 2016 was GBP3m (2015: GBP1m).
It reflects our basis risk exposure between the Bank of England
Bank Rate (Base Rate), reserve rate linked assets deposited with
central banks, the Sterling Overnight Index Average (SONIA) rate
and between London Interbank Offered Rates (LIBOR) of different
terms. The increase in H116 was largely due to underlying net basis
position changes as a result of the continued reduction in SVR
mortgages and growth in bank account liability volumes.
Inflation and spread risks
The VaR of the portfolios of securities we held for liquidity
and investment purposes at 30 June 2016 was GBP5m (2015: GBP3m).
The main risk factors remain the inflation and spread risk
exposures of these positions. The increase in H116 was due to an
increase in spread risk driven by changes in the composition of our
bond portfolio as part of normal liquidity management activities
and due to an increase in market volatility at the start of H116
and following the EU referendum.
We regularly stress test these portfolios against historical and
hypothetical scenarios. Using the possible losses we estimate from
the stress tests, we establish limits that complement our VaR-based
limits. At 30 June 2016, using historic deterministic stress tests,
we estimated the worst three month stressed loss for these
portfolios to be GBP286m (2015: GBP259m). The increase at 30 June
2016 was due to an increase in spread risk from changes in the
composition of our bond portfolio.
Liquidity risk
Liquidity risk management
In H116, there were no significant changes in the way we manage
liquidity risk as described in the 2015 Annual Report.
Liquidity risk review
We analyse below our key liquidity metrics, including our
Liquidity Coverage Ratio (LCR) and our eligible liquidity pool.
We then analyse our wholesale funding. Finally we analyse how we
have encumbered some of our assets to support our funding
activities.
Key metric
-- The LCR improved to 133%. Our LCR eligible liquidity pool
increased GBP3.6bn to GBP42.3bn at 30 June 2016, reflecting prudent
liquidity planning and an increase in the collateral received for
derivatives, which are used to hedge our foreign currency
medium-term funding issuance.
Liquidity risk management
We manage liquidity risk on a consolidated basis. We created our
governance, oversight and control frameworks, and our liquidity
risk appetite (LRA), on the same basis.
Stress testing
Compliance with internal and regulatory stress tests
This table shows the Santander UK LRA and LCR reflecting the
stress testing methodology in place at that time.
LRA LCR
(two-month Santander
UK
specific requirement)
==================================== ========================== ====================
30 June 31 December 30 June 31 December
2016 2015 2016 2015
GBPbn GBPbn GBPbn GBPbn
==================================== ========== ============== ======= ===========
Eligible liquidity pool 36.4 34.4 41.7 37.8
==================================== ========== ============== ======= ===========
Asset inflows 0.7 0.8 1.8 1.5
------------------------------------ ---------- -------------- ------- -----------
Stress outflows:
------------------------------------ ---------- -------------- ------- -----------
Retail and commercial deposit
outflows (9.5) (9.2) (7.9) (7.6)
------------------------------------ ---------- -------------- ------- -----------
Wholesale funding and derivatives (3.7) (9.0) (14.7) (16.3)
------------------------------------ ---------- -------------- ------- -----------
Contractual credit rating downgrade
exposure (5.5) (4.4) (7.2) (5.9)
------------------------------------ ---------- -------------- ------- -----------
Drawdowns of loan commitments (3.1) (2.7) (3.3) (3.1)
------------------------------------ ---------- -------------- ------- -----------
Other (1.1) (1.2) - -
==================================== ========== ============== ======= ===========
Total stress net cash outflows (22.2) (25.7) (31.3) (31.4)
==================================== ========== ============== ======= ===========
Surplus 14.2 8.7 10.4 6.4
==================================== ========== ============== ======= ===========
Eligible liquidity pool as a
percentage of anticipated net
cash flows 164% 134% 133% 120%
==================================== ========== ============== ======= ===========
The LCR improved to 133% at 30 June 2016 (2015: 120%). We also
track our current interpretation of the Net Stable Funding Ratio.
Throughout H116 and FY15, it stayed above 100%.
OUR LIQUIDity pool
To minimise our liquidity risk we hold a portfolio of
unencumbered liquid assets at all times.
Our LRA and regulatory requirements determine the size and
composition of this portfolio.
LCR eligible liquidity pool
This table shows the carrying value and liquidity value of the
assets in our eligible liquidity pool at 30 June 2016 and 31
December 2015. It also shows the weighted average carrying value in
H116 and FY15:
Carrying value Liquidity value(1) Weighted average carrying
value in the period
======================== ==================== ==================== ===========================
30 June 31 December 30 June 31 December 30 June 31 December
2016 2015 2016 2015 2016 2015
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
======================== ======= =========== ======= =========== ========== ===============
Cash and balances
at central banks 14.0 15.9 14.0 15.9 18.6 19.1
------------------------ ------- ----------- ------- ----------- ---------- ---------------
Government bonds 23.2 18.1 23.1 17.8 14.7 12.5
------------------------ ------- ----------- ------- ----------- ---------- ---------------
Supranational bonds
and multilateral
development banks 1.4 1.2 1.4 1.2 1.4 1.1
------------------------ ------- ----------- ------- ----------- ---------- ---------------
Covered bonds 2.7 2.1 2.5 1.8 2.5 2.3
------------------------ ------- ----------- ------- ----------- ---------- ---------------
Asset-backed securities 0.8 0.7 0.6 0.7 0.8 0.6
------------------------ ------- ----------- ------- ----------- ---------- ---------------
Corporate bonds - 0.1 - 0.1 - 0.1
------------------------ ------- ----------- ------- ----------- ---------- ---------------
Equities 0.2 0.6 0.1 0.3 0.6 0.5
======================== ======= =========== ======= =========== ========== ===============
42.3 38.7 41.7 37.8 38.6 36.2
======================== ======= =========== ======= =========== ========== ===============
(1) Liquidity value is the carrying value with the applicable
LCR haircut applied.
Composition of the eligible liquidity pool
This table shows the allocation of the carrying value of the
assets in our eligible liquidity pool for LRA and LCR purposes at
30 June 2016 and 31 December 2015.
LCR eligible liquidity Of which
pool LRA
eligible
GBPbn
======================== ====================================== =========
Level Level 2A Level 2B
1 GBPbn GBPbn Total
GBPbn GBPbn
======================== ======= ========= ========= ======= =========
30 June 2016
------------------------ ------- --------- --------- ------- ---------
Cash and balances
at central banks 14.0 - - 14.0 13.0
------------------------- ------- --------- --------- ------- ---------
Government bonds 22.8 0.4 - 23.2 23.2
------------------------- ------- --------- --------- ------- ---------
Supranational bonds
and multilateral
development banks 1.4 - - 1.4 1.4
------------------------- ------- --------- --------- ------- ---------
Covered bonds 1.6 1.1 - 2.7 2.2
------------------------- ------- --------- --------- ------- ---------
Asset-backed securities - - 0.8 0.8 0.3
------------------------- ------- --------- --------- ------- ---------
Corporate bonds - - - - -
------------------------ ------- --------- --------- ------- ---------
Equities - - 0.2 0.2 0.2
========================= ======= ========= ========= ======= =========
39.8 1.5 1.0 42.3 40.3
======================== ======= ========= ========= ======= =========
31 December 2015 35.6 1.8 1.3 38.7 36.9
========================= ======= ========= ========= ======= =========
30 June 2016 compared to 31 December 2015
Our LCR eligible liquidity pool significantly exceeded wholesale
funding of less than one year, with a coverage ratio of 206% at 30
June 2016 (2015: 183%). The change in the coverage ratio (which is
expected to be volatile due to the management of normal short-term
business commitments) was driven mainly by:
-- A decrease in wholesale funding with a residual maturity of
less than one year of GBP0.6bn to GBP20.5bn at 30 June 2016 (2015:
GBP21.1bn). This reflected changes in the maturity profile of our
wholesale funding.
-- An increase in eligible liquidity pool assets by GBP3.6bn to
GBP42.3bn at 30 June 2016 (2015: GBP38.7bn), reflecting prudent
liquidity planning and an increase in the collateral received for
derivatives, which are used to hedge our foreign currency
medium-term funding issuance.
OUR Funding strategy and structure
Our funding strategy continues to be based on maintaining a
conservatively structured balance sheet and diverse sources of
funding.
Deposit funding
Our Retail Banking and Commercial Banking activities are mostly
funded by customer deposits. The rest is funded by long-term debt
and equity (including funding secured against our customer loans
and advances).
Wholesale funding
Wholesale funding and issuance model
Banco Santander is a multiple point of entry resolution group.
This means that should it fail, it would be split up into parts.
Healthy parts might be sold or be maintained as a residual group
without their distressed sister companies. The resolution of the
distressed parts might be effected via 'bail in' of bonds that had
been issued to the market by a regional intermediate holding
company.
Santander UK Group Holdings plc is a single point of entry
resolution group. This means that resolution would work downwards
from the group's holding company (i.e. Santander UK Group Holdings
plc). Losses in subsidiaries would first be transferred up to
Santander UK Group Holdings plc. If the holding company is bankrupt
as a result, the group needs resolving. The 'bail in' tool is
applied to the holding company, with the equity being written off
and bonds converted into equity as necessary to recapitalise the
group. Those bondholders would become the new owners. The group
would stay together.
Santander UK Group Holdings plc is the immediate holding company
of Santander UK plc, which in turn is the immediate parent company
of Abbey National Treasury Services plc. This structure is a Bank
of England recommended configuration which aims to resolve banks
without disrupting the activities of their operating companies,
thereby maintaining continuity of services for customers.
Composition of wholesale funding
We are active in the wholesale markets and we have direct access
to both money market and long-term investors through our funding
programmes. This makes our wholesale funding well diversified by
product, maturity, geography and currency. This includes currencies
available across a range of channels, including money markets, repo
markets, senior unsecured, secured, medium-term and subordinated
debt.
30 June 2016 compared to 31 December 2015
As part of our ring-fence planning, from 1 June 2016, Santander
UK plc became the issuer in respect of the outstanding notes issued
by Abbey National Treasury Services plc under its US$30bn Euro
Medium Term Note Programme, its Euro 35bn Global Covered Bond
Programme, and its US SEC registered debt shelf. Santander UK plc
also became the issuer for the following standalone securities: the
Euro 60m Guaranteed Step-Down Fixed / Inverse Floating Rate Notes
due 2019, and the GBP166,995,000 Zero Coupon Amortising Guaranteed
Notes due 2038.
Except for the covered bonds, which will continue to have the
secured guarantee of Abbey Covered Bonds LLP, all notes transferred
to Santander UK plc by Abbey National Treasury Services plc and all
notes issued by Santander UK plc in the future under these
programmes will be the sole liability of Santander UK plc and will
not be guaranteed by any other entity.
Going forward, Santander UK plc is intended to be our main
operating company issuer of senior unsecured debt and covered
bonds. Santander UK Group Holdings plc will be the issuer of
subordinated debt and Minimum Requirement for Own Funds and
Eligible Liabilities (MREL) / Total Loss Absorbing Capacity (TLAC)
eligible senior unsecured debt.
Maturity profile of wholesale funding
This table shows our main sources of wholesale funding. It does
not include securities financing repurchase and reverse repurchase
agreements. The table is based on exchange rates at issue and
scheduled repayments. It does not reflect the final contractual
maturity of the funding.
<=1 >1 >3 >6 >9 Sub-total >1 >2 >5 Total
month and and and and <=1 and and years
<=3 <= <=9 <=12 year <=2 <=5
months 6 months months months years years
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
30 June 2016
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Downstreamed from Santander UK Group Holdings plc to
Santander UK plc(1)
---------------------------------------------------------------------------------------------------------------
Senior unsecured
- public benchmark - - - - - - - 1.5 0.5 2.0
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Subordinated
liabilities
and equity
(including AT1
issuances) - - - - - - - 0.8 1.7 2.5
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
- - - - - - - 2.3 2.2 4.5
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Other Santander UK plc
---------------------------------------------------------------------------------------------------------------
Deposits by
banks - 0.3 - - - 0.3 - - - 0.3
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured
- public benchmark(2) - - - 0.9 - 0.9 1.7 7.9 2.0 12.5
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured
- privately
placed(2) - 0.7 0.5 1.0 - 2.2 1.3 1.6 0.3 5.4
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Covered bonds(2) - 0.9 1.6 1.0 0.8 4.3 3.3 5.4 4.1 17.1
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Securitisation
and structured
issuance(3) 1.3 - 0.5 1.1 1.1 4.0 2.7 1.5 0.8 9.0
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Subordinated
liabilities - - - 0.1 - 0.1 0.1 0.3 2.2 2.7
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
1.3 1.9 2.6 4.1 1.9 11.8 9.1 16.7 9.4 47.0
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Other group
entities
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Deposits by
banks 0.2 0.3 - - - 0.5 - - - 0.5
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
CDs and commercial
paper 0.9 2.5 1.2 0.6 0.1 5.3 - - - 5.3
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured - - - - - - - - - -
- public benchmark(2)
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured
- privately
placed(2) - - 0.2 0.1 - 0.3 0.1 0.4 0.3 1.1
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Covered bonds(2) - - - - - - - - - -
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Securitisation
and structured
issuance(4) 0.1 0.8 1.3 0.2 0.2 2.6 0.7 0.6 - 3.9
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
1.2 3.6 2.7 0.9 0.3 8.7 0.8 1.0 0.3 10.8
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Total 2.5 5.5 5.3 5.0 2.2 20.5 9.9 20.0 11.9 62.3
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Of which: -
secured 1.4 1.7 3.4 2.3 2.1 10.9 6.7 7.5 4.9 30.0
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
- unsecured 1.1 3.8 1.9 2.7 0.1 9.6 3.2 12.5 7.0 32.3
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
31 December
2015
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Downstreamed from Santander UK Group Holdings plc to
Santander UK plc(1)
---------------------------------------------------------------------------------------------------------------
Senior unsecured
- public benchmark - - - - - - - 0.8 - 0.8
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Subordinated
liabilities
and equity (including
AT1 issuances) - - - - - - - 0.8 1.7 2.5
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
- - - - - - - 1.6 1.7 3.3
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Other Santander UK plc
---------------------------------------------------------------------------------------------------------------
Deposits by
banks 0.1 0.2 - - - 0.3 - - - 0.3
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured - - - - - - - - - -
- public benchmark(2)
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured - - - - - - - - - -
- privately
placed(2)
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Covered bonds(2) - - - - - - - - - -
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Securitisation
and structured
issuance(3) 0.9 - 0.7 1.3 0.5 3.4 4.4 1.7 0.7 10.2
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Subordinated
liabilities - - - - - - 0.1 0.4 2.3 2.8
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
1.0 0.2 0.7 1.3 0.5 3.7 4.5 2.1 3.0 13.3
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Other group
entities
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Deposits by
banks 0.1 0.6 - - - 0.7 - - - 0.7
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
CDs and commercial
paper 1.6 3.2 1.7 0.6 0.1 7.2 - - - 7.2
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured
- public benchmark(2) - - 0.7 - - 0.7 1.8 7.1 3.0 12.6
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Senior unsecured
- privately
placed(2) 0.5 - 0.2 0.7 0.6 2.0 1.8 2.0 0.2 6.0
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Covered bonds(2) - - - 0.9 1.6 2.5 3.2 3.7 6.9 16.3
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
Securitisation
and structured
issuance(4) 0.9 0.7 0.7 0.8 1.2 4.3 0.4 0.6 - 5.3
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
3.1 4.5 3.3 3.0 3.5 17.4 7.2 13.4 10.1 48.1
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Total 4.1 4.7 4.0 4.3 4.0 21.1 11.7 17.1 14.8 64.7
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
Of which: -
secured 1.8 0.7 1.4 3.0 3.3 10.2 8.0 6.0 7.6 31.8
----------------------- ------ ------- --------- ------- ------- --------- ------ ------ ------ -----
- unsecured 2.3 4.0 2.6 1.3 0.7 10.9 3.7 11.1 7.2 32.9
======================= ====== ======= ========= ======= ======= ========= ====== ====== ====== =====
(1) Currently all our debt issued out of Santander UK Group
Holdings plc is downstreamed into Santander UK plc on an equivalent
rankings basis (e.g. senior unsecured is downstreamed as senior
unsecured, subordinated capital instruments are downstreamed as
subordinated capital instruments, etc.). However, under the
end-state MREL / TLAC regime, senior unsecured debt issued out of
Santander UK Group Holdings plc will be downstreamed in a form that
is subordinated to senior unsecured debt, but senior to
subordinated capital instruments issued out of Santander UK
plc.
(2) With effect on and from 1 June 2016, Santander UK plc was
substituted in place of Abbey National Treasury Services plc as
principal obligor under its existing senior unsecured wholesale
securities. For more on this see Notes 19 and 20 to the Condensed
Consolidated Interim Financial Statements.
(3) This includes funding from mortgage-backed securitisation
vehicles where Santander UK plc is the asset originator.
(4) This includes funding from asset-backed securitisation
vehicles where entities other than Santander UK plc are the asset
originator.
