Source - RNS
RNS Number : 4085X
Santander UK Plc
10 August 2018
 



Half Yearly Financial Report 2018

Santander UK plc

PART OF THE BANCO SANTANDER GROUP

 

Important information for readers

Santander UK plc and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of Banco Santander (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA.

 

This Half Yearly Financial Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See 'Forward-looking statements' in the Shareholder information section.

 

Santander UK plc

Half Yearly Financial Report 2018

 










Contents




Introduction

2



Directors' responsibilities statement

4



Financial review

5



Risk review

 14



Financial statements

41



Shareholder information

66






 

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.

 

Ring-fencing progress to date

We have made significant progress in the implementation of our ring-fence structure this year ahead of the 1 January 2019 ring-fencing legislation deadline.

 

Our model ensures minimal customer disruption and maintains longer-term flexibility. The majority of our customer loans and assets as well as customer deposits and liabilities will remain within Santander UK plc, our principal ring-fenced bank. Prohibited businesses which cannot be transacted within the ring-fence include our derivatives business with financial institutions and certain corporates and elements of our short-term markets business, will be transferred to Banco Santander London Branch or Banco Santander. A small amount of residual activity or businesses which, for legal or operational reasons cannot remain inside the ring-fence and cannot be transferred, will remain in the Santander UK group, outside the ring-fence bank. This includes legacy contracts, the employee sharesave scheme and offshore deposits.

 

Our transition to a 'wide' ring-fence structure to serve our retail, commercial and corporate customers is now approaching completion following the achievement of several major milestones. We received Court approval of our Ring-Fence Transfer Scheme at the Part VII Sanctions Hearing, which took place on 11 and 12 June 2018.

 

In June 2018, we transferred customer loans totalling £0.7bn from CIB to Banco Santander London Branch. The remaining transfers to Banco Santander London Branch or Banco Santander were completed in July 2018. Furthermore, planned novations were finalised before the Part VII migrations, and short-term funding activity has now been transferred to Santander UK plc from Abbey National Treasury Services plc.

 

International Financial Reporting Standard 9 (IFRS 9)

On 1 January 2018, Santander UK transitioned to IFRS 9 from the former standard IAS 39. The initial impact on the CET1 capital ratio was 8bps before the application of any regulatory transitional arrangements, which we are adopting and which are expected to reduce the amount impacting CET1 in 2018.

 

The accounting policy changes for IFRS 9, as set out in Note 1 to the Condensed Consolidated Interim Financial Statements, have been applied from 1 January 2018. Comparatives have not been restated.

 

Development and performance of our business in H118

Delivering for customers in a competitive and uncertain operating environment

We have continued to deliver for our customers in a competitive market with strong net mortgage growth to UK homeowners and focused lending growth to trading businesses, driven by an emphasis on customer experience and loyalty.

 

The competitive and uncertain operating environment has resulted in profit before tax of £905m, down 15% year-on-year. However, we still continued to deliver attractive shareholder returns.

 

The progress made recently is encouraging with Q2 profit before tax of £490m, up 18% quarter-on-quarter, importantly with some improvement in costs. Our investment in business transformation initiatives also continued despite significantly higher regulatory, risk and control spend for projects, such as GDPR, PSD2 and MiFID II.

 

Strong and sustainable foundations

We have strong and sustainable foundations in place and the right approach to succeed and our focus remains on long-term customer loyalty.

 

We maintained our robust balance sheet and prudent approach to risk and continued to build CET1 capital, up 50bps in the first half to 12.7%. Credit quality remained strong, with a low NPL ratio of 1.25%.

 

Taking action to transform the bank for the future

Cost discipline is a key priority for management. We are progressing with our 2018 efficiency initiatives and expect the benefits of our actions to come through in the second half of the year. By further simplifying our organisation and continuing to harness digital technology going forward, we will improve our operational efficiency and deliver on our purpose - to help people and businesses prosper.

 

2018 outlook

We expect our gross mortgage lending and lending to UK companies to be broadly in line with market growth for the rest of the year. Our lending growth to trading business customers is expected to remain strong, and we will continue to actively manage our CRE exposures.

 

As previously guided, we expect net interest income for 2018 to be lower than in 2017, as a result of ongoing competition in new mortgage pricing and SVR attrition. SVR attrition is expected to be broadly in line with the net £5.5bn reduction in 2017, with increased customer refinancing into fixed rate products influenced by low mortgage rates and the competitive mortgage market.

 

We expect costs for 2018 to be higher than in 2017, however we are progressing with our efficiency programme and expect the benefits of our actions to come through in the second half of the year. We will also continue to invest in business transformation initiatives, which will improve our customer experience and deliver operational efficiencies.

 

We will continue to actively manage growth in certain business areas, in line with our proactive risk management policies and medium-low risk profile. These actions will help deliver sustainable results while supporting our customers in an uncertain environment.

 

Since 30 June 2018, trends evident in the business operating results have not changed significantly.

 

Our principal risks and uncertainties

Information on our principal risks and uncertainties is set out in the Risk review by type of risk. Except where noted, there has been no significant change to the description of these risks or key mitigating actions as set out in the 2017 Annual Report.

 

Key performance indicators

The directors of the Company's parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which includes the Santander UK plc group) on a business division basis. The Company's Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the Company. As a result, key performance indicators are not set, monitored or managed at the Santander UK plc group level. The development and performance of the business of the Santander UK plc group is set out in the 'Income statement review' section of the Financial review. The key performance indicators of the Santander UK Group Holdings plc group can be found on page 3 of its 2018 Half Yearly Financial Report, which does not form part of this report.

 

By Order of the Board

 

Nathan Bostock

Director
9 August 2018

 

Directors' responsibilities statement

The Directors confirm that to the best of their knowledge these Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union, and that the half-year management report herein includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R and 4.2.8R, namely:

 

-

An indication of important events that have occurred during the six months ended 30 June 2018 and their impact on the Condensed Consolidated Interim Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and

 

-

Material related party transactions in the six months ended 30 June 2018 and any material changes in the related party transactions described in the last Annual Report.

 

By Order of the Board

 

Nathan Bostock

Chief Executive Officer

9 August 2018

 

Financial review

 










Contents




Income statement review

6



Summarised Consolidated
Income Statement

6



Profit before tax by segment

7



- Retail Banking

7



- Commercial Banking

8



- Corporate & Investment Banking

9



- Corporate Centre

10



Balance sheet review

11



Business development highlights

13






 

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT

 


Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Net interest income

1,811

1,922

Non-interest income(1)

501

591

Total operating income

2,312

2,513

Operating expenses before credit impairment losses, provisions and charges

(1,283)

(1,215)

Credit impairment losses(2)

(91)

(48)

Provisions for other liabilities and charges

(33)

(186)

Total credit impairment losses, provisions and charges

(124)

(234)

Profit before tax

905

1,064

Tax on profit

(256)

(323)

Profit after tax for the period

649

741




Attributable to:



Equity holders of the parent

637

730

Non-controlling interests

12

11

Profit after tax for the period

649

741

(1)

Comprised of Net fee and commission income and Net trading and other income.

(2)

Credit impairment losses for H118 are calculated on an IFRS 9 basis and for H117 on an IAS 39 basis. For more on this change in methodology see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 25 to the Condensed Consolidated Interim Financial Statements.

 

H118 compared to H117

Profit before tax was down 15%.