Reconciliation of wholesale funding to the balance sheet
Balance sheet line item
========================= ======== ==========================================================================================
Funding Deposits Deposits Trading Financial Debt Subordinated Share capital
analysis by banks by liabilities liabilities securities liabilities and
GBPbn GBPbn customers(1) GBPbn designated in issue GBPbn other equity
GBPbn at fair GBPbn instruments(2)
value GBPbn
GBPbn
========================= ======== ======== ============ =========== =========== ========== ============ ==============
30 June 2016
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Deposits by banks
(non-customer
deposits) 0.8 - - 0.8 - - - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
CDs and commercial
paper 5.3 - - - - 5.3 - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Senior unsecured
- public benchmark 14.5 - 2.1 - - 12.4 - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
-
privately
placed 6.5 - - - 2.0 4.5 - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Covered bonds 17.1 - - - - 17.1 - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Securitisation
and structured
issuance 12.9 3.7 0.5 - - 8.7 - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Subordinated
liabilities and
equity 5.2 - - - - - 3.4 1.8
========================= ======== ======== ============ =========== =========== ========== ============ ==============
Total wholesale
funding 62.3 3.7 2.6 0.8 2.0 48.0 3.4 1.8
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Repos 7.3 0.3 - 7.0 - - - -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Foreign exchange
and hedge accounting 4.6 - 0.3 - - 3.5 0.8 -
------------------------- -------- -------- ------------ ----------- ----------- ---------- ------------ --------------
Other 10.6 3.7(3) - 6.9(4) - - - -
========================= ======== ======== ============ =========== =========== ========== ============ ==============
Balance sheet
total 84.8 7.7 2.9 14.7 2.0 51.5 4.2 1.8
========================= ======== ======== ============ =========== =========== ========== ============ ==============
31 December 2015 79.7 8.3 1.3 12.7 2.0 49.7 3.9 1.8
========================= ======== ======== ============ =========== =========== ========== ============ ==============
(1) This is included in our balance sheet total of GBP169,830m
(2015: GBP164,074m).
(2) This is GBP14m (2015: GBP14m) fixed/floating rate
non-cumulative callable preference shares, GBP235m (2015: GBP235m)
Step-up Callable Perpetual Reserve Capital Instruments, GBPnil
(2015: GBP7m) of Step-up Callable Perpetual Preferred Securities
and GBP1,550m (2015: GBP1,550m) Perpetual Capital Securities. See
Note 24 to the Condensed Consolidated Interim Financial
Statements.
(3) Mainly items in the course of transmission and other
deposits. See Note 17 to the Condensed Consolidated Interim
Financial Statements.
(4) Short positions in securities and unsettled trades, cash
collateral and short-term deposits. See Note 18 to the Condensed
Consolidated Interim Financial Statements.
Term issuance
In H116, our external term issuance (sterling equivalent)
was:
US Dollar Euro Other Total Total
GBPbn GBPbn GBPbn Half year Half year
to to
Sterling 30 June 2016 30 June 2015
GBPbn GBPbn GBPbn
================================ ======== ========= ====== ====== ============= =============
Securitisations 0.8 0.3 - - 1.1 1.7
-------------------------------- -------- --------- ------ ------ ------------- -------------
Covered bonds - public
benchmark - - 0.8 - 0.8 1.2
-------------------------------- -------- --------- ------ ------ ------------- -------------
Structured notes - 0.3 - - 0.3 -
-------------------------------- -------- --------- ------ ------ ------------- -------------
Senior unsecured -
public benchmark 0.5 2.1 - - 2.6 3.4
-------------------------------- -------- --------- ------ ------ ------------- -------------
- privately placed - - 0.6 0.1 0.7 0.9
-------------------------------- -------- --------- ------ ------ ------------- -------------
Subordinated debt
and equity (including
AT1 issuance) - - - - - 0.8
================================ ======== ========= ====== ====== ============= =============
Total gross issuances 1.3 2.7 1.4 0.1 5.5 8.0
================================ ======== ========= ====== ====== ============= =============
30 June 2016 compared to 31 December 2015
Together with our immediate parent, Santander UK Group Holdings
plc, our overall funding strategy remains to develop and sustain a
diversified funding base. We also need to fulfil regulatory
requirements as well as to support our credit ratings. As in H115,
the majority of our new issuance in H116 was in the unsecured
markets.
H116 presented a challenging market for issuance with
macro-economic headlines driving heightened volatility. Oil price
fluctuations, weaker equity markets and the EU referendum all
contributed to credit spreads drifting wider throughout H116.
Authorities however continued to provide support through further
rounds of monetary stimulus and maintaining the low interest rate
environment. The wholesale funding markets continued to offer us an
economically viable source of funding. Taking advantage of the
constructive market conditions at the beginning of the year and
capitalising on stable windows through H116 we remained active and
consequently ahead of our funding requirement.
In H116, our term issuance was GBP5.5bn (H115: GBP8.0bn), all of
which was medium-term funding (H115: GBP7.2bn):
-- We issued two public senior unsecured securities, and
received downstreamed funding, in the form of loans that rank pari
passu with our existing senior unsecured liabilities, from two
public issuances by our immediate parent. These downstreamed
funding issuances were a $1bn 5 year senior unsecured SEC
registered benchmark transaction and a GBP500m 10 year transaction.
The two public issuances were SEC registered securities out of
Abbey National Treasury Services plc, being a $1.650bn 3 year fixed
transaction and a $350m 3 year floating rate transaction.
-- We also issued two residential mortgage-backed securities and a covered bond.
Maturities in H116 were GBP5.5bn (H115: GBP9.1bn). At 30 June
2016, 67% (2015: 67%) of wholesale funding had a maturity of
greater than one year, with an overall residual duration of 45
months (2015: 43 months). In H116, our continuing strategy of
building closer customer relationships through the 1I2I3 World
retail offering created additional current account liabilities that
further strengthened this stable funding source. The total drawdown
of UK Treasury Bills under the various Funding for Lending Schemes
(FLS) increased GBP1.0bn to GBP3.2bn at 30 June 2016 (2015:
GBP2.2bn), demonstrating our commitment to small and medium sized
enterprises.
Encumbrance
On-balance sheet encumbered and unencumbered assets
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 also have a covered bond programme. Under this, we issue
securities to investors secured by a pool of residential
mortgages.
For more on how our notes issued from secured programmes
(securitisations and covered bonds) have been issued externally and
also retained, and what we have used them for, see Notes 12 and 27
to the Condensed Consolidated Interim Financial Statements.
30 June 2016 compared to 31 December 2015
At 30 June 2016, we had GBP58.4bn (2015: GBP63.6bn) of assets
encumbered as a result of transactions with counterparties other
than central banks. We also had GBP214.6bn (2015: GBP189.8bn) of
other assets (assets not positioned at central banks) and GBP26.0bn
(2015: GBP28.0bn) of assets positioned at central banks (i.e.
pre-positioned plus encumbered).
Our level of encumbrance from external issuance of
securitisations and covered bonds decreased in H116 as planned.
This reflected our desire to shift new wholesale funding issuance
away from the secured markets where possible. We expect our overall
level of encumbrance to continue to decrease in H216.
Credit ratings
Independent credit rating agencies review our credit quality.
They base their work on a wide range of business and financial
attributes. These include risk management, capital strength,
earnings, funding, liquidity, accounting and governance.
Standard
30 June 2016 & Poor's Moody's Fitch
=================== ========== =========== ============
Long term (outlook) A (Stable) A1 (Stable) A (Positive)
------------------- ---------- ----------- ------------
Short term A-1 P-1 F1
=================== ========== =========== ============
30 June 2016 compared to 31 December 2015
Following the results of the UK referendum on EU membership,
Standard & Poor's and Moody's changed the ratings outlook on
the operating company of most major UK banks because of the
medium-term impact of political and market uncertainty.
On 7 July 2016, Standard & Poor's affirmed the long-term
rating for Santander UK plc at A, with the outlook changed to
negative from stable.
Capital risk
Capital risk management
In H116, there were no significant changes to the way we manage
capital risk as described in the 2015 Annual Report.
The scope of our capital adequacy
We set out below how we are regulated by the PRA and the ECB,
and an update on emerging rules.
Capital risk review
We then analyse our key capital ratios.
Key metric
-- Our CET 1 capital ratio declined to 11.2%, reflecting
market-driven accounting impacts on defined benefit pension
schemes. There was also an adverse impact in the available-for-sale
portfolio, prudent valuation adjustments and RWA levels in the last
week of June.
THE SCOPE OF OUR CAPITAL ADEQUACY
Regulatory supervision
Santander UK plc is incorporated in the UK. For capital
purposes, we are subject to prudential supervision by the following
regulators:
-- PRA: as we are a UK authorised banking group
-- ECB: as we are a member of Banco Santander. The ECB
supervises Banco Santander as part of the Single Supervisory
Mechanism.
Although we are part of Banco Santander, we do not have any
guarantees from our ultimate parent Banco Santander SA and we
operate as an autonomous subsidiary. As we are regulated by the
PRA, we have to meet the PRA capital requirements on a standalone
basis. We also have to show the PRA that we can withstand capital
stress tests without the support of our parent. Reinforcing our
corporate governance framework, the PRA exercises oversight through
its rules and regulations on the Board and senior management
appointments.
Santander UK Group Holdings plc is the holding company of
Santander UK plc, and is the head of the Santander UK group for
regulatory capital and leverage purposes.
Our approach to CRD IV
We apply Banco Santander SA's approach to capital measurement
and risk management for CRD IV. As a result, Santander UK plc is
classified as a significant subsidiary of Banco Santander SA.
For more on the CRD IV risk measurement of our exposures, see
Banco Santander SA's Pillar 3 report.
30 June 2016 compared to 31 December 2015
In December 2015, the Financial Policy Committee (FPC) published
its view on the calibration of the capital framework for the UK
banking system at an end point in 2019. This reflected an aggregate
level of Tier 1 equity in the system of 11% RWA, with CET 1
comprising 9.5% of RWAs, plus time-varying elements including the
countercyclical buffer. The RWA measures considered for this
assessment assumed that the perceived shortcomings of the current
RWA measures under CRD IV are corrected. Overall, the FPC expected
the UK banking system would only have a little more capital to
build, although the required increase could be more significant for
some individual banks.
The Basel Committee on Banking Supervision (BCBS) is developing
revised standards for the calculation of minimum capital
requirements and RWAs for market risk, operational risk and credit
risk to address perceived shortcomings. In January 2016, the BCBS
published the revised market risk framework and is consulting on
proposals for significant revisions to the operational risk and
credit risk frameworks. It is also considering setting capital
floors based on standardised approaches. These revised standards,
once written into EU law, could significantly impact the
measurement of RWAs over the medium term and have a negative impact
on our capital ratios.
In addition, the Financial Stability Board finalised proposals
on TLAC in November 2015. These set out the minimum level of loss
absorbency required by globally systemically important banks from
2019. They are expected to apply to us as we are a subsidiary of
the globally significant Banco Santander. In the EU, loss
absorbency requirements have been established under the Bank
Recovery and Resolution Directive, under which institutions will be
required to maintain an MREL. The Bank of England has consulted on
the approach to setting MREL for UK institutions, and it has
proposed that MREL requirements could be set at levels equivalent
to two times the minimum capital requirements (Pillar 1 minimum
plus Pillar 2A) from 2020. It plans to set MREL as necessary to
implement the TLAC standard. We will need to ensure that we have
enough capital and loss absorbing eligible liabilities to meet this
level by the implementation date.
Capital risk management
Our approach to capital management is centralised. We base it on
our assessment of what the regulators ask of us, and the economic
capital impacts of our business. We operate within the capital risk
framework and appetite approved by our Board.
Capital resources
Key capital ratios
The table below is consistent with our regulatory filings for 30
June 2016 and 31 December 2015.
The table below analyses the total capital ratio of Santander UK
plc into its component parts:
30 June 31 December
2016 2015
% %
===================== ======= ===========
CET 1 capital ratio 11.2 11.6
--------------------- ------- -----------
AT1 1.8 1.8
--------------------- ------- -----------
Grandfathered Tier 1 0.8 0.8
--------------------- ------- -----------
Tier 2 4.1 4.0
===================== ======= ===========
Total capital ratio 17.9 18.2
===================== ======= ===========
The total subordination available to Santander UK plc
bondholders was 17.9% (2015: 18.2%) of RWAs.
30 June 2016 compared to 31 December 2015
The decline in our CET 1 capital ratio to 11.2% at 30 June 2016
(2015: 11.6%) reflected market-driven accounting impacts in Q216 on
defined benefit pension schemes, offsetting retained profits after
distribution. There was also an adverse impact on the
available-for-sale portfolio, prudent valuation adjustments and RWA
levels for credit, counterparty and market risk including those in
the last week of June.
Our total capital ratio decreased to 17.9% at 30 June 2016
(2015: 18.2%), due to the lower CET 1 capital ratio and the
transitional impact of the CRD IV Minority Interest and
grandfathering rules.
Pension risk
Pension risk management
In H116, there were no significant changes to the way we manage
pension risk as described in the 2015 Annual Report.
Pension risk review
We provide more detail below on the risk profile of the
Santander (UK) Group Pension Scheme (the Scheme). We also provide
information on the Scheme's accounting position.
Key metrics
-- The pension VaR increased to GBP1,540m due to significant
falls in long-term interest rates and increased market volatility,
partially offset by higher interest rate hedging levels in the
Scheme of 58%, up from 50% in 2015.
-- The accounting surplus of the Scheme and other funded schemes
reduced to GBP39m. This was due to an increase in liabilities
caused by a fall in AA corporate bond rates without a similar
inflation fall, partly offset by strong asset performance.
PENSION risk REVIEW
30 June 2016 compared to 31 December 2015
Risk monitoring and measurement
In H116, on a funding valuation basis, the inflation hedging
ratio of the Scheme was 62% (2015: 65%) and the interest rate
hedging ratio was 58% (2015: 50%). Santander UK plc asked the
Trustee to increase interest rate hedging to reduce the overall
level of risk in the Scheme, interest rates being the largest
single risk to which the pension fund is exposed. This change
reduced the potential volatility in the funding level of the Scheme
caused by changes in long-term interest rates.
We continue to seek the right balance between risk and reward.
In H116, portfolio management yielded positive performance mainly
from index-linked gilts, interest rate derivatives and equities.
Our long-term objective is to reduce the risk of the Scheme and
eliminate the deficit on a funding valuation basis. In H116, the
triennial funding valuation also commenced, as at 31 March 2016.
Negotiations are ongoing with the Trustees regarding the impact
this valuation could have on the Scheme, the output of which may
impact our definition of long-term goals, the risk profile and our
future contributions.
In H116, VaR (1 year, 95% confidence interval) increased to
GBP1,540m (2015: GBP1,260m). This was mainly due to the impact of a
significant fall in long-term interest rates and increased market
volatility, partially offset by higher interest rate hedging levels
in the Scheme.
Accounting position
During H116, the accounting surplus of the Scheme and other
funded arrangements reduced, with sections in surplus (retirement
benefit assets) of GBP377m at 30 June 2016 (2015: GBP556m) and
sections in deficit (retirement benefit obligations) of GBP338m at
30 June 2016 (2015: GBP73m). The overall position was a GBP39m
surplus at 30 June 2016 (2015: GBP483m surplus). In addition, there
were unfunded defined benefit scheme liabilities of GBP36m at 30
June 2016 (2015: GBP37m).
The reduction in the overall position in H116 was due to an
increase in liabilities caused by a fall in AA corporate bond
rates, which drive the discount rate, without a similar fall in
inflation. This was partially offset by strong asset
performance.
Further information
For more on our pension obligations, including the sensitivity
to key risk factors, see Note 22 to the Condensed Consolidated
Interim Financial Statements.
Other key risks and areas of focus
Other key risks
In H116, there were no significant changes to the way we manage
and monitor other key risks, as described in the 2015 Annual
Report, except as set out below.
Areas of focus
In this section, we discuss our country risk exposures, and
analyse our on and off-balance sheet exposures with a focus on the
eurozone. We show our 'Balances with other Banco Santander
companies' separately.
OPERATIONAL RISK
30 June 2016 compared to 31 December 2015
Cyber risk
In H116, in common with other large UK financial institutions,
we continued to be subject to cyber attack. This included an
incident that resulted in a temporary disruption to the service
offered via our digital channels and was caused by a denial of
service attack, launched by an unknown external third party.
We continued to improve our systems, processes, controls and
staff training to reduce cyber risk and enhance our data security.
This included adding the key findings from the Bank of England led
programme to improve and test resilience to cyber attacks in the
financial industry into our cyber security IT systems plan for
2016.
Our Cyber Safe awareness campaign continued across the business,
including mandatory training and internal phishing exercises. We
continued to improve access controls and monitoring for users who
have access to sensitive information.
Operational Risk Transformation Programme
We continued to invest in the delivery of our Operational Risk
Transformation Programme, which will help us to achieve market best
practice in operational risk management.
Operational losses
In H116, the majority of operational risk losses of GBP52m (30
June 2015: GBP46m) were in the 'execution, delivery and process
management' category. This was mainly due to remediation costs for
historic systems functionality and process issues.
Consistent with industry experience, we continued to see a high
volume of low value events in the 'external fraud' category,
however, expected losses remained within forecast.
FINANCIAL CRIME risk
30 June 2016 compared to 31 December 2015
In H116, as part of our Financial Crime Transformation Programme
and our financial crime agenda, we continued to improve our
controls, culture and awareness. We:
Further increased the visibility and governance for our
accountable executives. We did this in a time of political and
media focus, and ahead of expected changes to the UK's anti-money
laundering and terrorist finance regime
Intensified our work with the UK Home Office, the Joint Money
Laundering Intelligence Taskforce and other law enforcement
agencies. We placed a special focus on financial crime policy,
which allowed us to give better advice on key emerging
geo-political changes
Enhanced our financial crime compliance operating model. We put
in place dedicated first line governance and operations, and hired
skilled staff to support a more intelligence led second line
approach
Further improved our internal data. As part of this, we
introduced key risk indicators to track performance against our
financial crime risk appetite
Continued to invest in our transformation. We improved our
screening and monitoring functions. We also enhanced our controls
to support growth plans (such as trade finance) and innovative
client propositions, such as using blockchain technology for
international payments
Further automated our Suspicious Activity Reporting (SAR)
process. This built on positive feedback from the National Crime
Agency on the quality of our SAR submissions and improved our
ability to provide high quality data.
MODEL RISK
30 June 2016 compared to 31 December 2015
In H116 we updated our model risk policy to align it to the
framework that was approved in 2015. We continued to embed these
across the business, and prioritised our focus on models in Finance
and Retail Banking, as well as key model deployments for IFRS 9,
stress testing and valuation methodologies. We are reviewing our
models to ensure that we are prepared for the possibility of
negative interest rates in the UK. We also introduced an executive
model owner role that will enhance the year-end attestation
process.
Country risk exposures
The tables below show our exposures at 30 June 2016 and 31
December 2015. The tables exclude balances with other Banco
Santander companies. We show them separately in the 'Balances with
other Banco Santander companies' section.
Central and Government Banks(1) Other financial Retail Corporate Total(2)
local guaranteed GBPbn institutions GBPbn GBPbn GBPbn
governments GBPbn GBPbn
GBPbn
====================== ============ =========== ======== =============== ====== ========= ========
30 June 2016
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Peripheral eurozone
countries:
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Italy 1.0 - - 0.1 - 0.1 1.2
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Ireland - - 0.2 0.2 - 0.7 1.1
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Spain (excluding
Banco Santander) - - 0.4 - - 0.2 0.6
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Portugal - - 0.1 - - - 0.1
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Other eurozone
countries:
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
France 0.1 0.3 2.4 0.4 - 0.4 3.6
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Germany - - 4.0 - - 0.3 4.3
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
All other eurozone(3) 0.2 - 1.5 2.0 - 1.4 5.1
====================== ============ =========== ======== =============== ====== ========= ========
1.3 0.3 8.6 2.7 - 3.1 16.0
====================== ============ =========== ======== =============== ====== ========= ========
All other countries:
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
UK 13.7 0.4 12.6 15.6 189.5 48.8 280.6
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
US 4.6 0.3 13.1 1.5 - 0.3 19.8
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Japan 2.9 - 1.8 0.3 - 2.1 7.1
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
All others(4) - - 3.1 0.8 - 2.6 6.5
====================== ============ =========== ======== =============== ====== ========= ========
21.2 0.7 30.6 18.2 189.5 53.8 314.0
====================== ============ =========== ======== =============== ====== ========= ========
Total 22.5 1.0 39.2 20.9 189.5 56.9 330.0
====================== ============ =========== ======== =============== ====== ========= ========
31 December
2015
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Peripheral eurozone
countries:
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Italy 0.8 - 0.1 - - 0.1 1.0
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Ireland - - - 0.1 - 0.6 0.7
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Spain (excluding
Banco Santander) - - 0.2 - - 0.2 0.4
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Portugal - - 0.1 - - - 0.1
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Other eurozone
countries:
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
France 0.1 0.3 2.1 0.1 - 1.6 4.2
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Germany 0.1 - 2.2 - - 0.5 2.8
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
All other eurozone(3) 0.5 - 1.1 0.3 - 1.4 3.3
====================== ============ =========== ======== =============== ====== ========= ========
1.5 0.3 5.8 0.5 - 4.4 12.5
====================== ============ =========== ======== =============== ====== ========= ========
All other countries:
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
UK 17.0 0.4 9.6 6.8 184.1 52.5 270.4
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
US 2.5 0.2 9.0 3.2 - 0.1 15.0
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
Japan 2.7 - 1.0 0.1 - 1.7 5.5
---------------------- ------------ ----------- -------- --------------- ------ --------- --------
All others(4) 0.1 - 1.8 0.6 - 2.7 5.2
====================== ============ =========== ======== =============== ====== ========= ========
22.3 0.6 21.4 10.7 184.1 57.0 296.1
====================== ============ =========== ======== =============== ====== ========= ========
Total 23.8 0.9 27.2 11.2 184.1 61.4 308.6
====================== ============ =========== ======== =============== ====== ========= ========
(1) Excludes balances with central banks.
(2) Credit exposures exclude cash at hand, macro hedge of
interest rate risk, interests in other entities, intangible assets,
property, plant and equipment, current tax assets, retirement
benefit assets and other assets. Loans and advances to customers
are included gross of impairment loss allowances.
(3) Includes The Netherlands of GBP1.5bn (2015: GBP1.0bn),
Luxembourg of GBP1.9bn (2015: GBP0.9bn), Cyprus of GBP37m (2015:
GBP39m), Greece of GBPnil (2015: GBPnil), Belgium, Finland and
Austria.
(4) Includes Ukraine of GBPnil (2015: GBPnil).
30 June 2016 compared to 31 December 2015
Key changes in sovereign and other country risk exposures in
H116 were:
-- An increase of GBP10.2bn in exposure to the UK to GBP280.6bn
(2015: GBP270.4bn). This was mainly due to increased commitments
and undrawn facilities in retail mortgage lending and greater
assets held at fair value with other financial institutions,
partially offset by decreases in corporate bonds held and loans and
advances to corporate customers.
-- An increase of GBP4.8bn in exposure to the US to GBP19.8bn
(2015: GBP15.0bn). This was primarily due to an increase in trading
assets held at fair value with banks and increased holding of US
treasury bills.
-- An increase of GBP1.6bn in exposure to Japan to GBP7.1bn
(2015: GBP5.5bn). This was primarily due to the additional purchase
of equity instruments listed in Japan as part of increased activity
by Short Term Markets, and additional reverse repos with Japanese
banks. The equity instrument risk exposures are hedged using
derivative instruments and the additional reverse repos are fully
collateralised.
-- An increase of GBP1.5bn in exposure to Germany to GBP4.3bn
(2015: GBP2.8bn). This was due to increased derivative asset
balances entered into with banks.
-- A decrease of GBP0.6bn in exposure to France to GBP3.6bn
(2015: GBP4.2bn). This was principally due to decreased trading
assets held at fair value with corporate customers.
-- Movements in the other country risk exposures were minimal.
Redenomination risk
We consider the total dissolution of the eurozone to be
extremely unlikely. We also believe widespread redenomination of
our euro-denominated assets and liabilities is highly improbable,
despite the result of the recent referendum in the UK to leave the
EU. However, we have analysed the redenomination risk that might
arise from an exit of a member state from the euro or a total
dissolution of the euro and how that would be implemented. It is
not possible to predict what the total financial impact on us might
be of this.
Determining which balances would be legally redenominated is
complex and depends on a number of factors. These factors include
the precise exit scenario. This is because the effects on contracts
of a disorderly exit or one sanctioned under EU law may differ. We
monitor these risks and have taken steps to mitigate them and/or
reduce our overall exposure to losses that might arise in the event
of a redenomination. We have done this by reducing our balances and
funding mismatches. As part of maintaining a diverse funding base,
we raise funding in a number of currencies, including euro, and
convert it into sterling through currency swaps to fund our
commercial assets which are largely sterling denominated.
Our net asset position denominated in euro, reflecting assets,
liabilities and related swaps (which are mainly cross-currency
derivatives entered into to swap funding raised in euro into
sterling for reasons set out above) in connection with contracts
denominated in euro, was net assets of GBPnil at 30 June 2016
(2015: net assets of GBP0.5bn). This was debt securities of
GBP22.9bn (2015: GBP23.0bn) we issued as part of our medium-term
funding activities, medium-term repo liabilities of GBP1.3bn (2015:
GBP1.3bn), other deposit liabilities of GBP3.4bn (2015: GBP4.4bn),
other deposits by Banco Santander companies of GBP1.0bn (2015:
GBP1.1bn), other loans and securities of GBP3.4bn (2015: GBP4.9bn),
net trading repo assets of GBP2.3bn (2015: net liabilities of
GBP1.3bn) and related swap assets of GBP22.9bn (2015: GBP26.7bn)
which swap the euro exposures into sterling to ensure our assets
and liabilities are currency matched in sterling.
Our exposures to individual eurozone countries and total
exposures to eurozone counterparties, including any
euro-denominated contracts, are set out earlier in this
section.
Balances with other Banco Santander companies
We deal with other Banco Santander companies in the ordinary
course of business. We do this where we have a particular business
advantage or expertise and where they can offer us commercial
opportunities. This is done substantially on the same terms as for
similar transactions with third parties. These transactions also
arise where we support the activities of, or with, larger
multinational corporate clients and financial institutions which
may deal with other Banco Santander companies. We conduct these
activities in a way that manages the credit risk within limits
acceptable to the PRA. At 30 June 2016 and 31 December 2015, we had
gross balances with other Banco Santander companies as follows:
30 June 2016 31 December
2015
============= ========================================== ====== =============== =========== ======
Banks Other financial Corporate Total Banks Other financial Corporate Total
GBPbn institutions GBPbn GBPbn GBPbn institutions GBPbn GBPbn
GBPbn GBPbn
============= ====== =============== ========= ====== ====== =============== =========== ======
Assets:
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Spain 2.2 - - 2.2 1.5 - - 1.5
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- UK - 1.5 0.1 1.6 - 1.3 - 1.3
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Chile 0.6 - - 0.6 0.3 - - 0.3
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Norway - - - - 0.1 - - 0.1
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Other
<GBP100m 0.2 - - 0.2 0.1 0.1 - 0.2
============= ====== =============== ========= ====== ====== =============== =========== ======
3.0 1.5 0.1 4.6 2.0 1.4 - 3.4
============= ====== =============== ========= ====== ====== =============== =========== ======
Liabilities:
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Spain 4.3 0.3 0.1 4.7 3.6 0.3 0.1 4.0
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- UK - 3.9 0.1 4.0 - 2.0 0.1 2.1
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Chile 0.6 - - 0.6 0.3 - - 0.3
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Norway - - - - 0.1 - - 0.1
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Uruguay 0.2 - - 0.2 - - - -
------------- ------ --------------- --------- ------ ------ --------------- ----------- ------
- Other
<GBP100m 0.2 0.1 - 0.3 0.2 0.1 - 0.3
============= ====== =============== ========= ====== ====== =============== =========== ======
5.3 4.3 0.2 9.8 4.2 2.4 0.2 6.8
============= ====== =============== ========= ====== ====== =============== =========== ======
For further details on the above balances with other Banco
Santander companies at 30 June 2016, see Notes 8, 9, 17, 18, 19 and
20 to the Condensed Consolidated Interim Financial Statements.
Governance
58 Directors
----------------------------------------
59 Statement of Directors' responsibilities
----------------------------------------
Directors
The Directors of the Company are listed in the 2015 Annual
Report. In addition to those listed at the year-end, on 1 April
2016 Peter Jackson was appointed as a Non-Executive Director. José
María Fuster stepped down from the Board on 1 April 2016.
Peter Jackson's biographical details are shown below.
Non-Executive Directors
Peter Jackson
Appointed Non-Executive Director on 1 April 2016.
Skills and experience
Peter has extensive experience and knowledge of the financial
industry and is Head of Banco Santander SA's Innovation business.
He was CEO of the Travelex Group, where he led a major process to
transform the company, focused on digital innovation and business
re-engineering, and through mergers and acquisitions. Previously,
he held senior positions at Lloyds Banking Group plc and Halifax
Bank of Scotland plc, and was a consultant at McKinsey &
Company.
Other principal appointments
Non-Executive Director of Santander Group Holdings UK plc since
1 April 2016.
Head of Corporate Innovation of Banco Santander SA since January
2016.
Director of Santander Fintech Limited since 9 March 2016.
Non-Executive Director of Paddy Power Betfair plc since April
2013.
Auditors
Deloitte LLP stepped down from their office as auditor at the
Annual General Meeting on 31 March 2016 and the members appointed
PricewaterhouseCoopers LLP from the conclusion of that meeting.
Statement of Directors' responsibilities
The Directors listed below (being all the Directors of Santander
UK plc) confirm that to the best of their knowledge these condensed
consolidated interim financial statements have been prepared in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union, and that
the half-year management report herein includes a fair review of
the information required by Disclosure and Transparency Rules
4.2.7R and 4.2.8R, namely:
-- An indication of important events that have occurred during
the six months ended 30 June 2016 and their impact on the condensed
consolidated half-year financial statements, and a description of
the principal risks and uncertainties for the remaining six months
of the financial year, and
-- Material related party transactions in the six months ended
30 June 2016 and any material changes in the related party
transactions described in the last Annual Report.
Signed on behalf of the Board by
Nathan Bostock
Chief Executive Officer
15 August 2016
Santander UK plc Board of Directors:
Non-Executive Directors
Shriti Vadera
Scott Wheway
Ed Giera
Chris Jones
Alain Dromer
Annemarie Durbin
Genevieve Shore
Ana Botín
Bruce Carnegie-Brown
Juan Rodríguez Inciarte
Peter Jackson
Manuel Soto
Executive Director
Nathan Bostock
Financial statements
61 Independent review report
--- ----------------------------------------
62 Primary financial statements
--- ----------------------------------------
62 Condensed Consolidated Income Statement
for H116 and H115
--- ----------------------------------------
62 Condensed Consolidated Statement
of Comprehensive Income for H116
and H115
--- ----------------------------------------
63 Condensed Consolidated Balance Sheet
at 30 June 2016 and 31 December 2015
--- ----------------------------------------
64 Condensed Consolidated Cash Flow
Statement for H116 and H115
--- ----------------------------------------
65 Condensed Consolidated Statement
of Changes in Equity for H116 and
H115
--- ----------------------------------------
66 Notes to the financial statements
--- ----------------------------------------
Independent review report to Santander UK plc
Report on the Condensed Consolidated Interim Financial
Statements
Our conclusion
We have reviewed the Condensed Consolidated Interim Financial
Statements, defined below, in the Half Yearly Financial Report of
Santander UK plc for the six month period ended 30 June 2016. Based
on our review, nothing has come to our attention that causes us to
believe that the Condensed Consolidated Interim Financial
Statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
This conclusion is to be read in the context of what we say in
the remainder of this report.
What we have reviewed
The Condensed Consolidated Interim Financial Statements
comprise:
- the Condensed Consolidated Income Statement for the six months
ended 30 June 2016;
- the Condensed Consolidated Statement of Comprehensive Income
for the six months ended 30 June 2016;
- the Condensed Consolidated Balance Sheet as at 30 June
2016;
- the Condensed Consolidated Cash Flow Statement for the six
months ended 30 June 2016;
- the Condensed Consolidated Statement of Changes in Equity for
the six months ended 30 June 2016; and
- the explanatory notes to the Condensed Consolidated Interim
Financial Statements.
The Condensed Consolidated Interim Financial Statements have
been prepared in accordance with International Accounting Standard
34, 'Interim Financial Reporting', as adopted by the European Union
and the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in Note 1 to the Condensed Consolidated Interim
Financial Statements, the financial reporting framework that has
been applied in the preparation of the full annual financial
statements of the Group is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the European
Union.