 

By income statement line, the movements were:

 

-

Net interest income was down 6%, impacted by the fall in average new mortgage pricing in 2017 and SVR attrition(3) (H118: £2.4bn; H117: £2.5bn), partially offset by liability margin improvement.

-

Non-interest income was down 15%, largely due to the absence of the £48m gain on sale of Vocalink Holdings Limited shareholdings in H117 as well as lower income in CIB. Additionally, income was impacted by the absence of mark-to-market movements on asset portfolios in the Corporate Centre in H117, partially offset by an increases in Retail Banking and Commercial Banking income.

-

Operating expenses before credit impairment losses, provisions and charges were up 6% due to a number of regulatory, risk and control projects, such as GDPR, PSD2 and MiFID II, which were implemented in the first half of 2018. The impact of these projects increased costs which were only partially offset by operational and digital efficiencies.

-

Credit impairment losses were up 90%. This was primarily due to a charge for a single CIB customer, which moved to non-performing in 2017 and was materially provided for in Q118, as well as a charge for a 2018 drawdown by Carillion plc. Overall credit quality remained good across all customer loan books. In addition, mortgage releases were lower year-on-year.

-

Provisions for other liabilities and charges were down 82%, largely due to the absence of the £69m PPI and £35m other conduct charges in H117 and an £11m release in other conduct provisions relating to interest rate derivatives.

The remaining provision for PPI redress and related costs was £301m, in line with our assumptions and claims experience. However, we will continue to monitor our provision levels, and take account of the impact of any further change in claims received.

The remaining other conduct provision was £31m, primarily relating to the sale of interest rate derivatives, following an ongoing review regarding regulatory classification of certain customers potentially eligible for redress. Following further analysis of the impacted population, management has assessed the provision requirements resulting in a release of £11m in H118.

-

Tax on profit decreased 21% to £256m largely as a result of lower taxable profits and conduct provisions that were disallowed for tax purposes in H117. The effective tax rate was 28%.

(3)

Calculation of SVR attrition includes balances relating to our Follow-on-Rate product, which was introduced in January 2018.

 

PROFIT BEFORE TAX BY SEGMENT

This section contains a summary of our results, and commentary thereon, by income statement line item for each segment. The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date. For more, see Note 2 to the Condensed Consolidated Interim Financial Statements.

 

RETAIL BANKING

Retail Banking offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with an annual turnover of up to £6.5m, and Santander Consumer Finance, predominantly a vehicle finance business.

 

Summarised income statement


Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Net interest income

1,587

1,657

Non-interest income(1)

305

300

Total operating income

1,892

1,957

Operating expenses before credit impairment losses, provisions and charges

(965)

(919)

Credit impairment losses(2)

(52)

(39)

Provisions for other liabilities and charges

(33)

(155)

Total credit impairment losses, provisions and charges

(85)

(194)

Profit before tax for the period

842

844

(1) 

Comprised of Net fee and commission income and Net trading and other income.

(2)

Credit impairment losses for H118 are calculated on an IFRS 9 basis and for H117 on an IAS 39 basis. For more on this change in methodology see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 25 to the Condensed Consolidated Interim Financial Statements.

 

H118 compared to H117

Profit before tax decreased by £2m to £842m in H118 (H117: £844m). By income statement line, the movements were:

 

-

Net interest income decreased 4%, driven by pressure on new mortgage lending margins and SVR attrition offsetting strong mortgage lending volumes.

-

Non-interest income increased 2%, due to stronger consumer finance income partially offset by lower overdraft fees.

-

Operating expenses before credit impairment losses, provisions and charges increased 5%, with higher regulatory, risk and control costs, investment in business growth and digital enhancements.

-

Credit impairment losses increased to £52m, largely due to lower mortgage impairment releases with the customer loan book continuing to perform well.

-

Provisions for other liabilities and charges were lower at £33m, due to the absence of additional PPI provisions in H117 and other conduct provision releases relating to interest rate derivatives.

 

Customer balances


30 June 2018
£bn

31 December 2017
£bn

Mortgages

157.2

154.9

Business banking

1.8

1.9

Consumer (auto) finance

7.0

7.0

Other unsecured lending

5.3

5.2

Customer loans

171.3

169.0

Current accounts

68.0

67.3

Savings(1)

58.9

60.8

Business banking accounts

11.3

11.1

Other retail products(1)

9.4

10.1

Customer deposits

147.6

149.3

Risk-weighted assets (RWAs)

44.3

44.1

(1)

In March 2018, Cahoot current account and savings balances totalling £0.5bn transferred from 'Other retail products' to 'Current accounts' and 'Savings', and Isle of Man balances totalling £0.4bn transferred from 'Savings' to 'Other retail products'. Prior periods have not been restated.

 

30 June 2018 compared to 31 December 2017

 

-

Mortgage lending increased £2.3bn, with higher approvals driven by management pricing actions and a focus on customer service and retention. In H118, mortgage gross lending was £14.6bn (H117: £11.6bn).

-

Consumer (auto) finance balances were broadly flat. In H118, consumer (auto) finance gross lending was £1.9bn (H117: £1.7bn). Average Consumer (auto) loan size was c£12,500 (2017: £12,500).

-

Average unsecured loan and credit card balance stock balances at 30 June 2018 were c£5,900 and c£1,000, respectively.

-

Customer deposits decreased, primarily due to a decline of £1.9bn in savings balances and £0.7bn in other retail products. This was partially offset by a £0.7bn increase in current account balances. Business banking deposits increased to £11.3bn following steady inflows in Q2.

-

RWAs were broadly stable, with an increase in customer loans partially offset by a reduction resulting from an update to our mortgage application model.

 

COMMERCIAL BANKING

Commercial Banking offers a wide range of products and financial services provided by relationship teams that are based in a network of regional Corporate Business Centres (CBCs) and through telephony and digital channels. The management of our customers is organised across two relationship teams - the Regional Corporate Bank (RCB) that covers non-property backed trading businesses that are UK domiciled with annual turnover above £6.5m and Specialist Sector Groups (SSG) that cover real estate, social housing, education, healthcare, and hotels.

 

Summarised income statement


Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Net interest income

204

191

Non-interest income(1)

40

37

Total operating income

244

228

Operating expenses before credit impairment losses, provisions and charges

(135)

(109)

Credit impairment losses(2)

(22)

(3)

Provisions for other liabilities and charges

7

(29)

Total credit impairment losses, provisions and charges

(15)

(32)

Profit before tax for the period

94

87

(1)

Comprised of Net fee and commission income and Net trading and other income.

(2)

Credit impairment losses for H118 are calculated on an IFRS 9 basis and for H117 on an IAS 39 basis. For more on this change in methodology see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 25 to the Condensed Consolidated Interim Financial Statements.

 

H118 compared to H117

Profit before tax increased by £7m to £94m in H118 (H117: £87m). By income statement line, the movements were:

 

-

Net interest income increased 7%, driven by improved asset and liability margins.

-

Non-interest income was up £3m, with growth in asset restructuring fees, up 20%, digital and payment fees, up 16%, and international, up 7%, partially offset by a decline in rates management income.

-

Operating expenses before credit impairment losses, provisions and charges were up 24%, driven by investments in expansion and enhancements to improve our asset finance business and digital capability.

-

Credit impairment losses increased to £22m primarily due to a number of small charges, without material concentrations across sectors or portfolios in the period. The loan book continues to perform well and is supported by our prudent lending policy.