Responsibilities for the Condensed Consolidated Interim
Financial Statements and the review
Our responsibilities and those of the directors
The Half Yearly Financial Report, including the Condensed
Consolidated Interim Financial Statements, are the responsibility
of, and have been approved by, the directors. The directors are
responsible for preparing the Half Yearly Financial Report in
accordance with the Disclosure and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the Condensed
Consolidated 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 and Transparency Rules of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in giving this conclusion, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
What a review of the Condensed Consolidated Interim Financial
Statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and
Ireland) 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 Condensed Consolidated Interim Financial Statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
15 August 2016
Condensed Consolidated Income Statement (unaudited)
For the half year to 30 June 2016 and the half year to 30 June
2015
Half Half
year year
to to
30 June 30 June
2016 2015
Notes GBPm GBPm
---------------------------------- -------- ---------- ---------
Interest and similar income 3,301 3,371
Interest expense and similar
charges (1,528) (1,588)
---------------------------------- -------- ---------- ---------
Net interest income 1,773 1,783
---------------------------------- -------- ---------- ---------
Fee and commission income 578 570
Fee and commission expense (197) (193)
---------------------------------- -------- ---------- ---------
Net fee and commission income 381 377
---------------------------------- -------- ---------- ---------
Net trading and other income 3 290 123
---------------------------------- -------- ---------- ---------
Total operating income 2,444 2,283
---------------------------------- -------- ---------- ---------
Operating expenses before
impairment losses, provisions
and charges 4 (1,205) (1,200)
---------------------------------- -------- ---------- ---------
Impairment losses on loans
and advances 5 (63) (57)
Provisions for other liabilities
and charges 5 (97) (97)
---------------------------------- -------- ---------- ---------
Total operating impairment
losses, provisions and charges (160) (154)
---------------------------------- -------- ---------- ---------
Profit before tax 1,079 929
Tax on profit 6 (307) (195)
---------------------------------- -------- ---------- ---------
Profit after tax for the period 772 734
---------------------------------- -------- ---------- ---------
Attributable to:
Equity holders of the parent 756 722
Non-controlling interests 16 12
---------------------------------- -------- ---------- ---------
Condensed Consolidated Statement of Comprehensive Income
(unaudited)
For the half year to 30 June 2016 and the half year to 30 June
2015
Half Half
year year
to to
30 June 30 June
2016 2015
GBPm GBPm
---------------------------------------------- ---------- ---------
Profit for the period 772 734
----------------------------------------------- ---------- ---------
Other comprehensive (expense)/income:
Other comprehensive income that may
be reclassified to profit or loss
subsequently:
Available-for-sale securities
- Net losses/(gains) on available-for-sale
securities (3) 13
- Net gains on available-for-sale
securities transferred to profit
or loss (115) (8)
- Tax on above items 17 (1)
----------------------------------------------- ---------- ---------
(101) 4
---------------------------------------------- ---------- ---------
Cash flow hedges:
- Net gains/(losses) on cash flow
hedges 3,761 (1,485)
- Net (gains)/losses on cash flow
hedges transferred to profit or loss (2,994) 1,321
- Tax on above items (205) 33
----------------------------------------------- ---------- ---------
562 (131)
---------------------------------------------- ---------- ---------
Exchange differences on translation
of foreign operations (3) 1
----------------------------------------------- ---------- ---------
Net other comprehensive income/(expense)
that may be reclassified to profit
or loss subsequently 458 (126)
Other comprehensive income that will
not be reclassified to profit or
loss subsequently:
Remeasurement of defined benefit
pension obligations (489) 17
Tax on above item 126 (3)
----------------------------------------------- ---------- ---------
Net other comprehensive (expense)/income
that will not be reclassified to
profit or loss subsequently (363) 14
----------------------------------------------- ---------- ---------
Total other comprehensive income/(expense)
for the period net of tax 95 (112)
Total comprehensive income for the
period 867 622
----------------------------------------------- ---------- ---------
Attributable to:
Equity holders of the parent 856 610
Non-controlling interests 11 12
----------------------------------------------- ---------- ---------
Condensed Consolidated Balance Sheet (unaudited)
At 30 June 2016 and 31 December 2015
30 June 31 December
2016 2015
Notes GBPm GBPm
---------------------------------- -------- --------- ------------
Assets
Cash and balances at central
banks 14,862 16,842
Trading assets 8 29,273 23,961
Derivative financial instruments 9 29,943 20,911
Financial assets designated at
fair value 2,534 2,398
Loans and advances to banks 10 4,470 3,548
Loans and advances to customers 11 200,555 198,045
Loans and receivables securities 204 52
Available-for-sale securities 13 9,836 9,012
Macro hedge of interest rate
risk 1,386 781
Interests in other entities 14 54 48
Intangible assets 15 2,270 2,231
Property, plant and equipment 16 1,503 1,597
Current tax assets - 49
Retirement benefit assets 22 377 556
Other assets 1,782 1,375
---------------------------------- -------- --------- ------------
Total assets 299,049 281,406
---------------------------------- -------- --------- ------------
Liabilities
Deposits by banks 17 7,744 8,278
Deposits by customers 169,830 164,074
Trading liabilities 18 14,674 12,722
Derivative financial instruments 9 27,765 21,508
Financial liabilities designated
at fair value 19 1,958 2,016
Debt securities in issue 20 51,544 49,615
Subordinated liabilities 4,214 3,885
Macro hedge of interest rate
risk 482 110
Other liabilities 3,207 2,335
Provisions 21 748 870
Current tax liabilities 173 1
Deferred tax liabilities 192 223
Retirement benefit obligations 22 374 110
---------------------------------- -------- --------- ------------
Total liabilities 282,905 265,747
---------------------------------- -------- --------- ------------
Equity
Share capital and other equity
instruments 24 4,904 4,911
Share premium 5,620 5,620
Retained earnings 4,702 4,679
Other reserves 772 314
---------------------------------- -------- --------- ------------
Total shareholders' equity 15,998 15,524
Non-controlling interests 25 146 135
---------------------------------- -------- --------- ------------
Total equity 16,144 15,659
---------------------------------- -------- --------- ------------
Total liabilities and equity 299,049 281,406
---------------------------------- -------- --------- ------------
Condensed Consolidated Cash Flow Statement (unaudited)
For the half year to 30 June 2016 and the half year to 30 June
2015
Half year Half year
to to
30 June 30 June
2016 2015
Notes GBPm GBPm
---------------------------------------- -------- ---------- ----------
Cash flows from/(used in) operating
activities
Profit for the period 772 734
Adjustments for:
Non-cash items included in profit (31) 1,463
Change in operating assets (15,075) (6,422)
Change in operating liabilities 14,099 1,871
Corporation taxes paid (165) (235)
Effects of exchange rate differences 2,211 (2,058)
Net cash flow from/(used in)
operating activities 26 1,811 (4,647)
---------------------------------------- -------- ---------- ----------
Cash flows from/(used in) investing
activities
Investments in other entities 14 - (111)
Purchase of property, plant
and equipment and intangible 15,
assets 16 (128) (119)
Proceeds from sale of property,
plant and equipment and intangible
assets 44 10
Purchase of available-for-sale
securities (1,664) (915)
Proceeds from sale and redemption
of available-for-sale securities 1,634 616
Net cash flow used in investing
activities (114) (519)
---------------------------------------- -------- ---------- ----------
Cash flows from/(used in) financing
activities
Issue of Perpetual Capital Securities 24 - 750
Issue of debt securities 4,585 7,599
Issuance costs of debt securities (9) (17)
Repayment of debt securities (5,082) (10,472)
Repurchase of other equity instruments 24 (7) (99)
Dividends paid on ordinary shares 7 (102) (261)
Dividends paid on preference
shares classified in equity 7 (1) (2)
Dividends paid on Reserve Capital
Instruments 7 (17) (21)
Dividends paid on Perpetual
Capital Securities 7 (55) (45)
Net cash flow used in financing
activities (688) (2,568)
---------------------------------------- -------- ---------- ----------
Net increase/(decrease) in cash
and cash equivalents 1,009 (7,734)
---------------------------------------- -------- ---------- ----------
Cash and cash equivalents at
beginning of the period 20,351 27,363
Effects of exchange rate changes
on cash and cash equivalents 994 (628)
---------------------------------------- -------- ---------- ----------
Cash and cash equivalents at
the end of the period 26 22,354 19,001
---------------------------------------- -------- ---------- ----------
Condensed Consolidated Statement of Changes in Equity
(unaudited)
For the half year to 30 June 2016 and the half year to 30 June
2015
Other reserves
----------------------------------
Share
capital
& other Available Cash Foreign
equity Share for flow currency Retained Non-controlling
instruments premium sale hedging translation earnings(1) Total interests Total
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
1 January 2016 4,911 5,620 52 254 8 4,679 15,524 135 15,659
Total comprehensive
income for the
period:
- Profit for the
period - - - - - 756 756 16 772
- Other comprehensive
income/(expense)
for the period:
- Net losses on
available-for-sale
securities - - (3) - - - (3) - (3)
- Net gains on
available-for-sale
securities transferred
to profit or loss - - (115) - - - (115) - (115)
- Net gains on
cash flow hedges - - - 3,761 - - 3,761 - 3,761
- Net gains on
cash flow hedges
transferred to
profit or loss - - - (2,994) - - (2,994) - (2,994)
- Remeasurement
of defined benefit
pension obligations 22 - - - - - (484) (484) (5) (489)
- Exchange differences
on translation
of foreign operations - - - - (3) - (3) - (3)
- Tax on other
comprehensive
income/(expense) - - 17 (205) - 126 (62) - (62)
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
Other comprehensive
income/(expense)
for the period,
net of tax - - (101) 562 (3) (358) 100 (5) 95
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
Repurchase of
other equity instruments 24 (7) - - - - - (7) - (7)
Tax on other equity
instruments - - - - - 15 15 - 15
Dividends on ordinary
shares 7 - - - - - (317) (317) - (317)
Dividends on other
equity instruments 7 - - - - - (73) (73) - (73)
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
30 June 2016 4,904 5,620 (49) 816 5 4,702 15,998 146 16,144
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
1 January 2015 4,244 5,620 (2) 262 13 4,056 14,193 - 14,193
Total comprehensive
income/(expense)
for the period:
* Profit for the period - - - - - 722 722 12 734
- Other comprehensive
income/(expense)
for the period:
- Net gains on
available-for-sale
securities - - 13 - - - 13 - 13
- Net gains on
available-for-sale
securities transferred
to profit or loss - - (8) - - - (8) - (8)
- Net losses on
cash flow hedges - - - (1,485) - - (1,485) - (1,485)
- Net losses on
cash flow hedges
transferred to
profit or loss - - - 1,321 - - 1,321 - 1,321
- Remeasurement
of defined benefit
pension obligations 22 - - - - - 17 17 - 17
- Exchange differences
on translation
of foreign operations - - - - 1 - 1 - 1
- Tax on other
comprehensive
income/(expense) - - (1) 33 - (3) 29 - 29
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
Other comprehensive
income/(expense)
for the period,
net of tax - - 4 (131) 1 14 (112) - (112)
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
Acquisition of
subsidiary with
non-controlling
interests - - - - - - - 111 111
Issue of Perpetual
Capital Securities 750 - - - - - 750 - 750
Repurchase of
other equity instruments (83) - - - - (16) (99) - (99)
Tax on other equity
instruments - - - - - 12 12 - 12
Dividends on ordinary
shares - - - - - (325) (325) - (325)
Dividends on other
equity instruments - - - - - (68) (68) - (68)
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
30 June 2015 4,911 5,620 2 131 14 4,395 15,073 123 15,196
----------------------------- ------ ------------ -------- ---------- -------- ------------ ------------ -------- ---------------- --------
1) Includes capital redemption reserve of GBP21m arising from
the purchase of GBP300m fixed/floating rate non-cumulative callable
preference shares in 2015.
1. ACCOUNTING POLICIES
Basis of preparation
The financial information in these Condensed Consolidated
Interim Financial Statements does not constitute statutory accounts
as defined in section 434 of the UK Companies Act 2006. Statutory
accounts for the year ended 31 December 2015 have been delivered to
the Registrar of Companies. The auditor's report on those accounts
was unqualified, did not draw attention to any matters by way of
emphasis and did not contain a statement under section 498(2) of
the UK Companies Act 2006.
The Condensed Consolidated Interim Financial Statements reflect
all adjustments that, in the opinion of management, are necessary
for a fair presentation of the results of operations for the
interim period. All such adjustments to the financial information
are of a normal, recurring nature. Because the results from common
banking activities are so closely related and responsive to changes
in market conditions, the results for any interim period are not
necessarily indicative of the results that can be expected for the
year.
The Condensed Consolidated Interim Financial Statements have
been prepared in accordance with International Accounting Standard
(IAS) 34 'Interim Financial Reporting', as issued by the
International Accounting Standards Board (IASB) and adopted by the
European Union, and the Disclosure and Transparency Rules of the
Financial Conduct Authority (FCA). They do not include all the
information and disclosures normally required for full annual
financial statements and should be read in conjunction with the
Consolidated Financial Statements of the Santander UK group for the
year ended 31 December 2015 which were prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union. Those Consolidated Financial Statements were also
prepared in accordance with International Financial Reporting
Standards as issued by the IASB including interpretations issued by
the IFRS Interpretations Committee (IFRIC) of the IASB (together
IFRS). The Santander UK group has also complied with its legal
obligation to comply with International Financial Reporting
Standards as adopted by the European Union as there are no
applicable differences between the two frameworks for the periods
presented.
The same accounting policies, presentation and methods of
computation are followed in these Condensed Consolidated Interim
Financial Statements as were applied in the presentation of the
Santander UK group's 2015 Annual Report. Copies of the Santander UK
group's 2015 Annual Report are available on the Santander UK
group's website or upon request from Investor Relations, Santander
UK plc, 2 Triton Square, Regent's Place, London NW1 3AN.
Future accounting developments
The Santander UK group has not yet adopted the following
significant new or revised standards and interpretations, and
amendments thereto, which have been issued but which are not yet
effective for the Santander UK group:
a) IFRS 9 'Financial Instruments' (IFRS 9) - In July
2014, the IASB issued the final version of IFRS
9 which replaces IAS 39 'Financial Instruments:
Recognition and Measurement'. The key areas of
the standard are discussed below.
Classification and measurement of financial assets and financial
liabilities. Under IFRS 9, financial assets are classified on the
basis of the business model within which they are held and their
contractual cash flow characteristics. These factors determine
whether the financial assets are measured at amortised cost, fair
value through other comprehensive income or fair value through
profit or loss. For many financial assets, the classification and
measurement outcomes will be similar to IAS 39. However, under IFRS
9, embedded derivatives are not separated from host financial
assets and equity securities are measured at fair value either
through profit or loss or, in certain circumstances, an irrevocable
election may be made to present fair value movements in other
comprehensive income. The requirements for the classification and
measurement of financial liabilities were carried forward unchanged
from IAS 39, however, the requirements relating to the fair value
option for financial liabilities were changed to address own credit
risk and, in particular, the presentation of gains and losses
within other comprehensive income. Based on the analysis performed
to date, Santander UK generally expects:
- The vast majority of financial assets which
are classified as loans and receivables under
IAS 39 will be continue to be measured at amortised
cost under IFRS 9;
- Most debt securities classified as available-for-sale
financial assets will be measured at amortised
cost or fair value through other comprehensive
income, with some being measured at fair value
through profit or loss; and
- Treasury and other eligible bills classified
as available-for-sale financial assets will
be measured at amortised cost or fair value
through other comprehensive income depending
upon the business model in which they are held.
Impairment. IFRS 9 makes fundamental changes to the impairment
of financial assets measured at amortised cost or at fair value
through other comprehensive income, lease receivables and certain
commitments to extend credit and financial guarantee contracts. It
is no longer necessary for a credit event to have occurred before
credit losses are recognised. Instead, under IFRS 9, an entity
always accounts for expected credit losses (ECLs), and any changes
in those ECLs. IFRS 9 introduces a number of new concepts and
changes to the approach to provisioning. The main features are set
out below:
- ECLs are based on an assessment of the probability
of default, loss given default and exposure
at default, discounted to give a net present
value. The estimation of ECL should be unbiased
and probability-weighted, taking into account
all reasonable and supportable information,
including forward looking economic assumptions
and a range of possible outcomes.
- On initial recognition, and for financial assets
where there has not been a significant increase
in credit risk since the initial recognition
date, IFRS 9 provisions will be made for expected
credit default events within the next 12 months.
- Where there has been a significant increase
in credit risk since the initial recognition
date, provisions will be made for those assets
expected to default at any point over their
lifetime reflecting the asset's full expected
loss.
- For assets where there is evidence of credit
impairment, provisions will be made under IFRS
9 on the basis of lifetime expected credit losses.
Hedge accounting. The general hedge accounting requirements
align hedge accounting more closely with risk management practices
and establish a more principle-based approach to hedge accounting
thereby allowing hedge accounting to be applied to a wider variety
of hedging instruments and risks. Macro hedge accounting is being
dealt with as a separate project. Until such time as that project
is complete, and to remove any potential conflict between any
existing macro hedge accounting undertaken under IAS 39 and the new
general hedge accounting requirements of IFRS 9, entities can
choose to continue to apply the existing hedge accounting
requirements in IAS 39. Based on the analysis performed to date,
Santander UK expects to continue IAS 39 hedge accounting. No
changes are currently being implemented to hedge accounting
policies and practices.
Transition. The effective date of IFRS 9 is 1 January 2018. The
classification and measurement and impairment requirements are
applied retrospectively by adjusting the opening balance sheet at
the date of initial application. There is no requirement to restate
comparative information. For annual periods beginning before 1
January 2018, an entity may elect to early apply only the
requirements for the presentation of gains and losses on financial
liabilities designated at fair value through profit or loss. At the
date of publication of these Condensed Consolidated Interim
Financial Statements the standard is awaiting EU endorsement. EU
endorsement is expected later in 2016. Santander UK intends to
revise the presentation of fair value gains and losses relating to
its own credit risk on certain liabilities as soon as IFRS 9 has
been endorsed and is able to be applied. Santander UK is currently
assessing the impact that the financial asset classification and
impairment requirements will have. While it is expected that the
measurement basis for the majority of financial assets will be
unchanged upon applying IFRS 9, it is not yet practicable to
quantify the effect of IFRS 9 on these Condensed Consolidated
Interim Financial Statements.
b) IFRS 15 'Revenue from Contracts with Customers'
(IFRS 15) - In May 2014, the IASB issued IFRS
15. The effective date of IFRS 15 is 1 January
2018. The standard establishes the principles
that shall be applied in connection with revenue
from contracts with customers including the core
principle that the recognition of revenue must
depict the transfer of promised goods or services
to customers in an amount that reflects the entitlement
to consideration in exchange for those goods and
services. IFRS 15 applies to all contracts with
customers but does not apply to lease contracts,
insurance contracts, financial instruments and
certain non-monetary exchanges. At the date of
publication of these Condensed Consolidated Interim
Financial Statements the standard is awaiting
EU endorsement. Whilst it is expected that a significant
proportion of the Santander UK group's revenue
will be outside the scope of IFRS 15, the impact
of the standard is currently being assessed. It
is not yet practicable to quantify the effect
of IFRS 15 on these Condensed Consolidated Interim
Financial Statements.
c) IFRS 16 'Leases' (IFRS 16) - In January 2016,
the IASB issued IFRS 16. The standard is effective
for annual periods beginning on or after 1 January
2019. Earlier adoption is permitted for entities
that apply IFRS 15 at or before the date of initial
application of IFRS 16. IFRS 16 sets out the principles
for the recognition, measurement, presentation
and disclosure for both lessees and lessors. For
lessee accounting, IFRS 16 introduces a single
lessee accounting model and requires a lessee
to recognise a right-of-use asset representing
its right to use the underlying leased asset and
a lease liability representing its obligation
to make lease payments for all leases with a term
of more than 12 months, unless the underlying
asset is of low value. For lessor accounting,
IFRS 16 substantially carries forward the lessor
accounting requirements from the existing leasing
standard (IAS 17) and a lessor continues to classify
its leases as operating leases or finance leases
and to account for those two types of leases differently.
At the date of publication of these Condensed
Consolidated Interim Financial Statements the
standard is awaiting EU endorsement. The impact
of the standard is currently being assessed, however,
it is not yet practicable to quantify the effect
of IFRS 16 on these Condensed Consolidated Interim
Financial Statements.
Going concern
After making enquiries, the Directors have a reasonable
expectation that the Santander UK group has adequate resources to
continue in operational existence for at least twelve months from
the date that the balance sheet is signed. Having reassessed the
principal risks and uncertainties, the Directors consider it
appropriate to adopt the 'going concern' basis of accounting in
preparing the Condensed Consolidated Interim Financial
Statements.
Critical accounting policies and areas of significant management
judgement
The preparation of the Condensed Consolidated Interim Financial
Statements requires management to make estimates and judgements
that affect the reported amount of assets and liabilities at the
date of the Condensed Consolidated Interim Financial Statements and
the reported amount of income and expenses during the reporting
period. Management evaluates its estimates and judgements on an
ongoing basis. Management bases its estimates and judgements on
historical experience and on various other factors that are
believed to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or
conditions.
There have been no significant changes in the basis upon which
estimates have been determined compared to that applied in the 2015
Annual Report.
2. SEGMENTS
The Santander UK group's business is managed and reported on the
basis of the following segments: Retail Banking, Commercial
Banking, Global Corporate Banking and Corporate Centre. The
Santander UK group's segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies. There has been no change to the descriptions of these
segments and segmental accounting as provided in Note 2 to the
Consolidated Financial Statements in the 2015 Annual Report.
As described in Note 2 to the Consolidated Financial Statements
in the 2015 Annual Report, the internal UK transfer pricing
mechanism used to calculate the cost and risks associated with
funding and liquidity in each business segment was refined in the
fourth quarter of 2015 for Retail Banking and Corporate Centre to
reflect the current market environment and rates. The segmental
analyses for Retail Banking and Corporate Centre have been adjusted
to reflect these changes for prior periods.
Global
Retail Commercial Corporate Corporate
Half year to 30 June Banking Banking Banking Centre Total
2016 GBPm GBPm GBPm GBPm GBPm
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Net interest income 1,489 245 39 - 1,773
Non-interest income 275 49 184 163 671
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Total operating income 1,764 294 223 163 2,444
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Operating expenses
before impairment losses,
provisions and charges (865) (170) (141) (29) (1,205)
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Impairment (losses)/releases
on loans and advances (30) (15) (21) 3 (63)
Provisions for other
liabilities and charges (76) (1) - (20) (97)
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Total operating impairment
losses, provisions
and charges (106) (16) (21) (17) (160)
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Profit before tax 793 108 61 117 1,079
----------------------------------------------------------- ---------
Revenue from external customers 2,131 355 254 (296) 2,444
Inter-segment revenue (367) (61) (31) 459 -
-----------------------------------------------------------
Total operating income 1,764 294 223 163 2,444
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Customer loans 165,483 21,579 6,830 7,154 201,046
Total assets(1) 172,666 21,579 44,699 60,105 299,049
-----------------------------------------------------------
Customer deposits 141,125 19,705 3,232 2,944 167,006
Total liabilities 144,295 19,705 39,406 79,499 282,905
-----------------------------------------------------------
Average number of staff(2) 17,205 2,003 867 6 20,081
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Half year to 30 June
2015
----------------------------------------------------------- --------- ----------- ----------- ---------- --------
Net interest income 1,497 221 39 26 1,783
Non-interest income 264 58 165 13 500
Total operating income 1,761 279 204 39 2,283
Operating expenses before impairment losses, provisions and
charges (890) (165) (145) - (1,200)
Impairment (losses)/releases on loans and advances (85) (20) 21 27 (57)
Provisions for other liabilities and charges (95) (2) - - (97)
Total operating impairment losses, provisions and
(charges)/releases (180) (22) 21 27 (154)
Profit before tax 691 92 80 66 929
Revenue from external customers 2,244 354 228 (543) 2,283
Inter-segment revenue (483) (75) (24) 582 -
Total operating income 1,761 279 204 39 2,283
31 December 2015
Customer loans 164,830 20,943 5,470 7,391 198,634
Total assets(1) 171,847 20,943 36,593 52,023 281,406
Customer deposits 137,332 18,102 3,013 3,808 162,255
Total liabilities 140,131 18,102 32,290 75,224 265,747
Average number of staff(2) 17,495 2,005 898 7 20,405
(1) Includes customer loans, net of impairment loss
allowances.
(2) Full-time equivalents.
3. NET TRADING AND OTHER INCOME
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Net trading and funding of other items by the trading book 80 100
Net income from operating lease assets 18 22
Net gains/(losses) on assets designated at fair value through profit or loss 219 (4)
Net gains/(losses) on liabilities designated at fair value through profit or loss 8 (27)
Net (losses)/gains on derivatives managed with assets/liabilities held at fair value
through
profit or loss (202) 22
Net share of profit from associates and joint ventures 6 6
Net profit on sale of available-for-sale assets 115 8
Net losses on sale of property, plant and equipment and intangible fixed assets (1) (3)
Hedge ineffectiveness and other 47 (1)
290 123
'Net trading and funding of other items by the trading book'
includes fair value losses of GBP34m (H115: GBP7m) on embedded
derivatives bifurcated from certain equity index-linked deposits.
The embedded derivatives are economically hedged internally with
the equity derivatives trading desk. These transactions are managed
as part of the overall positions of the equity derivatives trading
desk, the results of which are also included in this line item, and
amounted to gains of GBP35m (H115: GBP8m). As a result, the net
fair value movements recognised on the equity index-linked deposits
and the related economic hedges were net gains of GBP1m (H115:
GBP1m).
In H116, as part of a liability management exercise, certain
debt instruments were purchased pursuant to a tender offer. This
had no significant impact on the income statement.
In H115, as part of a capital management exercise, certain debt
instruments were purchased pursuant to a tender offer. This had no
significant impact on the income statement.
4. OPERATING EXPENSES BEFORE IMPAIRMENT LOSSES, PROVISIONS AND
CHARGES
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Staff costs:
Wages and salaries 366 369
Performance-related payments 65 86
Social security costs 45 47
Pensions costs: - defined contribution plans 26 24
- defined benefit plans 13 17
Other personnel costs 30 29
545 572
Other administration expenses:
Information technology expenses 240 195
Property, plant and equipment expenses 88 91
Other 194 206
1,067 1,064
Depreciation, amortisation and impairment:
Depreciation and impairment of property, plant and equipment 100 107
Amortisation and impairment of intangible assets 38 29
138 136
1,205 1,200
5. IMPAIRMENT LOSSES AND PROVISIONS
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Impairment losses on loans and advances:
- loans and advances to customers (Note 11) 108 101
Recoveries of loans and advances (Note 11) (45) (44)
63 57
Provisions for other liabilities and charges: (Note 21) 97 97
Total impairment losses and provisions charged to the income statement 160 154
There were no impairment losses on loans and advances to banks,
loans and receivables securities and available-for-sale
securities.
6. TAXATION
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Current tax:
UK corporation tax on profit for the period 321 164
Adjustments in respect of prior periods (10) (11)
Total current tax 311 153
Deferred tax:
Origination and reversal of temporary differences (3) 38
Change in rate of UK corporation tax (1) -
Adjustments in respect of prior periods - 4
Total deferred tax (credit)/charge (4) 42
Tax charge on profit for the period 307 195
Interim period corporation tax is accrued based on the estimated
average annual effective corporation tax rate for the year of 28.5%
(2015: 21.6%). The standard rate of UK corporation tax was 28% for
banking entities and 20% for non-banking entities (2015: 20.25%).
The standard rate of UK corporation tax was reduced from 21% to 20%
with effect from 1 April 2015 and an 8% surcharge is applied to
banking companies from 1 January 2016. Taxation for other
jurisdictions is calculated at the rates prevailing in the relevant
jurisdictions. The Finance (No.2) Act 2015, which was substantively
enacted on 26 October 2015, introduces further reductions in the
corporation tax rate from 20% to 19% by 2017 and to 18% by
2020.
The UK Government has announced that it will enact a further
reduction in the main rate of tax of 1%, down to 17% at 1 April
2020 (instead of 18%) in the Finance Bill 2016, which is expected
to be enacted later in the year. Since the proposed change was not
substantively enacted as at the balance sheet date, the effect has
not been reflected in these financial statements.
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
30 June 2016 30 June 2015
GBPm GBPm
Profit before tax 1,079 929
Tax calculated at a tax rate of 20% (H115: 20.25%) 216 188
Bank surcharge on profits 77 -
Non-deductible preference dividends paid 5 1
Non-deductible UK Bank Levy 17 12
Other non-equalised items 3 4
Effect of non-UK profits and losses - (1)
Utilisation of capital losses for which credit was not previously recognised - (2)
Effect of change in tax rate on deferred tax provision (1) -
Adjustment to prior period provisions (10) (7)
Tax charge 307 195
7. DIVIDS
a) Ordinary share capital
Dividends of GBP102m (2015: GBP261m) were paid on the Company's
ordinary shares in issue during the period. An interim dividend of
GBP317m was approved on 29 June 2016 on the Company's ordinary
shares in issue.
b) Other equity instruments
The annual dividend of GBP17m (2015: GBP21m) on the Step-Up
Callable Perpetual Reserve Capital Instruments was paid on 14
February 2016; the annual dividend of GBP0.4m (2015: GBP0.4m) on
the GBP300m Step-up Callable Perpetual Preferred Securities was
paid on 22 March 2016; the annual dividend of GBP1m (2015: GBP2m)
on the GBP300m fixed/floating rate non-cumulative callable
preference shares was paid on 24 May 2016.
The remaining GBP300m Step-up Callable Perpetual Preferred
Securities were repurchased on 22 March 2016 as described in Note
24.
The quarterly dividends of GBP8m and GBP7m (2015: GBP24m and
GBP8m) on the GBP500m Perpetual Capital Securities were declared
and paid on 24 March and 24 June 2016; the quarterly dividends of
GBP6m and GBP6m (2015: GBP7m and GBP6m) on the GBP300m Perpetual
Capital Securities were declared and paid on 24 March and 24 June
2016 and the quarterly dividends of GBP14m and GBP14m (2015:
GBPnil) on the GBP750m Perpetual Capital Securities were declared
and paid on 24 March and 24 June 2016.
8. TRADING ASSETS
30 June 2016 31 December 2015
GBPm GBPm
Loans and advances to banks - securities purchased under resale agreements 1,784 992
- other(1) 5,690 4,441
Loans and advances to customers - securities purchased under resale agreements 7,147 4,352
- other(1) 2,405 1,608
Debt securities 6,523 5,462
Equity securities 5,724 7,106
29,273 23,961
(1) Total 'other' comprises short-term loans of GBP1,088m (2015:
GBP665m) and cash collateral of GBP7,007m (2015: GBP5,384m).
Included in the above balances are amounts due from Banco
Santander SA and other subsidiaries of Banco Santander SA outside
the Santander UK group of GBP413m (2015: GBP126m) and GBP68m (2015:
GBP91m) respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS
30 June 2016 31 December 2015
Fair value Fair value
Notional amount Assets Liabilities Assets Liabilities
Derivatives held for trading GBPm GBPm GBPm Notional amount GBPm GBPm GBPm
Exchange rate contracts 158,346 4,915 7,254 161,904 4,265 4,936
Interest rate contracts 942,044 17,884 17,048 738,271 12,774 12,344
Equity and credit contracts 36,831 942 1,176 37,345 1,470 1,625
1,137,221 23,741 25,478 937,520 18,509 18,905
Derivatives held for hedging
Derivatives designated as fair value hedges:
Exchange rate contracts 4,391 636 - 3,213 78 113
Interest rate contracts 65,747 1,781 2,211 68,905 1,234 1,288
70,138 2,417 2,211 72,118 1,312 1,401
Derivatives designated as cash flow hedges:
Exchange rate contracts 24,138 3,493 20 22,727 989 1,146
Interest rate contracts 10,435 289 56 8,407 97 56
Equity derivative contracts 21 3 - 21 4 -
34,594 3,785 76 31,155 1,090 1,202
104,732 6,202 2,287 103,273 2,402 2,603
Total derivatives 1,241,953 29,943 27,765 1,040,793 20,911 21,508
Included in the above balances are amounts due from Banco
Santander SA and other subsidiaries of Banco Santander SA outside
the Santander UK group of GBP1,781m (2015: GBP1,320m) and GBP762m
(2015: 458m), respectively, and amounts due to Banco Santander SA
and other subsidiaries of Banco Santander SA outside the Santander
UK group of GBP2,183m (2015: GBP1,502m) and GBP574m (2015:
GBP427m), respectively. The net exposures after collateral to the
ultimate parent undertaking and fellow subsidiaries at 30 June 2016
amounted to GBPnil (2015: GBPnil) and GBPnil (2015: GBPnil)
respectively, with collateral held exceeding the net position.
Derivative assets and liabilities are reported on a gross basis
on the balance sheet unless there is a legally enforceable right to
set off the recognised amounts and there is an intention to settle
on a net basis, or to realise the assets and settle the liabilities
simultaneously.
10. LOANS AND ADVANCES TO BANKS
30 June 2016 31 December 2015
GBPm GBPm
Placements with other banks - securities purchased under resale agreements 1,332 1,247
- other 3,134 2,293
Amounts due from Banco Santander 4 8
4,470 3,548
11. LOANS AND ADVANCES TO CUSTOMERS
30 June 2016 31 December 2015
GBPm GBPm
Loans and advances to customers 200,134 197,833
Amounts due from Santander UK Group Holdings plc 4 2
Amounts due from fellow Banco Santander SA group subsidiaries and joint ventures 1,528 1,367
Loans and advances to customers 201,666 199,202
Less: impairment loss allowances (1,111) (1,157)
Loans and advances to customers, net of impairment loss allowances 200,555 198,045
Movement in impairment loss allowances:
Loans secured Other
on residential Corporate Finance unsecured
property Loans leases advances Total
30 June 2016 GBPm GBPm GBPm GBPm GBPm
At 1 January 424 395 69 269 1,157
Charge/(release) to the income statement (54) 35 3 124 108
Write offs and other items(1) (16) (15) (8) (115) (154)
At 30 June 354 415 64 278 1,111
31 December 2015
At 1 January 579 558 54 248 1,439
Charge/(release) to the income statement (123) (6) 20 265 156
Write offs and other items(1) (32) (157) (5) (244) (438)
At 31 December 424 395 69 269 1,157
Recoveries:
30 June 2016 2 2 1 40 45
30 June 2015 1 1 1 41 44
(1) Mortgage write-offs exclude the effect of the unwind over
time of the discounting in estimating losses, as described in the
accounting policy 'Impairment of financial assets' in Note 1 to the
Consolidated Financial Statements in the 2015 Annual Report.
Mortgage write-offs including this effect were GBP18m (H115:
GBP20m).
12. SECURITISATIONS AND COVERED BONDS
a) Securitisations
The balances of loans and advances to customers subject to
securitisation at 30 June 2016 and 31 December 2015 were:
30 June 2016 31 December 2015
Gross assets Gross assets
securitised securitised
GBPm GBPm
Master Trust Structures:
- Holmes 6,256 7,045
- Fosse 7,997 8,902
- Langton 5,910 6,683
Other securitisation structures:
- Motor 829 1,069
- Auto ABS UK Loans 1,257 1,138
22,249 24,837
i) Master Trust Structures
Holmes
In H116, there were issuances of GBP1.2bn (H115: GBPnil) from
Holmes Master Issuer plc. Mortgage-backed notes totalling GBP2.9bn
(H115: GBP2.1bn) equivalent were redeemed during the period.
Fosse
In H116, there were no issuances (H115: issuances of GBP1bn)
from Fosse Master Issuer plc. Mortgage-backed notes totalling
GBP0.8bn (H115: GBP3.6bn) equivalent were redeemed during the
period.
Langton
In H116, there were no issuances (H115: GBPnil) from any of the
Langton issuing companies. Mortgage-backed notes totalling GBP1.9bn
(H115: GBP0.6bn) equivalent were redeemed during the period.
ii) Other securitisation structures
Motor
In H116, there were no issuances (H115: issuances of GBP1bn)
from the Motor securitisation structures. Asset-backed notes
totalling GBP0.3bn (H115: GBPnil) equivalent were redeemed during
the period.
Auto ABS UK Loans
During H116, asset-backed notes totalling GBP0.5bn were issued
to new senior tranche investors. During the same period,
asset-backed notes totalling GBP0.4bn were redeemed as the new
investment allowed some existing investors to reduce their
holdings. In H115, the Santander UK group recognised GBP1.2bn notes
issued through Auto ABS UK Loans plc as part of the acquisition of
PSA Finance UK Limited.
b) Covered Bonds
At 30 June 2016, gross assets assigned amounted to GBP21,866m
(2015: GBP23,613m) and notes in issue amounted to GBP20,219m (2015:
GBP17,760m).
13. AVAILABLE-FOR-SALE SECURITIES
30 June 2016 31 December 2015
GBPm GBPm
Debt securities 9,783 8,883
Equity securities 53 129
9,836 9,012
14. INTERESTS IN OTHER ENTITIES
The Company has interests in subsidiaries, associates, joint
ventures and unconsolidated structured entities, as set out in Note
21 to the Consolidated Financial Statements in the 2015 Annual
Report. The unconsolidated structured entities include Abbey
National Capital Trust I and Abbey National Capital LP I, which are
100% owned finance subsidiaries (as defined in Regulation S-X under
the US Securities Act 1933, as amended) of Santander UK plc. On 7
February 2000, Abbey National Capital Trust I issued US$1bn of
8.963% Non-cumulative Trust Preferred Securities, which have been
registered under the US Securities Act of 1933, as amended. Abbey
National Capital Trust I serves solely as a passive vehicle holding
the partnership preferred securities issued by Abbey National
Capital LP I and each has passed all the rights relating to such
partnership preferred securities to the holders of trust preferred
securities issued by Abbey National Capital Trust I. All of the
trust preferred securities and the partnership preferred securities
have been fully and unconditionally guaranteed on a subordinated
basis by Santander UK plc. The terms of the securities do not
include any significant restrictions on
the ability of Santander UK plc to obtain funds, by dividend or
loan, from any subsidiary.