-

Provision releases for other liabilities and charges of £7m mainly due to a conduct provision release.

 

Customer balances


30 June 2018
£bn

31 December 2017
£bn

Trading business

11.7

11.5

Commercial Real Estate(1)

7.3

7.9

Customer loans

19.0

19.4

Customer deposits

17.0

18.7

RWAs

19.3

19.4

(1)

Excludes Commercial Real Estate loans totalling £0.2bn to small business customers that are managed by Business banking in the Retail Banking business segment.

 

30 June 2018 compared to 31 December 2017

-

Customer loans were down at £19.0bn, with a managed reduction in CRE lending of £0.6bn, partially offset by £0.2bn growth in lending to non-property backed trading businesses.

-

Customer deposits were down £1.7bn, with management pricing actions and working capital use by customers.

-

RWAs were broadly flat, in line with customer loans.

 

Business volumes


Half year to
30 June 2018

Half year to
 30 June 2017

New facilities (£bn)

3.5

3.5

Bank account openings (No.)

1,640

1,620

Online banking (Connect) active users(1) (No.)

31,400

28,840

(1)

Online banking (Connect) active users include both business banking and Commercial Banking customers.

 

H118 compared to H117

-

We continue to attract new clients within our target sectors and deepen existing relationships. Our Relationship Managers are also building their portfolios by leveraging our comprehensive suite of products and services.

-

Active users of our corporate online banking platform 'Connect' continued to increase, up 9%, driven by enhancements to the online platform, and access to our international product suite.

 

CORPORATE & INVESTMENT BANKING 

 

As part of a rebrand across the Banco Santander group, Global Corporate Banking (the UK segment of Santander Global Corporate Banking) has been branded as Corporate & Investment Banking (CIB).

 

Corporate & Investment Banking services corporate clients with a turnover of £500m and above per annum and financial institutions. CIB clients require specially tailored solutions and value-added services due to their size, complexity and sophistication. We provide these clients with products to manage currency fluctuations, protect against interest rate risk, and arrange capital markets finance and specialist trade finance solutions, as well as providing support to the rest of Santander UK's business segments.

 

Summarised income statement


Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Net interest income

33

33

Non-interest income(1)

171

201

Total operating income

204

234

Operating expenses before credit impairment losses, provisions and charges

(150)

(145)

Credit impairment losses(2)

(18)

(9)

Provisions for other liabilities and charges

(2)

-

Total credit impairment losses, provisions and charges

(20)

(9)

Profit before tax for the period

34

80

(1)

Comprised of Net fee and commission income and Net trading and other income.

(2)

Credit impairment losses for H118 are calculated on an IFRS 9 basis and for H117 on an IAS 39 basis. For more on this change in methodology see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 25 to the Condensed Consolidated Interim Financial Statements.

 

H118 compared to H117

Profit before tax decreased by £46m to £34m in H118 (H117: £80m). By income statement line, the movements were:

 

-

Net interest income was flat at £33m.

-

Non-interest income decreased to £171m, largely due to lower trading income.

-

Operating expenses before credit impairment losses, provisions and charges were up 3% predominantly due to higher regulatory costs and investment in business growth and digital enhancements.

-

Credit impairment losses increased to £18m, primarily due to a charge for a single CIB customer, which moved to non-performing in 2017 and was materially provided for in Q118, as well as a charge for a 2018 drawdown by Carillion plc. This was partially offset by some releases across portfolios due to customers moving from non-performing.

-

Provisions for other liabilities and charges remained at a very low level at £2m.

 

Customer balances


30 June 2018
£bn

31 December 2017
£bn

Customer loans

5.5

6.0

Customer deposits

4.5

4.5

RWAs

13.5

16.5

 

30 June 2018 compared to 31 December 2017

-

Customer loans decreased to £5.5bn, largely due to a transfer of £0.7bn of customer assets from CIB to Banco Santander London Branch in June 2018, as part of our ring-fencing implementation, partially offset by normal lending growth.

-

Customer deposits were flat at £4.5bn.

-

RWAs decreased 18% to £13.5bn with the widening of the scope of our model for large corporates and a transfer of £0.7bn of customer assets to Banco Santander London Branch in June 2018. RWAs attributable to customer loans were £6.1bn (2017: £7.2bn).

 

CORPORATE CENTRE

Corporate Centre predominantly consists of the non-core corporate and legacy treasury portfolios. Corporate Centre is also responsible for managing capital and funding, balance sheet composition, structure, pension and strategic liquidity risk. To enable a more targeted and strategically aligned apportionment of capital and other resources, revenues and costs incurred in Corporate Centre are allocated to the three business segments. The non-core corporate and legacy treasury portfolios are being run-down and / or managed for value.

 

Summarised income statement


Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Net interest income / (expense)

(13)

41

Non-interest income / (expense) (1)

(15)

53

Total operating income / (expense)

(28)

94

Operating expenses before credit impairment losses, provisions and charges

(33)

(42)

Credit impairment losses(2)

1

3

Provisions for other liabilities and charges

(5)

(2)

Total credit impairment releases/(losses), provisions and charges

(4)

1

Loss before tax for the period

(65)

53

(1)

Comprised of Net fee and commission income and Net trading and other income.

(2)

Credit impairment losses for H118 are calculated on an IFRS 9 basis and for H117 on an IAS 39 basis. For more on this change in methodology see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 25 to the Condensed Consolidated Interim Financial Statements.

 

H118 compared to H117

Profit before tax decreased by £118m to a loss of £65m in H118 (H117: £53m profit). By income statement line, the movements were:

 

-

Net interest expense of £13m was impacted by the absence of the £39m accrued interest release in H117 and lower yields on non-core assets.

-

Non-interest expense was impacted by the absence of the £48m gain on sale of Vocalink Holdings Limited shareholdings and mark-to-market movements on asset portfolios in H117, partially offset by hedging inefficiencies.

-

Operating expenses before credit impairment losses, provisions and charges, represent regulatory compliance and project costs relating to Banking Reform of £28m as well as strategic investment in business transformation and growth initiatives.

-

Credit impairment releases were immaterial in the first half of the year.

-

Provisions for other liabilities and charges remained at a low level at £5m in the first half of the year.

 

Customer balances


30 June 2018
£bn

31 December 2017
£bn

Non-core customer loans

5.2

5.9

- of which Social Housing

4.5

5.1

Customer deposits

3.5

3.4

RWAs

8.0

7.0

 

30 June 2018 compared to 31 December 2017

-

Non-core customer loans decreased £0.7bn, as we continue to implement our exit strategy from individual loans and leases.

-

Customer deposits remained broadly flat at £3.5bn.

-

RWAs were higher at £8.0bn, due to temporary increases relating to ring-fencing, partially offset by a reduction in non-core customer loans with low average risk-weights. RWAs attributable to non-core customer loans amounted to £0.9bn (2017: £1.0bn).

-

The structural hedge position at 30 June 2018 was c£89bn with an average duration of c2.2years. The majority of new mortgage flows were left un-hedged.