15. INTANGIBLE ASSETS
During the period, the Santander UK group spent GBP80m (H115:
GBP52m) on additions and disposed of GBP3m (H115: GBPnil) in
respect of computer software.
16. PROPERTY, PLANT AND EQUIPMENT
During the period, the Santander UK group spent GBP7m (H115:
GBP13m) on the refurbishment of its branches and office premises,
GBP35m (H115: GBP44m) on additions to its office fixtures and
equipment, GBPnil (H115: GBPnil) on computer software and GBP6m
(H115: GBP10m) on the acquisition of operating lease assets. The
Santander UK group disposed GBP13m (H115: GBP9m) of property,
GBP60m (H115: GBP6m) of office fixtures and equipment, GBPnil
(H115: GBP1m) of computer software and GBP22m (H115: GBP11m) of
operating lease assets during the period.
At 30 June 2016, capital expenditure contracted, but not
provided for was GBP18m (2015: GBP46m) in respect of property,
plant and equipment. Assets under construction with a total value
of GBP33m (2015: GBP98m) are included in the total carrying value
of property, plant and equipment at the balance sheet date.
17. DEPOSITS BY BANKS
30 June 2016 31 December 2015
GBPm GBPm
Items in the course of transmission 297 326
Deposits by banks - securities sold under repurchase agreements 3,658 3,900
Amounts due to Banco Santander SA:
- securities sold under repurchase agreements 377 309
- other 987 1,014
Amounts due to fellow Banco Santander subsidiaries 151 135
Deposits held as collateral 750 438
Other deposits 1,524 2,156
7,744 8,278
18. TRADING LIABILITIES
30 June 2016 31 December 2015
GBPm GBPm
Deposits by banks - securities sold under repurchase agreements 345 1,148
- other(1) 3,586 1,629
Deposits by customers - securities sold under repurchase agreements 6,689 6,510
- other(1) 1,247 641
Short positions in securities and unsettled trades 2,807 2,794
14,674 12,722
(1) Comprises cash collateral of GBP3,847m (2015: GBP1,559m) and
short-term deposits of GBP986m (2015: GBP711m).
Included in the above balances are amounts due to Banco
Santander SA of GBPnil (2015: GBPnil) and to fellow subsidiaries of
Banco Santander SA of GBP243m (2015: GBP126m).
19. FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE
30 June 2016 31 December 2015
GBPm GBPm
Debt securities in issue 1,950 2,006
Warrants programme 8 10
1,958 2,016
Details of the Santander UK group's debt and warrants programmes
are set out in Note 29 to the Consolidated Financial Statements in
the 2015 Annual Report. With effect on and from 1 June 2016
Santander UK plc was substituted in place of Abbey National
Treasury Services plc as principal obligor under the US$30bn Euro
Medium Term Note Programme. This substitution was effected pursuant
to a deed of substitution dated 26 April 2016. On and from 1 June
2016, notes issued under the US$30bn Euro Medium Term Note
Programme are the sole liability of Santander UK plc and are not
guaranteed by any other entity in the Santander UK group. Santander
UK plc also became the issuer for the following standalone
securities: the Euro 60m Guaranteed Step-Down Fixed/ Inverse
Floating Rate Notes due 2019, and the GBP166,995,000 Zero Coupon
Amortising Guaranteed Notes due 2038. These steps were taken as
Santander UK began repositioning the structure of its funding
vehicles in preparation for Banking Reform.
Included in the above balances are amounts due to Banco
Santander SA of GBP39m (2015: GBP25m) and to fellow subsidiaries of
Banco Santander SA of GBPnil (2015: GBPnil).
Gains and losses arising from changes in the credit spread of
liabilities issued by the Santander UK group reverse over the
contractual life of the debt, provided that the debt is not repaid
at a premium or a discount. The net gain during the period
attributable to changes in the Santander UK group's own credit risk
on the above debt securities in issue was GBP32m (H115: GBP20m).
The cumulative net gain attributable to changes in the Santander UK
group's own credit risk on the above debt securities in issue at 30
June 2016 was GBP48m (2015: GBP16m).
At 30 June 2016, the amount that would be required to be
contractually paid at maturity of the debt securities in issue
above was GBP60m (2015: GBP162m) higher than the carrying
value.
20. DEBT SECURITIES IN ISSUE
30 June 2016 31 December 2015
GBPm GBPm
Bonds and medium term notes 42,381 39,772
Securitisation programmes (See Note 12) 9,163 9,843
51,544 49,615
Details of the Santander UK group's debt, certificates of
deposits and securitisation programmes are set out in Note 30 to
the Consolidated Financial Statements in the 2015 Annual Report.
With effect on and from 1 June 2016, Santander UK plc was
substituted in place of Abbey National Treasury Services plc as
principal obligor under the euro 35bn Global Covered Bond
Programme, US SEC-registered debt shelf and the US$30bn Euro Medium
Term Note Programme. This substitution was effected pursuant to a
deed of substitution, novation and amendment dated 26 April 2016.
On and from 1 June 2016, the Covered Bonds continue to be
guaranteed, in respect of payments of interest and principal, by
Abbey Covered Bonds LLP, but are not guaranteed by any other entity
in the Santander UK group. On and from 1 June 2016, notes issued
under the US$30bn Euro Medium Term Note Programme are the sole
liability of Santander UK plc and are not guaranteed by any other
entity in the Santander UK group. These steps were taken as
Santander UK began repositioning the structure of its funding
vehicles in preparation for Banking Reform.
Included in the above balances are amounts due to Banco
Santander SA and other subsidiaries of Banco Santander SA outside
the Santander UK group of GBP58m (2015: GBP67m) and GBP64m (2015:
GBP60m) respectively.
21. PROVISIONS
Conduct remediation
Wealth and
PPI Investment Other products Regulatory-related Vacant property Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2016 465 146 26 93 68 72 870
Additional provisions - - - 36 1 60 97
Used during the
period (61) (34) (10) (47) (7) (60) (219)
At 30 June 2016 404 112 16 82 62 72 748
To be settled:
- Within 12 months 193 112 13 44 29 67 458
- In more than 12
months 211 - 3 38 33 5 290
404 112 16 82 62 72 748
At 1 January 2015 129 127 35 85 76 39 491
Additional provisions 450 43 7 177 6 79 762
Used during the year (125) (24) (16) (169) (14) (46) (394)
Transfers 11 - - - - - 11
At 31 December 2015 465 146 26 93 68 72 870
To be settled:
- Within 12 months 227 146 26 93 22 67 581
- In more than 12
months 238 - - - 46 5 289
465 146 26 93 68 72 870
Conduct remediation
The amounts in respect of conduct remediation comprise the
estimated cost of making redress payments, including related costs,
with respect to the past sales or administration of products. The
provision for conduct remediation represents management's best
estimate of the anticipated costs of related customer contact
and/or redress, including related costs.
Payment Protection Insurance (PPI)
The table below sets out the key drivers of the provision
balance and forecast assumptions used in calculating the provision,
as well as the sensitivity of the provision to changes in the
assumptions.
Cumulative to Future Sensitivity analysis
30 June expected Increase/decrease in provision
2016
Inbound complaints(1) ('000) 993 1,224 25 = GBP7m
Outbound contact ('000) 349 9 25 = GBP16m
Response rate to outbound contact 34% 40% 1% = GBP0.2m
Average uphold rate per claim(2) 54% 66% 1% = GBP5m
Average redress per claim GBP1,804 GBP429 GBP100 = GBP81m
(1) Excludes invalid claims where the complainant has not held a
PPI policy.
(2) Claims include inbound and responses to outbound
contact.
30 June 2016 compared to 31 December 2015
The remaining provision for PPI redress and related costs
amounted to GBP404m. Monthly utilisation, excluding pro-active
customer contact, during the period was in line with the 2015
average.
On 2 August 2016, the FCA issued Consultation Paper 16/20 (Rules
and Guidance on payment protection insurance complaints: Feedback
on CP 15/39 and further consultation). The paper recommends a two
year time bar period starting in June 2017 which is later than
proposed in CP 15/39 issued in November 2015. As a consequence, we
have increased the number of estimated claim inflows. The impact on
the provision of this increase was offset by updates to other
assumptions, including lower than anticipated average redress and
uphold rates, based on actual experience seen during H1 and
therefore no additional provision has been made in H1 2016.
The CP also includes proposals in relation to how redress for
Plevin-related claims should be calculated including consideration
of how profit share arrangements should be reflected in commission
levels. These changes may impact on the future amounts expected to
be paid. The final rules are expected to be in place in December
2016 and the FCA has indicated that further guidance on how the
proposals should be implemented will be provided in advance. It is
therefore considered too early to quantify the impact on the
provision in relation to the CP's proposals on Plevin-related
claims.
The total provision at 30 June 2016 represents the best estimate
of the future cost of claims. There are a number of significant
risks and uncertainties, including the volume of future claims and
the amount of Plevin-related redress, which will be influenced by a
number of factors including the finalisation of the FCA rules. The
provision requirement will remain under review during the remainder
of 2016.
22. RETIREMENT BENEFIT PLANS
The amounts recognised in the balance sheet were as follows:
30 June 2016 31 December 2015
GBPm GBPm
Assets/(liabilities)
Funded defined benefit pension scheme - surplus 377 556
Funded defined benefit pension scheme - deficit (338) (73)
Unfunded defined benefit pension scheme (36) (37)
Total net assets 3 446
Remeasurement losses/(gains) recognised in other comprehensive
income during the period were as follows:
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Remeasurement of defined benefit schemes 489 (17)
a) Defined contribution pension schemes
An expense of GBP26m (H115: GBP24m) was recognised for defined
contribution plans in the period, and is included in staff costs
classified within administration expenses in the Condensed
Consolidated Income Statement. None of this amount was recognised
in respect of key management personnel for H116 and H115.
b) Defined benefit pension schemes
The total amount charged/(credited) to the income statement,
including any amounts classified as redundancy costs was as
follows:
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Net interest income (9) (3)
Current service cost 17 20
Past service cost - 1
Administration costs 3 2
11 20
The amounts recognised in other comprehensive income for the
period were as follows:
Half year to Half year to
30 June 2016 30 June 2015
GBPm GBPm
Return on plan assets (excluding amounts included in net interest expense) (1,055) 10
Actuarial gains arising from experience adjustments (28) (21)
Actuarial losses/(gains) arising from changes in financial assumptions 1,572 (3)
Cumulative actuarial reserve acquired with subsidiary - (3)
Remeasurement of defined benefit pension schemes 489 (17)
The net asset recognised in the balance sheet was determined as
follows:
30 June 2016 31 December 2015
GBPm GBPm
Present value of defined benefit obligation (10,604) (9,004)
Fair value of plan assets 10,607 9,450
Net defined benefit asset 3 446
Movements in the present value of defined benefit obligations
during the period were as follows:
30 June 2016 31 December 2015
GBPm GBPm
Balance at 1 January (9,004) (9,314)
Assumed through business combinations - (34)
Income statement charge (186) (384)
Remeasurement (losses)/gains (1,544) 480
Benefits paid 130 248
Balance at 30 June/31 December (10,604) (9,004)
Movements in the fair value of scheme assets during the period
were as follows:
30 June 2016 31 December 2015
GBPm GBPm
Balance at 1 January 9,450 9,430
Acquired through business combinations - 47
Income statement charge 232 385
Return on plan assets (excluding amounts included in net interest expense) 1,055 (164)
Benefits paid (130) (248)
Balance at 30 June/31 December 10,607 9,450
Actuarial assumptions
The principal actuarial assumptions used for the defined benefit
schemes were as follows:
30 June 2016 31 December 2015
% %
To determine benefit obligations:
- Discount rate for scheme liabilities 2.8 3.7
- General price inflation 2.7 3.0
- General salary increase 1.0 1.0
- Expected rate of pension increase 2.7 2.8
Years Years
Longevity at 60 for current pensioners, on the valuation date:
- Males 27.7 27.7
- Females 30.2 30.2
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
- Males 29.9 29.9
- Females 32.2 32.2
Details of the pension actuarial assumptions are set out in Note
34 to the Consolidated Financial Statements in the 2015 Annual
Report.
Actuarial assumption sensitivities
The sensitivity analyses below have been determined based on
reasonably possible changes of the respective assumptions occurring
at the end of the reporting period, while holding all other
assumptions constant.
Increase/(decrease)
30 June 2016 31 December 2015
GBPm GBPm
Change in pension obligation at period-end from a 25 bps
Discount rate increase (581) (434)
Change in pension cost for the period from a 25 bps increase (16) (16)
Change in pension obligation at period-end from a 25 bps
General price inflation increase 386 278
Change in pension cost for the period from a 25 bps increase 10 10
Change in pension obligation at period-end from a 25 bps
General salary increase increase n/a n/a
Change in pension obligation at period-end from each
Mortality additional year of longevity assumed 302 218
23. CONTINGENT LIABILITIES AND COMMITMENTS
30 June 2016 31 December 2015
GBPm GBPm
Guarantees given to third parties 1,579 1,568
Formal standby facilities, credit lines and other commitments 41,283 35,753
42,862 37,321
There have been no significant changes to the contingent
liabilities as set out in Note 35 to the Consolidated Financial
Statements in the 2015 Annual Report, except as follows.
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. Additional deferred cash consideration is also payable
following the third anniversary of closing.
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). 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 EUR1bn 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. In valuing the preferred stock, Santander UK makes
adjustments for illiquidity and the potential for changes in
conversion. Visa Inc. may have recourse to a general indemnity in
place under Visa Europe Operating Regulations for damages not
satisfied through the above mechanism.
24. SHARE CAPITAL AND OTHER EQUITY INSTRUMENTS
30 June 2016 31 December 2015
GBPm GBPm
Ordinary share capital 3,105 3,105
GBP300m fixed/floating rate non-cumulative callable preference shares 14 14
GBP300m Step-up Callable Perpetual Reserve Capital Instruments 235 235
GBP300m Step-up Callable Perpetual Preferred Securities - 7
Additional Tier 1 securities:
- GBP750m Perpetual Capital Securities 750 750
- GBP300m Perpetual Capital Securities 300 300
- GBP500m Perpetual Capital Securities 500 500
4,904 4,911
GBP300m Step-up Callable Perpetual Preferred Securities
As part of a capital management exercise, the outstanding
balance of the Perpetual Preferred Securities were purchased on 22
March 2016.
25. NON-CONTROLLING INTERESTS
30 June 2016 31 December 2015
GBPm GBPm
PSA Finance UK Limited 146 135
26. CASH FLOW STATEMENT
Analysis of cash and cash equivalents in the balance sheet
30 June 2016 31 December 2015
GBPm GBPm
Cash and balances at central banks 14,862 16,842
Less: regulatory minimum cash balances (344) (340)
14,518 16,502
Net trading other cash equivalents 5,440 2,068
Net non-trading other cash equivalents 2,396 1,781
Cash and cash equivalents 22,354 20,351
27. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL
ACCEPTED AS SECURITY FOR ASSETS
Securitisations and covered bonds
As described in Note 17 to the Consolidated Financial Statements
in the 2015 Annual Report, Santander UK plc and certain of its
subsidiaries enter into securitisation transactions whereby
portfolios of residential mortgage loans and other loans are
purchased by or assigned to structured securitisation companies,
and have been funded through the issue of mortgage-backed
securities and other asset-backed securities. Holders of the
securities are only entitled to obtain payments of principal and
interest to the extent that the resources of the securitisation
companies are sufficient to support such payments and the holders
of the securities have agreed in writing not to seek recourse in
any other form. At 30 June 2016, GBP525m (2015: GBP947m) of loans
were so assigned by the Santander UK group.
Santander UK plc also has a covered bond programme, whereby
securities are issued to investors and are secured by a pool of
residential mortgages. At 30 June 2016, the pool of residential
mortgages for the covered bond programme was GBP21,866m (2015:
GBP23,613m).
At 30 June 2016, total notes issued externally from secured
programmes (securitisations and covered bonds) increased to
GBP27,432m (2015: GBP25,885m), including gross issuance of
GBP1,147m (2015: GBP3,068m) and redemptions of GBP2,227m (2015:
GBP9,840m). At 30 June 2016, a total of GBP8,138m (2015:
GBP11,110m) of notes issued under securitisation and covered bond
programmes had also been retained internally, a proportion of which
had been used as collateral for raising funds via third party
bilateral secured funding transactions, which totalled GBP4,619m at
30 June 2016 (2015: GBP5,393m), or for creating collateral which
could in the future be used for liquidity purposes.
28. FINANCIAL INSTRUMENTS
a) Measurement basis of financial assets and liabilities
The Santander UK group categorises assets and liabilities
measured at fair value within the fair value hierarchy based on the
inputs to the valuation techniques as described in Note 43(a) in
the Consolidated Financial Statements of the 2015 Annual
Report.
b) Fair values of financial instruments carried at amortised
cost
The following tables analyse the fair value of the financial
instruments carried at amortised cost at 30 June 2016 and 31
December 2015, including their levels in the fair value hierarchy -
level 1, level 2 and level 3.
Details of the valuation methodology of the financial assets and
financial liabilities carried at amortised cost can be found in
Note 43(c) in the Consolidated Financial Statements of the 2015
Annual Report.
30 June 2016 31 December 2015
Fair value Fair value
Level 2 Level 3 Total Carrying Level 2 Level 3 Total Carrying
value value
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Loans and advances to banks 3,895 428 4,323 4,470 3,006 431 3,437 3,548
Loans and Advances secured
advances to on residential
customers property - 157,062 157,062 153,528 - 156,105 156,105 152,837
Corporate loans 6,507 26,259 32,766 32,839 6,426 24,821 31,247 31,515
Other advances - 14,175 14,175 14,188 - 13,685 13,685 13,693
6,507 197,496 204,003 200,555 6,426 194,611 201,037 198,045
Loans and receivables securities 215 - 215 204 63 - 63 52
Liabilities
Securities sold
under
Deposits by agreements to
banks repurchase 4,061 - 4,061 4,035 4,265 - 4,265 4,209
Other deposits 3,145 572 3,717 3,709 3,577 501 4,078 4,069
7,206 572 7,778 7,744 7,842 501 8,343 8,278
Deposits by Current and
customers demand accounts - 90,510 90,510 90,510 - 76,193 76,193 76,193
Savings accounts - 53,261 53,261 53,018 - 59,580 59,580 59,420
Time deposits - 25,856 25,856 25,800 - 28,085 28,085 27,959
Securities sold under
agreements to repurchase 596 - 596 502 546 - 546 502
596 169,627 170,223 169,830 546 163,858 164,404 164,074
Debt securities Bonds and medium
in issue term notes 44,130 - 44,130 42,381 41,425 - 41,425 39,772
Securitisation programmes 8,268 1,205 9,473 9,163 8,942 997 9,939 9,843
52,398 1,205 53,603 51,544 50,367 997 51,364 49,615
Subordinated liabilities 4,406 - 4,406 4,214 4,022 - 4,022 3,885
c) Fair values of financial instruments measured at fair value
on a recurring basis
The following tables summarise the fair values of the financial
assets and liabilities accounted for at fair value at 30 June 2016
and 31 December 2015, analysed by their levels in the fair value
hierarchy - Level 1, Level 2 and Level 3.
Transfers between levels of the fair value hierarchy
Transfers between levels of the fair value hierarchy are
reported at the beginning of the period in which they occur. During
H116, the following financial instruments were transferred between
Levels 1 and 2 in the fair value hierarchy.
- Available-for-sale debt securities - Debt securities with fair values of GBP25m were transferred
from Level 1 to Level 2 principally due to a lack of market transactions in these instruments.
During H116, there were no transfers of financial instruments
between Levels 2 and 3 in the fair value hierarchy. Transfers
relating to the FY15 are disclosed in Note 43(d) in the
Consolidated Financial Statements of the 2015 Annual Report.
Fair value
Balance sheet category 30 June 2016 31 December 2015
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Valuation
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm technique
Assets
Loans and
advances to
Trading assets banks - 7,474 - 7,474 - 5,433 - 5,433 A
Loans and advances to customers 1,010 8,542 - 9,552 580 5,380 - 5,960 A
Debt securities 6,523 - - 6,523 5,462 - - 5,462 -
Equity securities 5,724 - - 5,724 7,106 - - 7,106 -
Exchange rate
Derivative assets contracts - 9,014 30 9,044 - 5,277 55 5,332 A
Interest rate contracts - 19,937 17 19,954 - 14,087 18 14,105 A & C
Equity and credit contracts 88 737 120 945 88 1,271 115 1,474 B & D
Financial assets Loans and
designated at fair advances to
value customers - 1,930 71 2,001 - 1,832 59 1,891 A
Debt securities - 316 217 533 - 299 208 507 A & B
Available-for-sale Equity
securities securities 16 12 25 53 17 12 100 129 B
Debt securities 9,783 - - 9,783 8,856 27 - 8,883 C
Total assets at fair value 23,144 47,962 480 71,586 22,109 33,618 555 56,282
Liabilities
Deposits by
Trading liabilities banks - 3,931 - 3,931 - 2,777 - 2,777 A
Deposits by customers - 7,936 - 7,936 - 7,151 - 7,151 A
Short positions 2,807 - - 2,807 2,794 - - 2,794 -
Derivative Exchange rate
liabilities contracts - 7,247 27 7,274 - 6,140 55 6,195 A
Interest rate contracts - 19,305 10 19,315 1 13,677 10 13,688 A & C
Equity and credit contracts - 1,131 45 1,176 2 1,583 40 1,625 B & D
Financial
liabilities Debt
designated at fair securities in
value issue - 1,951 7 1,958 - 2,011 5 2,016 A
Total liabilities at fair value 2,807 41,501 89 44,397 2,797 33,339 110 36,246
d) Valuation techniques
The main valuation techniques employed in internal models to
measure the fair value of the financial instruments are disclosed
in Note 43(e) in the Consolidated Financial Statements of the 2015
Annual Report. The Santander UK group did not make any material
changes to the valuation techniques and internal models it used
during H116.
e) Fair value adjustments
The internal models incorporate assumptions that the Santander
UK group believes would be made by a market participant to
establish fair value. Fair value adjustments are adopted when the
Santander UK group considers that there are additional factors that
would be considered by a market participant that are not
incorporated in the valuation model.
The Santander UK group classifies fair value adjustments as
either 'risk-related' or 'model-related'. The fair value
adjustments form part of the portfolio fair value and are included
in the balance sheet values of the product types to which they have
been applied. The majority of these adjustments relate to Global
Corporate Banking. The magnitude and types of fair value adjustment
adopted by Global Corporate Banking are listed in the following
table:
30 June 2016 31 December 2015
GBPm GBPm
Risk-related:
- Bid-offer and trade specific adjustments 46 46
- Uncertainty 50 42
- Credit risk adjustment 5 23
101 111
Model-related 4 6
Day One profits 3 1
108 118
Risk-related adjustments
Risk-related adjustments are driven, in part, by the magnitude
of the Santander UK group's market or credit risk exposure, and by
external market factors, such as the size of market spreads. For
further details, see the 'Risk-related adjustments' section in Note
43(f) to the Consolidated Financial Statements in the 2015 Annual
Report.
f) Internal models based on information other than market data
(Level 3)
Valuation techniques
There have been no significant changes to the valuation
techniques as set out in Note 43(i) to the Consolidated Financial
Statements in the 2015 Annual Report.
Reconciliation of fair value measurements in Level 3 of the fair
value hierarchy
The following table provides a reconciliation of the movement
between opening and closing balances of Level 3 financial
instruments, measured at fair value using a valuation technique
with significant unobservable inputs:
Assets Liabilities
Derivatives Fair value Available-for-sale Total Derivatives Fair value Total
through P&L through P&L
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2016 188 267 100 555 (105) (5) (110)
Total
gains/(losses)
recognised in
profit/(loss):
- Fair value
movements (2) 36 - 34 8 (1) 7
- Foreign
exchange and
other movements 1 - - 1 - (1) (1)
Gains recognised
in other
comprehensive
income - - 19 19 - - -
Additions - - 25 25 - - -
Sales - - (119) (119) - - -
Settlements (20) (15) - (35) 15 - 15
At 30 June 2016 167 288 25 480 (82) (7) (89)
Gains/(losses)
recognised in
profit/(loss)
relating to
assets and
liabilities held
at the
end of the
period (1) 36 - 35 8 (2) 6
At 1 January 2015 152 281 - 433 (51) (13) (64)
Total gains/(losses) recognised in profit/(loss):
- Fair value movements (10) 19 - 9 (3) (4) (7)
Gains recognised in other comprehensive income - - 100 100 - - -
Transfers in 63 - - 63 (61) - (61)
Settlements (17) (33) - (50) 10 12 22
At 31 December 2015 188 267 100 555 (105) (5) (110)
Gains/(losses) recognised in profit/(loss) relating to assets and
liabilities held at the
end of the period (10) 19 - 9 (3) (4) (7)
Total gains or losses are included in 'Net trading and other
income' (see Note 3).
Effect of changes in significant unobservable assumptions to
reasonably possible alternatives (Level 3)
The fair value of financial instruments are, in certain
circumstances, measured using valuation techniques that incorporate
assumptions that are not evidenced by prices from observable
current market transactions in the same instrument and are not
based on observable market data and, as such require the
application of a degree of judgement. Changing one or more of the
inputs to the valuation models to reasonably possible alternative
assumptions would change the fair values significantly. The
following table shows the sensitivity of these fair values to
reasonably possible alternative assumptions.
Favourable and unfavourable changes are determined on the basis
of changes in the value of the instrument as a result of varying
the levels of the unobservable input as described in the table
below. The potential effects do not take into effect any hedged
positions.
30 June 2016 Significant unobservable input Sensitivity
Fair Assumption value
value
GBPm
Range(1) Weighted Favourable Unfavourable
average changes changes
Balance sheet note line item and product Assumption description Shift GBPm GBPm
3. Derivative assets - Interest rate contracts:
- Bermudan swaptions 9 Mean reversion 0%-4% 1% 1% 1 (1)
5. Derivative assets - Equity and credit contracts: 93 HPI Forward growth rate 0%-5% 2.75% 1% 13 (13)
- Reversionary property derivatives HPI Spot rate n/a 729(2) 10% 10 (10)
6. Derivative assets - Credit contracts:
- Credit default swaps 4 Probability of default 0%-2% 0.38% 20% 1 (1)
7. Derivative assets - Equity contracts: 23 HPI Forward growth rate 0%-5% 2.51% 1% 1 (1)
- Options and forwards HPI Spot rate n/a 699(2) 10% 3 (2)
8. FVTPL - Loans and advances to customers:
- Roll-up mortgage portfolio 71 HPI Forward growth rate 0%-5% 2.83% 1% 3 (3)
9. FVTPL - Debt securities: 217 HPI Forward growth rate 0%-5% 2.75% 1% 15 (15)
- Reversionary property securities HPI Spot rate n/a 729(2) 10% 20 (20)
11. AFS - Equity securities: Contingent litigation
- Unlisted equity shares 25 risk 0%-100% 56% 20% 6(3) (6)(3)
13. Derivative liabilities - Interest rate
contracts:
* Bermudan swaptions (3) Mean reversion 0%-4% 1% 1% 1 (1)
15. Derivative liabilities - Equity contracts: (45) HPI Forward growth rate 0%-5% 2.51% 1% 5 (5)
- Options and forwards HPI Spot rate n/a 699(2) 10% 10 (10)
31 December 2015 Significant unobservable input Sensitivity
Fair Assumption value
value Favourable Unfavourable
GBPm Range(1) Weighted changes changes
Balance sheet note line item and product Assumption description average Shift GBPm GBPm
3. Derivative assets - Interest rate contracts:
- Bermudan swaptions 10 Mean reversion 0%-4% 2% 1% 1 (1)
5. Derivative assets - Equity and credit contracts: 81 HPI Forward growth rate 0%-5% 2.65% 1% 11 (11)
- Reversionary property derivatives HPI Spot rate n/a 688(2) 10% 8 (8)
6. Derivative assets - Credit contracts:
- Credit default swaps 4 Probability of default 0%-2% 0.38% 20% 1 (1)
7. Derivative assets - Equity contracts: 30 HPI Forward growth rate 0%-5% 2.09% 1% 1 (1)
- Options and forwards HPI Spot rate n/a 659(2) 10% 2 (1)
8. FVTPL - Loans and advances to customers:
- Roll-up mortgage portfolio 59 HPI Forward growth rate 0%-5% 2.79% 1% 2 (2)
9. FVTPL - Debt securities: 208 HPI Forward growth rate 0%-5% 2.65% 1% 14 (14)
- Reversionary property securities HPI Spot rate n/a 688(2) 10% 19 (19)
11. AFS - Equity securities: Contingent litigation
- Unlisted equity shares 100 risk 0%-36% 18% 20% 5(3) (5)(3)
13. Derivative liabilities - Interest rate
contracts:
* Bermudan swaptions (4) Mean reversion 0%-4% 2% 1% 1 (1)
15. Derivative liabilities - Equity contracts: (40) HPI Forward growth rate 0%-5% 2.09% 1% 5 (5)
- Options and forwards HPI Spot rate n/a 659(2) 10% 13 (13)
(1) The range of actual assumption values used to calculate the
weighted average disclosure.
(2) Represents the HPI spot rate index level at 30 June 2016 and
31 December 2015.
(3) Gains and losses arising from changes in the fair value of
securities classified as available-for-sale are recognised in other
comprehensive income; for all other assets and liabilities shown in
the tables above, gains and losses arising from changes in their
fair value are recognised in the income statement.
No sensitivities are presented for Derivative assets -
securitisation cross currency swaps (instrument 2), Derivative
assets - securitisation swaps (instrument 4) and the FVTPL - debt
securities in issue (instrument 16), and related exchange rate and
interest rate derivatives (instruments 1, 12 and 14) as the terms
of these instruments are fully matched. As a result, any changes in
the valuation of the debt securities in issue would be exactly
offset by an equal and opposite change in the valuation of the
exchange rate derivatives.
29. RELATED PARTY DISCLOSURES
The financial position and performance of the Santander UK group
have not been materially affected in H116 by any related party
transactions, or changes to related party transactions, except as
disclosed in the other Notes to these Condensed Consolidated
Interim Financial Statements or otherwise described below.
Further information on balances due from/(to) other Banco
Santander SA group companies is set out in the section 'Balances
with other Banco Santander SA group companies' in the 'Country risk
exposure' section in the Risk review. In addition, transactions
with pension schemes operated by the Santander UK group are
described in Note 22. Further information on related party
transactions during the period and balances outstanding at the
period-end is described in the other Notes.
These transactions were made in the ordinary course of business
and substantially on the same terms as for comparable transactions
with third party counterparties and within limits acceptable to the
PRA. Such transactions do not involve more than the normal risk of
collectability or present any unfavourable features.
30. EVENTS AFTER THE BALANCE SHEET DATE
There have been no significant events between 30 June 2016 and
the date of approval of these financial statements which would
require a change to or additional disclosure in the financial
statements.
Risk factors
An investment in Santander UK plc (the Company) and its
subsidiaries (us, we or Santander UK) involves a number of risks,
the material ones of which are set out in the 2015 Annual Report on
pages 300 to 320. The principal risks described in these risk
factors, a summary of which can be found in the 'Forward-looking
statements' section, remain unchanged except for the risk factors
entitled "Exposure to UK political developments could have a
material adverse effect on us", "An adverse movement in our
external credit rating would likely increase our cost of funding,
require us to post additional collateral or take other actions
under some of our derivative contracts and adversely affect our
interest margins and results of operations" and "Potential
intervention by the FCA, the PRA or an overseas regulator may
occur, particularly in response to customer complaints", which have
been replaced as follows:
Exposure to UK political developments, including the outcome of
the UK referendum on membership of the EU, could have a material
adverse effect on us
On 23 June 2016, the UK held a referendum on the UK's membership
of the European Union (the EU). The result of the referendum's vote
was to leave the EU, which creates a number of uncertainties within
the UK, and regarding its relationship with the EU.
Although the result does not entail any immediate changes to our
current operations and structure, it has caused volatility in the
markets, including depreciation of the pound sterling, and is
expected to continue to cause economic uncertainty which could
adversely affect our results, financial condition and prospects.
The terms and timing of the UK's exit from the EU are yet to be
confirmed and it is not possible to determine the full impact that
the referendum, the UK's exit from the EU and/or any related
matters may have on general economic conditions in the UK
(including on the performance of the UK housing market and UK
banking sector) and, by extension, the impact the exit may have on
our results, financial condition and prospects. Further, there is
uncertainty as to whether, following exit from the EU, it will be
possible for us (and other UK banks) to continue to provide
financial services on a cross-border basis within other EU member
states. The exit from the EU could also lead to legal uncertainty
and potentially divergent national laws and regulations across
Europe should EU laws be replaced, in whole or in part, by UK laws
on the same (or substantially similar) issues. The negotiation of
the UK's exit terms is likely to take a number of years.
The UK political developments described above, along with any
further changes in government structure and policies, may lead to
further market volatility and changes to the fiscal, monetary and
regulatory landscape to which we are subject and could have a
negative adverse effect on our financing availability and terms
and, more generally, on our results, financial condition and
prospects.
An adverse movement in our external credit rating would likely
increase our cost of funding, require us to post additional
collateral or take other actions under some of our derivative
contracts and adversely affect our interest margins and results of
operations
Credit ratings can in some instances affect the cost and other
terms upon which we are able to obtain funding. Credit rating
agencies regularly evaluate us, and their credit ratings of our
institution and our debt in issue are based on a number of factors,
including our financial strength and that of the UK economy and
conditions affecting the financial services industry generally.
Any downgrade in the external credit ratings assigned to us or
any of our debt securities could have an adverse impact on us. In
particular, such downgrade in our credit ratings could increase our
borrowing costs and could require us to post additional collateral
or take other actions under some of our derivative contracts, and
could limit our access to capital markets and adversely affect our
commercial business. For example, a credit rating downgrade could
adversely affect our ability to sell or market certain of our
products, engage in certain longer-term transactions and
derivatives transactions and retain our customers, particularly
customers who need a minimum rating threshold in order to
invest.
In addition, under the terms of certain of our derivative
contracts, we may be required to maintain a minimum credit rating
or otherwise our counterparties may be able to terminate such
contracts. Any of these results of a credit rating downgrade could,
in turn, reduce our liquidity and have an adverse effect on us,
including our operating results, financial condition and prospects.
For example, we estimate that as at 31 December 2015, if Fitch,
Moody's and Standard & Poor's were concurrently to downgrade
the long-term credit ratings of the Company by one notch, and
thereby trigger a short-term credit rating downgrade, this could
result in an outflow of GBP5.6bn of cash and collateral. A
hypothetical two notch downgrade would result in a further outflow
of GBP0.4bn of cash and collateral. These outflow requirements are
however captured under the LCR regime.