 

Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET


30 June 2018
£m

31 December 2017
£m

Assets



Cash and balances at central banks

21,342

32,771

Trading assets

19,158

30,555

Derivative financial instruments

3,838

19,942

Other financial assets at fair value through profit or loss

2,710

2,096

Loans and advances to banks(1)

2,410

3,463

Loans and advances to customers(1)

200,950

199,340

Reverse repurchase agreements- non trading(1)

13,611

2,614

Financial investments

20,986

17,611

Interest in other entities

80

73

Property, plant and equipment

1,702

1,598

Retirement benefit assets

868

449

Tax, intangibles and other assets

4,736

4,253

Assets held for sale

24,241

-

Total assets

316,632

314,765

Liabilities



Deposits by banks(1)

15,655

12,708

Deposits by customers(1)

175,885

183,146

Repurchase agreements- non trading(1)

17,447

1,578

Trading liabilities

8,375

31,109

Derivative financial instruments

1,466

17,613

Financial liabilities designated at fair value

1,238

2,315

Debt securities in issue

46,004

42,633

Subordinated liabilities

3,758

3,793

Retirement benefit obligations

108

286

Tax, other liabilities and provisions

3,511

3,379

Liabilities held for sale

26,616

-

Total liabilities

300,063

298,560

Equity



Total shareholders' equity

16,404

16,053

Non-controlling interests

165

152

Total equity

16,569

16,205

Total liabilities and equity

316,632

314,765

(1)

From 1 January 2018, non-trading repurchase agreements and non-trading reverse repurchase agreements are now presented as separate lines in the balance sheet, as described in Note 1 to the Condensed Consolidated Interim Financial Statements.

 

A more detailed Consolidated Balance Sheet is contained in the Condensed Consolidated Interim Financial Statements.

 

As described in more detail below, and in Note 26 and Note 27 to the Condensed Consolidated Interim Financial Statements, the balances at 30 June 2018 exclude assets relating to our ring-fencing plans that have either transferred outside the Santander UK group, or whose transfer is considered highly probable at the balance sheet date and have therefore been reclassified as held for sale.

 

30 June 2018 compared to 31 December 2017

 

Assets

Cash and balances at central banks

Cash and balances at central banks decreased by 35% to £21,342m at 30 June 2018 (2017: £32,771m). This was mainly due to a decrease in securities sold under repurchase agreements as part of ongoing operational liquidity management activity which resulted in the mix of our eligible liquidity pool being weighted less towards cash.

 

Trading assets

Trading assets decreased by 37% to £19,158m at 30 June 2018 (2017: £30,555m). This reflected the running down of our trading business in the Santander UK group as the prohibited elements moved to Banco Santander London Branch as part of the transition to our ring-fencing model. It also reflected the reclassification of our gilt-edged market making business as held for sale, as part of our ring-fencing plans.

 

Derivative financial instruments - assets

Derivative assets decreased to £3,838m at 30 June 2018 (2017: £19,942m). This mainly related to transfers in H118 of the prohibited part of our derivatives business with financial institutions, as part of our ring-fencing plans, and held for sale reclassifications of balances transferred in July 2018.

 

Other financial assets at fair value through profit or loss

Other financial assets at fair value through profit or loss increased by 29% to £2,710m at 30 June 2018 (2017: £2,096m), mainly driven by an increase in securities purchased under resale agreements.

 

Loans and advances to customers

Loans and advances to customers increased by 1% to £200,950m at 30 June 2018 (2017: £199,340m), with strong lending growth of £2.3bn in mortgages, partially offset by decreases of £0.7bn in non-core loans. Lending to corporates decreased by £1.0bn with a managed reduction of £0.6bn in Commercial Real Estate and a transfer of £0.7bn of customer assets from CIB to Banco Santander London Branch in June 2018, as part of our ring-fencing implementation. Lending to trading business customers increased by £0.2bn.

 

Reverse repurchase agreements - non trading

Non trading reverse repurchase agreements increased to £13,611m at 30 June 2018 (2017: £2,614m), which reflected the establishment of a liquidity risk management function within Santander UK plc, in line with the business model for managing these assets as part of our ring-fencing plans.

 

Financial investments

Financial Investments increased by 19% to £20,986m at 30 June 2018 (2017: £17,611m) primarily due to investments in Japanese government bonds and Eurobond senior debt securities. These were partially offset by balance sheet re-presentations on adoption of IFRS 9, including loans and receivables that were moved to other financial assets at fair value through profit or loss.

 

Retirement benefit assets

Retirement benefit assets increased by 93% to £868m at 30 June 2018 (2017: £449m). This reflected increased defined benefit pension scheme surpluses, mainly due to actuarial gains in H118 driven by widening credit spreads on the discount rate used to value scheme liabilities.

 

Assets held for sale

Assets held for sale of £24,241m at 30 June 2018 (2017: £nil) represent business transfers that management considered highly probable at the balance sheet date, following Court approval of our Ring Fencing Transfer Scheme at the Part VII Sanctions Hearing which took place on 11 and 12 June 2018. For more on our ring-fencing plans, see Notes 26 and 27 of the Condensed Consolidated Interim Financial Statements.

 

Liabilities

 

Deposits by banks

Deposits by banks increased by 23% to £15,655m at 30 June 2018 (2017: £12,708m), mainly due to an increase in the total drawdown outstanding from the TFS with the Bank of England.

 

Deposits by customers

Deposits by customers decreased by 4% to £175,885m at 30 June 2018 (2017: £183,146m), with management pricing actions driving a reduction in retail savings products, corporate deposits and other retail products. Deposits also decreased due to continued demand for higher interest rate retail products, and working capital use by corporate customers. This was only partially offset by an increase in personal current accounts. Deposits by customer also decreased due to the reclassification of certain customer deposits as held for sale, as part of our ring-fencing plans.

 

Repurchase agreements - non trading

Non trading repurchase agreements increased to £17,447m (2017: £1,578m), which reflected the establishment of a liquidity risk management function within Santander UK plc, in line with the business model for managing these liabilities as part of our ring-fencing plans.

 

Trading liabilities

Trading liabilities decreased by 73% to £8,375m at 30 June 2018 (2017: £31,109m). This reflected the running down of our trading business in the Santander UK group as the prohibited elements moved to Banco Santander London Branch as part of the transition to our ring-fencing model. It also reflected the reclassification of our gilt-edged market making business as held for sale, as part of our ring-fencing plans.

 

Derivative financial instruments - liabilities

Derivative liabilities decreased to £1,466m at 30 June 2018 (2017: £17,613m). This mainly related to transfers of the prohibited part of our derivatives business with financial institutions as part of our ring-fencing plans, and held for sale reclassification of balances transferred in July 2018.

 

Financial liabilities designated at fair value

Financial liabilities designated at fair value through profit and loss decreased by 47% to £1,238m at 30 June 2018 (2017: £2,315m). This was due to debt security and structured deposit maturities exceeding issuances in H118.

 

Debt securities in issue

Debt securities in issue increased by 8% to £46,004m at 30 June 2018 (2017: £42,633m). Gross issuances, which exceeded maturities in the period, included £2.9bn of senior unsecured notes by the Company, £2.4bn of covered bonds and £1.0bn of securitisations.

 

Retirement benefit obligations

Retirement benefit obligations decreased to £108m at 30 June 2018 (2017: £286m). This reflected reduced defined benefit pension scheme deficits, mainly due to actuarial gains in H118 driven by widening credit spreads on the discount rate used to value scheme liabilities.

 

Liabilities held for sale

Liabilities held for sale of £26,616m at 30 June 2018 (2017: £nil) represent business transfers that management considered highly probable at the balance sheet date, following Court approval of our Ring Fencing Transfer Scheme at the Part VII Sanctions Hearing, which took place on 11 and 12 June 2018. For more on our ring-fencing plans, see Notes 26 and 27 of the Condensed Consolidated Interim Financial Statements.