However, while certain potential impacts are contractual and
quantifiable, the full consequences of a credit rating downgrade
are inherently uncertain, as they depend upon numerous dynamic,
complex and inter-related factors and assumptions, including market
conditions at the time of any downgrade, whether any downgrade of a
firm's long-term credit rating precipitates downgrades to its
short-term credit rating, and assumptions about the potential
behaviours of various customers, investors and counterparties.
Actual outflows could be higher or lower than this hypothetical
example, depending upon certain factors including any management or
restructuring actions that could be taken to reduce cash outflows
and the potential liquidity impact from a loss of unsecured funding
(such as from money market funds) or loss of secured funding
capacity.
Although unsecured and secured funding stresses are included in
our stress testing scenarios and a portion of our total liquid
assets is held against these risks, it is still the case that a
credit rating downgrade could have a material adverse effect on us.
In addition, if certain counterparties terminated derivative
contracts with us and we were unable to replace such contracts, our
market risk profile could be altered.
Following the results of the UK referendum on EU membership,
S&P Global Ratings and Moody's Investors Service affirmed the
long-term credit ratings and changed the ratings outlooks of most
major UK banks because of the medium term impact of political and
market uncertainty. The Company's long-term debt is currently rated
investment grade by the major rating agencies: A1 with stable
outlook by Moody's Investors Service, A with negative outlook by
S&P Global Ratings and A with positive outlook by Fitch
Ratings. If a downgrade of any Santander UK member's long-term
credit ratings were to occur, it could also impact the short-term
credit ratings of other Santander UK member(s). Should there be any
removal of systemic support by the UK Government, all things being
equal, the impact on our long-term credit-rating could potentially
increase the cost of some of our wholesale borrowing and our
ability to secure both long-term and short-term funding may be
reduced.
Following the results of the UK referendum on EU membership, the
UK's sovereign credit rating was downgraded by Fitch Ratings and
S&P Global Ratings, and its outlook changed to negative by
Moody's Investors Service. Changes to the UK sovereign credit
rating, or the perception that further changes may occur, could
have a material adverse effect on our operating results, financial
condition, prospects and the marketability and trading value of our
securities. This might also impact on our own credit rating,
borrowing costs and our ability to secure funding. Changes to the
UK sovereign credit rating, or the perception that further changes
may occur, could also have a material effect in depressing consumer
confidence, restricting the availability, and increasing the cost,
of funding for individuals and companies, further depressing
economic activity, increasing unemployment and/or reducing asset
prices.
There can be no assurance that the credit rating agencies will
maintain our current credit ratings or outlooks. Our failure to
maintain favourable credit ratings and outlooks could increase our
cost of funding and adversely affect our interest margins, which
could have a material adverse effect on us.
Potential intervention by the FCA, the PRA, the CMA or an
overseas regulator may occur, particularly in response to customer
complaints
The PRA and the FCA now have a more outcome-focused regulatory
approach than their predecessor the FSA. This involves more
proactive intervention, investigation and enforcement, and more
punitive penalties for infringement. As a result, we and other PRA
and/or FCA-authorised firms face increased supervisory intrusion
and scrutiny (resulting in increasing costs including supervision
fees), and in the event of a breach of relevant law or regulation,
we are likely to face more stringent penalties.
The developing legal and regulatory regime in which we operate
requires us to be compliant across all aspects of our business,
including the training, authorisation and supervision of personnel,
systems, processes and documentation. If we fail to be compliant
with relevant law or regulation, there is a risk of an adverse
impact on our business from more proactive regulatory intervention
(including by any overseas regulator which establishes
jurisdiction), investigation and enforcement activity leading to
sanctions, fines or other action imposed by or agreed with the
regulatory authorities. Customers of financial services
institutions, including our customers, may seek redress if they
consider that they have suffered loss for example as a result of
the mis-selling of a particular product, or through incorrect
application of the terms and conditions of a particular product or
in connection with a competition law infringement.
In particular, the FCA has operational objectives to protect
consumers and to promote competition, and it is taking a more
interventionist approach in its increasing scrutiny of product
terms and conditions and monitoring compliance with competition
law. FSMA (as amended by the Financial Services Act 2012) gives the
FCA the power to make temporary product intervention rules either
to improve a firm's systems and controls in relation to product
design, product management and implementation, or to address
problems identified with products which may potentially cause
significant detriment to consumers because of certain product
features or firms' flawed governance and distribution strategies.
Such rules may prevent firms from entering into product agreements
with consumers until such problems have been rectified. Since April
2015 the FCA (and the Payment Systems Regulator) obtained
concurrent competition law enforcement powers. This is in addition
to the CMA and European Commission which continue to have
jurisdiction to enforce competition law infringement in the UK. As
a result, the UK financial services sector now operates in an
environment of heightened competition law scrutiny.
Under the Financial Services Act 2010, the FCA also has the
power to impose its own customer redress scheme on authorised
firms, including us, if it considers that consumers have suffered
loss or damage as a consequence of a regulatory failing, including
mis-selling. In recent years there have been several industry-wide
issues in which the FSA (now the FCA) has intervened directly. One
such issue is the mis-selling of PPI where, following an
unsuccessful legal challenge by the British Bankers' Association
(BBA) in 2011 of new FSA rules which altered the basis on which
regulated firms must consider and deal with complaints in relation
to the sale of PPI, Santander UK, along with other institutions,
revised its provision for PPI complaint liabilities in 2011 to
reflect the change in rules and the consequential increase in
claims levels. No additional provisions were made for PPI in 2012
or 2013. In 2014, a total charge of GBP140m, including related
costs, was made for conduct remediation. Of this, GBP95m related to
PPI. In November 2015, the FCA issued a consultation paper
(CP15/39) outlining its proposed approach to PPI in light of the
2014 decision of the Supreme Court in Plevin v Paragon Personal
Finance Ltd (Plevin) and its proposal to set a two year deadline
for PPI claims. In Plevin, the Supreme Court ruled that a failure
to disclose a large commission payment on a single premium PPI
policy sold in connection with a secured personal loan made the
relationship between the lender and the borrower unfair under
section 140A of the Consumer Credit Act 1974. Regarding the two
year deadline for PPI claims, the FCA outlined details of a
GBP42.2m media campaign, funded by the 18 firms (including us) that
have reported the most PPI complaints. The FOS is also currently
considering its position with respect to the impact of Plevin on
PPI complaints. When assessing the adequacy of our provision, we
have applied our interpretation of the proposed rules and guidance
in CP15/39 to our current assumptions. This application resulted in
an additional GBP450m provision charge in December 2015, which
represented our best estimate of the remaining redress and costs at
that time, notwithstanding the ongoing nature of the consultation.
New legislation was introduced in 2015 which has the effect of
restricting the corporation tax deductibility for a large
proportion of this cost. This new legislation is further detailed
in the Risk factor entitled 'Changes in taxes and other assessments
may adversely affect us'. The FCA's consultation period in respect
of CP15/39 closed in February 2016. In August 2016, the FCA issued
feedback on CP15/39 and commenced a further consultation on
amendments to the proposed rules and guidance set out in CP15/39,
addressing (amongst other things) the inclusion of profit share in
the FCA's proposed approach to the assessment of fairness and
redress and the extension of the deadline for making PPI-related
complaints to the end of June 2019. This further consultation will
close on 11 October 2016. We are considering the impact of these
proposed amendments on our PPI complaint liabilities, although it
is not possible to determine at this time the nature or extent of
that impact.
Given the above, the ultimate financial impact on us of the
claims arising from PPI complaints is still uncertain and will
depend on a number of factors, including the impact of the Supreme
Court's decision in Plevin, the nature and content of the FCA's
final rules and/or guidance arising from CP15/39, changes to FOS'
approach to handling customer complaints (if any), the rate at
which new complaints arise, the length of any complaints, the
content and quality of the complaints (including the availability
of supporting evidence) and the average uphold rates and redress
costs. We can make no assurance that expenses associated with PPI
complaints will not exceed the provision made relating to these
claims. More generally, we can make no assurance that estimates for
potential liabilities, based on the key assumptions used, are
correct, and the reserves taken as a result may prove inadequate.
If additional expenses that exceed provisions for PPI liabilities
or other provisions were to be incurred, these expenses could have
a material adverse effect on our operating results, financial
condition and prospects. For further information about the
provisions for PPI complaint liabilities and other conduct
remediation, see Note 21 to the Condensed Consolidated Interim
Financial Statements and Note 33 to the Consolidated Financial
Statements in the 2015 Annual Report. The above may be relevant to
any future industry-wide mis-selling or other infringement that
could affect our businesses. Any such issues may lead from time to
time to: (i) significant costs or liabilities; and (ii) changes in
the practices of such businesses which benefit customers at a cost
to shareholders.
Decisions taken by the FOS could, if applied to a wider class or
grouping of customers, have a material adverse effect on our
operating results, financial condition and prospects.
The Financial Services and Markets Act 2000 (Designated Consumer
Bodies) Order 2013 (the Designated Consumer Bodies Order) was made
on 16 December 2013 and came into force on 1 January 2014. The
Designated Consumer Bodies Order designates the National
Association of Citizens Advice Bureaux, the Consumers' Association,
the General Consumer Council for Northern Ireland and the National
Federation of Self Employed and Small Businesses as consumer bodies
that may submit a 'super-complaint' to the FCA. A 'super-complaint'
is a complaint made by any of these designated consumer bodies to
the FCA on behalf of consumers of financial services where it
considers that a feature, or a combination of features, of the
market for financial services in the UK is seriously damaging the
interests of these customers. Complaints about damage to the
interests of individual consumers will continue to be dealt with by
the FOS. If a 'super-complaint' were to be made against a Santander
UK group entity by a designated consumer body under the Designated
Consumer Bodies Order, any response published or action taken by
the FCA could have a material adverse effect on our operating
results, financial condition and prospects.
Given the (i) requirement for compliance with an increasing
volume of relevant law and regulation; (ii) more proactive
regulatory intervention and enforcement and more punitive sanctions
and penalties for infringement; (iii) the inherent unpredictability
of litigation; and (iv) the evolution of the jurisdiction of FOS
and related impacts, it is possible that related costs or
liabilities could have a material adverse effect on our operating
results, financial condition and prospects.
Glossary
A glossary of financial services industry terms can be found in
the 'Shareholder information' section of the 2015 Annual
Report.
Forward-looking statements
The Company and its subsidiaries (together Santander UK) may
from time to time make written or oral forward-looking statements.
The Company makes written forward-looking statements in this Half
Yearly Financial Report and may also make forward-looking
statements in its periodic reports to the SEC on Forms 20-F and
6-K, in its offering circulars and prospectuses, in press releases
and other written materials and in oral statements made by its
officers, directors or employees to third parties. Examples of such
forward-looking statements include, but are not limited to:
- Projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share,
dividends, capital structure or other financial items or ratios
- Statements of plans, objectives or goals of Santander UK or its management, including those
related to products or services
- Statements of future economic performance, and
- Statements of assumptions underlying such statements.
Words such as 'believes', 'anticipates', 'expects', 'intends',
'aims', 'plans', 'targets' and similar expressions are intended to
identify forward-looking statements, but are not the exclusive
means of identifying such statements.
By their very nature, forward-looking statements are not
statements of historical or current facts; they cannot be
objectively verified, are speculative and involve inherent risks
and uncertainties, both general and specific, and risks exist that
the predictions, forecasts, projections and other forward-looking
statements will not be achieved. Santander UK cautions readers that
a number of important factors could cause actual results to differ
materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements made by
Santander UK or on its behalf. Some of these factors, which could
affect Santander UK's business, financial condition and/or results
of operations, are considered in detail in the Risk review and the
Risk factors section in the Shareholder information section in this
report, and they include:
- the ability of Santander UK to recruit, retain and develop appropriate senior management and
skilled personnel
- the disruptions and volatility in the global financial markets
- the effects of UK economic conditions
- Santander UK's exposure to UK political developments, including the outcome of the UK referendum
on membership of the EU
- the extent to which regulatory capital and leverage requirements and any changes to these
requirements may limit and adversely affect Santander UK's operations
- the extent to which liquidity requirements and any changes to these requirements may limit
and adversely affect Santander UK's operations
- Santander UK's exposure to UK Government debt
- the effects of the ongoing economic and sovereign debt tensions in the eurozone
- Santander UK's exposure to risks faced by other financial institutions
- Santander UK's ability to access liquidity and funding on acceptable financial terms
- the effects of an adverse movement in external credit rating assigned to Santander UK, any
Santander UK member or any of their respective debt securities
- the effects of fluctuations in interest rates and other market risks
- the extent to which Santander UK may be required to record negative fair value adjustments
for its financial assets due to changes in market conditions
- the risk of failing to successfully implement and continue to improve Santander UK's credit
risk management systems
- the risks associated with Santander UK's derivative transactions
- the extent to which Santander UK may be exposed to operational risks, including risks relating
to data and information collection, processing, storage and security
- the risk of failing to effectively improve or upgrade Santander UK's information technology
infrastructure and management information systems in a timely manner
- Santander UK's exposure to unidentified or unanticipated risks despite its risk management
policies, procedures and methods
- the effects of competition with other financial institutions
- the various risks facing Santander UK as it expands its range of products and services (e.g.
risk of new products and services not being responsive to customer demands or successful,
risk of changing customer needs)
- Santander UK's ability to control the level of non-performing or poor credit quality loans
and whether Santander UK's loan loss reserves are sufficient to cover loan losses
- the extent to which Santander UK's loan portfolio is subject to prepayment risk
- the risk that the value of the collateral, including real estate, securing Santander UK's
loans may not be sufficient and Santander UK may be unable to realise the full value of the
collateral securing its loan portfolio
- the ability of Santander UK to realise the anticipated benefits of its organic growth or business
combinations and the exposure, if any, of Santander UK to any unknown liabilities or goodwill
impairments relating to acquired businesses
- the effects of the financial services laws, regulations, governmental oversight, administrative
actions and policies and any changes thereto in each location or market in which Santander
UK operates
- Santander UK's exposure to any potential uncertainly and changes to the UK regulatory regime
as a result of the reform and reorganisation of the UK financial regulatory authorities and
the UK regulatory framework
- the effects of any new reforms to the UK mortgage lending and the personal loans market
- Santander UK's exposure to any risk of loss from legal and regulatory proceedings
- the power of the FCA, the PRA, the CMA or an overseas regulator to potentially intervene in
response to e.g. attempts by customers to seek redress from financial service institutions,
including Santander UK, in case of industry-wide issues
- the effects which the Banking Act 2009 may have on Santander UK's business and the value of
securities issued
- the effects which the bail-in and write down powers under the Banking Act 2009 and the BRRD
may have on Santander UK's business and the value of securities issued
- the extent to which members of Santander UK may be responsible for contributing to compensation
schemes in the UK in respect of banks and other authorised financial services firms that are
unable to meet their obligations to customers
- the risk of third parties using Santander UK as a conduit for illegal or improper activities
without Santander UK's knowledge
- the effects of taxation requirements and other assessments and any changes thereto in each
location in which Santander UK operates
- the effects of any changes in the pension liabilities and obligations of Santander UK
- the effects of any changes to the reputation of Santander UK, any Santander UK member or any
affiliate operating under the Santander UK brands
- the basis of the preparation of the Company's and Santander UK's financial statements and
information available about Santander UK, including the extent to which assumptions and estimates
made during such preparation are accurate
- the extent to which disclosure controls and procedures over financial reporting may not prevent
or detect all errors or acts of fraud
- the extent to which changes in accounting standards could impact Santander UK's reported
earnings
- the extent to which Santander UK relies on third parties for important infrastructure support,
products and services
- the possibility of risk arising in the future in relation to transactions between the Company
and its parent, subsidiaries or affiliates
- the extent to which different disclosure and accounting principles between the UK and the
US may provide you with different or less information about us than you expected
- the risk associated with enforcement of judgments in the US and
- Santander UK's success at managing the risks to which it is exposed, including the items above.
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 foregoing
non-exhaustive list of important factors. Forward-looking
statements speak only as of the date on which they are made and are
based on the knowledge, information available and views taken on
the date on which they are made; such knowledge, information and
views may change at any time. Santander UK does not undertake any
obligation to update or revise any forward-looking statement,
whether as a result of new information, future events or
otherwise.
Selected financial data
30 June 2016 31 December 2015
% %
Capital ratios:
Common Equity Tier 1 (CET 1) capital ratio 11.2 11.6
Total capital ratio 17.9 18.2
Equity to assets ratio(1) 4.73 4.68
Ratio of earnings to fixed charges:(2)
- Excluding interest on retail deposits 305 218
- Including interest on retail deposits 171 143
Profitability ratios:
Return on assets(3) 0.53 0.34
Return on ordinary shareholders' equity(4) 10.7 7.0
Dividend payout ratio(5) n/a 51
(1) Average ordinary shareholders' equity divided by average
total assets. Average balances are based on monthly data.
(2) For the purpose of calculating the ratios of earnings to
fixed charges, earnings consist of profit from continuing
operations before tax and before adjustment for non-controlling
interests plus fixed charges. Fixed charges consist of interest
expense, including the amortisation of discounts and premiums on
debt securities in issue and related capitalised expenses and
including or excluding interest on retail deposit as
appropriate.
(3) Profit after tax divided by average total assets. Average
balances are based on monthly data.
(4) Profit after tax divided by average ordinary shareholders'
equity.
(5) Ordinary equity dividends approved divided by profit after
tax attributable to equity holders of the parent.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR AKPDBBBKBBFD
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