 

Equity

 

Total shareholders' equity

Total shareholders' equity increased by 2% to £16,404m at 30 June 2018 (2017: £16,053m). The increase was mainly due to the profit for the period and actuarial gains on defined benefit pension schemes, partially offset by dividend payments.

 

2018 business development highlights

Retail Banking

-

We continue to enhance the digital experience for our customers through the ongoing development of our digital capabilities, including the launch of a new mobile banking app in Q118, which offers enhanced device security and identification features. The new mobile app provides a modernised platform which allows us to add new functionality and features in the future.  In April 2018 we became the first major UK high-street bank to offer Fitbit Pay and we also launched support for Garmin Pay in May 2018, allowing customers to link debit and credit cards to their fitness devices. We also introduced a Web Appointment Booking system in May 2018, enabling customers to book an appointment at a time and branch of their choice, which currently accounts for c5% of all branch appointments.

-

In April 2018, we launched 'Santander One Pay FX', a new blockchain-based international payments service. This was part of a Banco Santander initiative for retail customers across UK, Spain, Brazil and Poland. 'Santander One Pay FX' makes it possible for our customers to complete international transfers on the same day in many cases or by the next day. We will continue to enhance the new service and add more features in the coming months, including offering instant international payments in several markets, making it significantly faster than existing international payment services.

-

Servicing our customers' needs remains at the core of our priorities, and H118 has seen us make improvements to the overall customer journey. We launched an overdraft alert auto-registration facility to notify customers who enter an unarranged overdraft, allowing them to manage their accounts better and reduce the number of days overdrawn. In May 2018, we re-launched our First Time Buyer mortgage proposition, which includes 5% deposit mortgages with no product fees, gifted deposits (allowing family members to gift deposit) and exclusive products for Help to Buy ISA savings customers.

-

Our wealth management strategy continues to focus on expanding our multi-channel proposition to make investments accessible for our customers through our growing online platform, the Investment Hub, which now serves over 235,000 customers (+12% from H117). We are also providing affordable high quality investment advice with the recent launch of a new lower cost face-to-face advice service for customers with straightforward investment needs.

-

We continued to make improvements to our banking services for smaller SME customers by growing the Santander Business franchise. We support the international growth aspirations of UK SMEs, providing access to Santander technology for payments, introduction and guidance on using our trade platform and knowledge sharing webinars. We provide ongoing support to start-up businesses and in H118 have opened 39,600 business banking accounts, and have continued to build our SME franchise and have attracted 1,400 full service banking relationships and offered over £400m of credit approved facilities.

 

Commercial Banking

-

Our Growth Capital Team continues to provide high growth SME's with innovative funding solutions to support investment and help accelerate the development of our clients' business. Since inception, we have supported over 130 businesses and lent almost £600m, and we will soon surpass the milestone of completing 200 deals as part of the programme.

-

In recent years we have made significant investment to allow us to provide a fuller banking service to our corporate and commercial customers and we are now focused on leveraging this to help meet our customers' financial needs.

-

We are also building primacy banking customer relationships with a growing number of international trade initiatives, which complements existing services like the Santander Trade Club. We have expanded our Trade Club to include 11 international banking groups which will provide global access for our customers to find new counterparts to trade with.

-

We are developing these initiatives in collaboration with Banco Santander SA and key strategic partners to leverage global expertise and contacts to help our customers grow their businesses.

-

We have established trade corridors to connect our UK customers, helping UK businesses to establish the necessary contacts and local support services to open up new markets and successfully grow trade overseas.

 

Corporate & Investment Banking

-

Global Corporate Banking has been rebranded as Corporate & Investment Banking to reflect the transformation the business has undergone over the past year. Our strategy has been developed, with teams strengthened to supplement the business proposition, and key opportunities to serve our customers with our unique proposition identified.

-

We also made progress in rolling out our client management service to all our customers, to simplify the client on-boarding process and improve customer experience. Furthermore, we embedded our operational risk framework in Santander London Branch in preparation for ring-fencing.

 

Risk review










Contents




Risk governance

15



Credit risk

16



Santander UK group level

19



Retail Banking

22



Other segments

28



Market risk

33



Trading market risk

33



Banking market risk

33



Liquidity risk

34



Capital risk

37



Other key risks

39






 

Risk governance

 

As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance and build sustainable value for our stakeholders.

 

We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.

 

30 June 2018 compared to 31 December 2017

There were no significant changes in our risk governance as described in the 2017 Annual Report. We are reviewing and updating our risk governance arrangements in line with the changes we are making to our legal and operational structures, as required under banking reform regulation.

 

Credit risk


Overview



Key metrics



Credit risk is the risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for which we have assumed a financial obligation.

 

Credit risk management

On 1 January 2018, we adopted the new IFRS 9 Expected Credit Loss (ECL) impairment methodology, which we do not expect to materially change our credit risk policies and practices. There are no other significant changes in the way we manage credit risk as described in the 2017 Annual Report.

 

Credit risk review

In this section we begin by introducing the key concepts associated with the measurement of ECL, and the use of forward-looking information in our assessments. We then analyse our credit risk profile and performance at a Santander UK group level followed by Retail Banking, which is covered separately from our other segments: Commercial Banking, Corporate & Investment Banking and Corporate Centre.



NPL ratio improved to 1.25% (2017: 1.42%), largely driven by the write-off of the Carillion plc exposures in H118.

 

Loss allowance increased by £211m to £1,151m on transition to IFRS 9 on 1 January 2018.

 

















 

THE INTRODUCTION OF IFRS 9

 

IFRS 9 Financial Instruments replaced IAS 39 Financial Instruments: Recognition and Measurement on 1 January 2018. IFRS 9 introduced a new impairment methodology and rules around classification and measurement of financial assets. As published in our Transition to IFRS 9 document on 28 February 2018, the initial adoption of IFRS 9 decreased our shareholders' equity by £192m (net of £68m of deferred tax), driven by an increase in the loss allowance provision of £211m, and reclassifications of financial assets of £49m.

 

As a result of the change from IAS 39 to IFRS 9, some disclosures presented within certain tables in this section are not comparable because the methodologies for the calculation of incurred losses under IAS 39 and ECLs under IFRS 9 are fundamentally different. This means that some IFRS 9 disclosures do not have prior period comparatives and some disclosures that relate to information presented on an IAS 39 basis are no longer relevant in the current period.

 

The impact of new ECL rules on our credit risk management

We do not expect the adoption of the new ECL impairment methodology to materially change our credit risk policies in the short term. Our credit risk appetite in terms of target markets, market share and the credit quality of customers to whom we wish to lend is not directly impacted by IFRS 9 and we expect this to remain broadly the same.

 

IFRS 9 impacts the timing of recognition of credit impairment charges, but not the amount of credit write-offs. Our retail collections and recoveries procedures are unchanged. We may review risk-adjusted hurdle rates for corporate lending, but we do not expect this to lead to a significant change in credit policy.

 

Measuring ECL

The ECL approach estimates the credit losses on qualifying exposures arising from defaults in the next 12 months, or defaults over the lifetime of the exposure where there is evidence of significant increase in credit risk at the measurement date relative to the origination date. This ECL estimate should take into account forward looking information which is unbiased and probability weighted in order to consider the likelihood of a loss being incurred even when it is considered unlikely.

 

For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month until the end of the forecast period. We calculate each monthly ECL as the discounted product of the survival rate (SR), probability of default (PD), exposure at default (EAD) and loss given default (LGD) for the relevant forecast month. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof. The lifetime ECL is the sum of the monthly ECLs over the forecast period while the 12-month ECL is limited to the first 12 months. For accounts that are in default at the reporting date, we use the EAD as the reporting date balance. We also calculate an LGD value to reflect the default status of the exposure, considering the current days past due and loan to value. PD and SR values are not required for accounts in default.

 

We classify an account as default, for the purposes of calculating the ECL, if it is more than 90 days past due or meets an 'unlikeliness to pay' criterion. The criterion for unlikeliness to pay varies across portfolios and where the advanced internal ratings-based basis is used for that portfolio in capital calculations, we use the same default definitions for IFRS 9 purposes.

 

An assessment of each facility's credit risk profile will determine whether they are to be allocated to one of three stages:

-

Stage 1: when it is deemed there has been no significant increase in credit risk since initial recognition, we apply a loss allowance equal to a 12-month ECL i.e. the proportion of lifetime expected losses that relate to that default event observed in the next 12-months;

-

Stage 2: when it is deemed there has been a significant increase in credit risk since initial recognition, but no credit impairment has materialised, we apply a loss allowance equal to the lifetime ECL i.e. lifetime expected loss resulting from all possible defaults throughout the residual life of a facility; and

-

Stage 3: when the facility is considered credit impaired, we apply a loss allowance equal to the lifetime ECL. Similar to incurred losses under IAS 39, objective evidence of credit impairment is required.

 

Survival rate

SR is the probability that the exposure has not closed or defaulted since the reporting date. We estimate it for each month of the forecast period.

 

Probability of default

PD is the likelihood of a borrower defaulting on their financial obligation in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which become less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis.

 

Exposure at default

We base EAD on the amount we expect to be owed if a default event was to occur. We determine the EAD for each month of the forecast period by the expected payment profile, which varies by product type:

 

-

For amortising products, we base it on the borrower's contractual repayments over the forecast period. We adjust this for any expected overpayments the borrower may make and for any arrears we expect if the account was to default.

-

For revolving products, or amortising products with an undrawn element, we determine the EAD by the balance at default and the contractual limit of the exposure. We vary these assumptions by product type and base them on analysis of recent default data.

 

Loss given default

LGD is our expected loss if a default event were to occur. We express the LGD as a percentage and calculate it as the expected loss divided by EAD for each month of the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type.

 

Forecast period

We base the forecast period for amortising facilities on the remaining contractual term. For revolving facilities, we use an analytical approach based on the behavioural, rather than contractual, characteristics of the facility type. In some cases, we shorten the period to simplify the calculation, in which case we apply a post model adjustment to reflect our view of the full lifetime ECL.

 

Significant Increase in Credit Risk (SICR)

 

We consider exposures to have experienced a SICR due to quantitative, qualitative or backstop reasons.

 

Quantitative criteria

The quantitative criteria we apply is based on whether the increase in the lifetime PD at the reporting date from the recognition date exceeds a set threshold both in relative and absolute terms.

 

We produce the lifetime PD for each exposure using the values we describe above under "Measuring ECL". We base the value anticipated from the initial recognition on a similar set of assumptions and data to the ones we used at the reporting date, adjusted to reflect the account surviving to that date. The comparison uses an annualised lifetime PD, where the lifetime PD is divided by the forecast period.

 

For revolving retail products, we use a lifetime period of 5 years for determining the SICR. This period is broadly aligned to the observed behavioural lifetimes. This is different to the lifetime period applied in the ECL calculation set out above.

 

We apply a relative threshold of 100% (doubling the PD) across all portfolios, and we tailor absolute increase thresholds to each portfolio. We choose them after considering the characteristics of the accounts we identify as having deteriorated and their subsequent performance.

 

Qualitative criteria

For each portfolio, there are specific criteria that indicate an exposure has increased in credit risk, independent of any changes in PD. We select these criteria reflecting portfolio management practices and the performance of the exposures they identify.

 

Backstop criteria

We are not rebutting the presumptions in IFRS 9 relating to either a SICR or default. Therefore, all exposures more than 30 or 90 days past due (DPD) will be placed in at least stages 2 and 3 respectively.

 

Forward-looking multiple economic scenarios and probability weights

For all portfolios, except for our CIB portfolio, we use five forward-looking economic scenarios. These consist of a central base case, two upside scenarios and two downside scenarios. We have used five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy, for example for the most severe downside scenario the possibility of a recessionary period occurring.

 

For our CIB portfolio, the IFRS 9 approach was developed centrally by Banco Santander to ensure consistent treatment of these large and/or international counterparties across the organisation.

 

To determine the correct decile paths to follow for GDP for the upside and downside scenarios, we use the Office of Budget Responsibility (OBR) fan charts, the PRA Baseline and the Annual Cyclical Scenario GDP paths. The GDP for the upside scenarios was informed by the PRA indicative upside scenarios (0.6 & 0.7), which were imposed on the OBR fan chart. For the downside scenarios, judgement dictated that more moderate GDP end points were required from the fan chart distribution (0.3). For the worst scenario downside, we then imposed a recessionary path on this distribution, which is followed by a period of rapid recovery so that the GDP path converged with that in the more moderate downside scenario in the long run.

 

We used the OGEM to derive the other macroeconomic variables with the imposition of the bank rate.  The forecasting period for GDP is 5 years and then is mean-reverting over 3 years based on the OBR's forecast.  To determine our initial scenario probability weightings, we award the highest weight to the base case, whilst the extreme scenarios typically attract lower weights than the more moderate ones. In addition, due to the current economic position and policy concerns evidenced by the PRA and Financial Policy Committee (FPC), and due to political concerns we have applied a higher weighting to the downside scenarios. We consider this appropriate in light of the consensus view of future performance of the UK economy, including projections for UK GDP growth.

 

For CIB, we use three scenarios (base, upside and downside) based on a composite global GDP weighted to reflect regions where Banco Santander has operations. Consideration of both upside and downside meets the "unbiased" requirement and we consider these scenarios sufficient to account for any non-linearity in our credit losses. For non CIB portfolios, we create our macroeconomic scenarios by imposing the chosen paths for UK Gross Domestic Product (GDP) on the Oxford Global Economic Model (OGEM) in order to generate other macroeconomic variables, such as House Price Index (HPI) and unemployment rates.

 

Scenario type

Probability (%)

Upside 2

5

Upside 1

15

Base case

40

Downside 1

30

Downside 2

10

 

Grouping of instruments for losses measured on a collective basis

 

Instruments collectively assessed for impairment are typically grouped on the basis of shared risk characteristics using one or more statistical models. Where internal capital or similar models have been leveraged as the basis of IFRS 9 models, this will typically result in a large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models.

 

Individually assessed impairments (IAIs)

The IAI process is applied to individually significant stage 3 cases (e.g. CIB and Commercial Banking cases but not Business Banking cases). The process involves calculating an estimated loss, taking into account anticipated future cash flows under several different scenarios each of which utilises case-specific factors and circumstances. The net present value of the cash flows under each of these scenario is then probability weighted to arrive at a weighted average provision requirement. This assessment process is refreshed at a minimum every quarter but will take place more frequently if there are changes in circumstances that might affect the scenarios, the cash flows or the probabilities applied.

 

santander uk group level - Credit risk review

 

Credit performance

 

The customer loans in the tables below and in the remainder of the 'Credit risk' section are presented differently from the balances in the Consolidated Balance Sheet. The main difference is that customer loans exclude interest we have accrued but not charged to customers' accounts yet.

 

30 June 2018

Customer loans
£bn

NPLs(1)(2)
£m

NPL ratio(3)
%

Gross write-offs
£m

Loss allowances(4)
£m

Retail Banking:

171.3

2,131

1.24

93

601

-

of which mortgages

157.2

1,893

1.20

8

252

Commercial Banking

19.0

348

1.83

66

207

Corporate & Investment Banking

5.5

13

0.24

247

26

Corporate Centre

5.2

23

0.44

1

18


201.0

2,515

1.25

407

852







31 December 2017






Retail Banking:

169.0

2,105

1.25

195

491

-

of which mortgages

154.9

1,868

1.21

22

225

Commercial Banking

19.4

383

1.97

35

195

Corporate & Investment Banking

6.0

340

5.67

-

236

Corporate Centre

5.9

20

0.34

23

18


200.3

2,848

1.42

253

940







Of which: Corporate lending






30 June 2018

26.3

466

1.77

321

298

31 December 2017

27.3

838

3.07

56

485

(1)

We define NPLs in the 'Credit risk management' section in the 2017 Annual Report.

(2)

All NPLs (excluding personal bank accounts) continue accruing interest.

(3)

NPLs as a percentage of customer loans.

(4)

Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for H118 they are on an expected credit loss basis per IFRS 9.  The ECL allowance is for both on and off-balance sheet exposures.

 

Corporate lending comprises the customer loans in business banking portfolio of our Retail Banking segment, and our Commercial Banking and Corporate & Investment Banking segments.

 

30 June 2018 compared to 31 December 2017

The NPL ratio improved 17bps to 1.25%, supported by our medium-low risk profile, proactive management actions and the ongoing resilience of the UK economy. The improvement in the ratio was also driven by the write-off of the Carillion plc exposures in Q118.

 

-

The Retail Banking NPL ratio remained flat at 1.24% and the loss allowance increased as a result of the application of IFRS 9. The loan loss rate remained low at 0.03% (2017: 0.02%).

-

The Commercial Banking NPL ratio improved to 1.83%, primarily due to a number of loans which were written-off in Q118. The loan loss rate remained low at 0.17% (2017: 0.07%).

-

The CIB NPL ratio improved to 0.24% with the loans write-off for Carillion plc and another CIB customer, both of which moved to non-performing in 2017.

-

The Corporate Centre NPL ratio increased to 0.44%, reflecting the fall in non-core customer loans as part of our exit strategy from individual loans and leases.

 

For more on the credit performance of our key portfolios by business segment, see the 'Retail Banking - credit risk review' and 'Other segments - credit risk review' sections.

 

IFRS 9 credit quality

 

Total drawn exposures are made up of £201.0bn of customer loans; loans and advances to banks of £6.0bn (reported as a Corporate & Investment Banking exposure); and £6.5bn of sovereign assets measured at amortised cost, £9.7bn of assets measured at FVOCI, and £21.4bn of cash and balances at central banks (all reported as Corporate Centre exposures).

 





Stage 2




Average PD(1)

Stage 1

≤30 DPD

>30 DPD

Sub total

Stage 3(2)

Total

30 June 2018

%

£m

£m

£m

£m

£m

£m

Exposures








Drawn exposures








Retail Banking

0.61

158,752

9,222

1,054

10,276

2,229

171,257

-

of which mortgages

0.55

145,791

8,439

947

9,386

1,998

157,175

Commercial Banking

0.79

17,854

738

88

826

348

19,028

Corporate & Investment Banking

0.17

11,354

3

93

96

13

11,463

Corporate Centre(3)

0.07

42,671

131

10

141

23

42,835

Total drawn exposures


230,631

10,094

1,245

11,339

2,613

244,583

Off-balance sheet exposures








Retail Banking


22,850

182

-

182

44

23,076

-

of which mortgages


11,696

77

-

77

19

11,792

Commercial Banking


4,750

269

-

269

11

5,030

Corporate & Investment Banking


12,437

159

-

159

24

12,620

Corporate Centre


722

-

-

-

-

722

Total undrawn exposures(4)


40,759

610

-

610

79

41,448









Total exposures


271,390

10,704

1,245

11,949

2,692

286,031

IFRS 9 ECL








ECL on drawn exposures








Retail Banking


95

186

42

228

252

575

-

of which mortgages


12

92

19

111

127

250

Commercial Banking


34

27

5

32

125

191

Corporate & Investment Banking


2

-

1

1

5

8

Corporate Centre


6

3

-

3

9

18

Total ECL on drawn exposures


137

216

48

264

391

792

ECL on off-balance sheet exposures








Retail Banking


13

12

-

12

1

26

-

of which mortgages


2

1

-

1

-

3

Commercial Banking


5

8

-

8

3

16

Corporate & Investment Banking


4

4

-

4

10

18

Corporate Centre


-

-

-

-

-

-

Total ECL on undrawn exposures


22

24

-

24

14

60









Total ECL


159

240

48

288

405

852

(1)

Average IFRS 9 PDs are 12-month, scenario-weighted PDs. Weighted averages are determined using EAD for the first year. Financial assets in default are excluded from the calculation, given they are allocated a PD of 100%.

(2)

Our Stage 3 exposures under IFRS 9 and our non-performing loans used in our NPL ratio metric are subject to different criteria. These criteria are under review in parallel with the ongoing regulatory changes to the default definition.

(3)

The drawn exposures for Corporate Centre do not include recently introduced portfolios amounting to £4.2bn, made up of short dated securities issued by central governments and government guaranteed counterparties, and £10.5bn, made up of reverse repo transactions for which an ECL methodology is yet to be established. Both asset portfolios carry the lowest level of credit risk and, consequently, a negligible ECL.

(4)

Undrawn exposures include £5.6bn of retail mortgage offers in the pipeline.

 

Reconciliation of exposures, ECL and net carrying amounts

The table below shows the relationships between disclosures in this Half Yearly Financial Report which refer to drawn and undrawn exposures and ECL and the total assets as presented in the Consolidated Balance Sheet.

 


Exposures


ECL


Net carrying amount

Drawn

£m

Undrawn

£m


Drawn

£m

Undrawn

£m


Drawn

£m

Retail Banking

171,257

23,076


575

26


170,682

-

of which mortgages

157,175

11,792


250

3


156,925

Commercial Banking

19,028

5,030


191

16


18,837

Corporate & Investment Banking

11,463

12,620


8

18


11,455

Corporate Centre

42,835

722


18

-


42,817

Total exposures presented in IFRS 9 Credit Quality tables

244,583

41,448


792

60


243,791

Reverse repurchase agreements with customers - non trading(1)

10,516

-


-

-


10,516

Short-dated securities issued by central governments(2)

4,200

-


-

-


4,200

Other items

2,552

-


-

-


2,552


17,268

-


-

-


17,268

Adjusted net carrying amount







261,059









Assets classified at FVTPL (including those classified as held for sale)







48,187

Non-financial assets







7,386









Total assets per the Consolidated Balance Sheet







316,632

(1)

These assets carry low credit risk and therefore are expected to have an immaterial ECL.

(2)

Recently introduced portfolios made up of short dated securities issued by central governments and government guaranteed counterparties. These assets carry low credit risk and therefore are expected to have an immaterial ECL. 

 

The following table illustrates the changes in drawn exposures subject to ECL assessment, and the corresponding ECL, during the reporting period.

 

 

All portfolios(1)

Non-credit impaired


Credit impaired


Stage 1
Subject to 12 month
ECL


Stage 2
Subject to lifetime ECL


Stage 3
Subject to lifetime ECL

Total

Exposures(2)

ECL


Exposures(2)

ECL


Exposures(2)

ECL

Exposures(2)

ECL

£m

£m


£m

£m


£m

£m

£m

£m

At 1 January 2018

241,976

150


11,606

262


2,965

689

256,547

1,101(8)

Transfer to lifetime ECL (not-credit impaired)(3)

(2,973)

(11)


2,920

77


-

-

(53)

66

Transfer to credit impaired(3)

(238)

(4)


(505)

(21)


715

102

(28)

77

Transfer to 12-month ECL(3)

2,482

6


(2,573)

(53)


-

-

(91)

(47)

Transfer from credit impaired(3)

2

-


364

15


(385)

(44)

(19)

(29)

Net movement arising from transfer of stage(4)

(727)

(9)


206

18


330

58

(191)

67

New assets originated or purchased(5)

26,919

26


380

9


36

11

27,335

46

Other(6)

(5,391)

(16)


(278)

(9)


(62)

(34)

(5,731)

(59)

Assets derecognised(7)

(32,146)

(14)


(575)

(16)


(656)

(333)

(33,377)

(363)

At 30 June 2018

230,631

137


11,339

264


2,613

391

244,583

792

Net carrying amount


230,494



11,075



2,222


243,791

Movement for the period

(11,345)

(13)


(267)

2


(352)

(298)

(11,964)

(309)

(1)

This table represents total Gross Carrying Amounts and ECLs at a Santander UK group-level. We present segmental views of this analysis in the sections below. 

(2)

Exposures relates to on-balance sheet exposures that have attracted an ECL, and as reported in the IFRS 9 Credit Quality table above.

(3)

Stage transfers capture the total impact of facilities that have moved stage(s) during the reporting period. This means, for example, that where changes in risk parameters (model inputs) or model changes (methodology) result in a facility changing stage, the full impact will be reflected in this section (rather than in "Other"). Stage flow analysis is only applicable to facilities that existed at both the beginning and end of the reporting period. Transfers out of each stage are based on opening balances, whilst the transfers in are based on closing balances, giving rise to a net movement on transfer. 

(4)

Net movement arising from transfer of stage - captures the overall net movement between stages during the period.

(5)

Assets originated or purchased - captures exposures and ECL at reporting date of facilities that did not exist at the start of the period, but do at the end. Amounts in Stage 2 and 3 represent assets which have deteriorated during the period subsequent to origination in Stage 1.

(6)

Other consists of any residual movements on facilities that have not changed stage during the period, and which were neither acquired nor purchased during the period. The impact of repayments or further drawdowns on existing customer facilities is included in these figures.

(7)

Assets derecognised - captures exposures and ECL at reporting date for facilities that existed at the start of the reporting period, but not at the end. This includes facilities that have matured ("closed good") and those that have been fully written off ("closed bad") during the period.

(8)

On transition to IFRS 9 we disclosed an opening ECL balance of £1,151m, of which £50m related to ECL on undrawn exposures. On a segmental basis this is split by: Retail: £28m (of which Mortgages was £2m), Commercial Banking: £13m, CIB: £9m, Corporate Centre £nil.

 

RETAIL BANKING - CREDIT RISK REVIEW

 

The following table shows changes in exposures subject to ECL assessment, and the corresponding ECL in the period. The footnotes to the Santander UK group level analysis on page 21 are also applicable to this table.

 


Non-credit impaired


Credit impaired



Stage 1
Subject to 12-month ECL


Stage 2
Subject to lifetime ECL


Stage 3
Subject to lifetime ECL

Total

Exposures(2)

ECL


Exposures(2)

ECL


Exposures(2)

ECL

Exposures(2)

ECL

Retail Banking

£m

£m


£m

£m


£m

£m

£m

£m

At 1 January 2018

156,118

97


10,657

234


2,222

266

168,997

597(8)

Transfer to lifetime ECL (not-credit impaired) (3)

(2,409)

(8)


2,379

66


-

-

(30)

58

Transfer to credit impaired(3)

(201)

(4)


(442)

(20)


625

82

(18)

58

Transfer to 12-month ECL(3)

2,212

4


(2,289)

(48)


-

-

(77)

(44)

Transfer from credit impaired(3)

2

-


309

13


(325)

(27)

(14)

(14)

Net movement of ECL arising from transfer of stage(4)

(396)

(8)


(43)

11


300

55

(139)

58

New assets originated or purchased(5)

16,794

21


310

7


9

4

17,113

32

Other(6)

(3,865)

(6)


(147)

(10)


(3)

(2)

(4,015)

(18)

Assets derecognised(7)

(9,899)

(9)


(501)

(14)


(299)

(71)

(10,699)

(94)

At 30 June 2018

158,752

95


10,276

228


2,229

252

171,257

575

Net carrying amount


158,657



10,048



1,977


170,682

Movement for the period

2,634

(2)


(381)

(6)


7

(14)

2,260

(22)

 

Residential mortgages

 

The following table shows changes in exposures subject to ECL assessment, and the corresponding ECL, for residential mortgages in the period. The footnotes to the Santander UK group level analysis on page 21 are also applicable to this table.

 


Non-credit impaired


Credit impaired



Stage 1
Subject to 12-month ECL


Stage 2
Subject to lifetime ECL


Stage 3
Subject to lifetime ECL

Total

Exposures(2)

ECL


Exposures(2)

ECL


Exposures(2)

ECL

Exposures(2)

ECL

Mortgages

£m

£m


£m

£m


£m

£m

£m

£m

As at 1 January 2018

143,208

20


9,756

129


1,986

121

154,950

270(8)

Transfer to lifetime ECL (not-credit impaired) (3)

(2,076)

(3)


2,051

18


-

-

(25)

15

Transfer to credit impaired(3)

(150)

(4)


(385)

(10)


526

22

(9)

8

Transfer to 12-month ECL(3)

1,973

1


(2,009)

(18)


-

-

(36)

(17)

Transfer from credit impaired(3)

1

-


273

5


(283)

(9)

(9)

(4)

Net movement of ECL arising from transfer of stage(4)

(252)

(6)


(70)

(5)


243

13

(79)

2

New assets originated or purchased(5)

13,662

1


198

2


2

2

13,862

5

Other(6)

(2,582)

-


(90)

(10)


(20)

7

(2,692)

(3)

Assets derecognised(7)

(8,245)

(3)


(408)

(5)


(213)

(16)

(8,866)

(24)

As at 30 June 2018

145,791

12


9,386

111


1,998

127

157,175

250

Net carrying amount


145,779



9,275



1,871


156,925

Movement for the period

2,583

(8)


(370)

(18)


12

6

2,225

(20)

 

Borrower profile

In this table, 'home movers' include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house. 'Remortgagers' are external customers who are remortgaging with us. We have not included internal remortgages, further advances and any flexible mortgage drawdowns in the new business figures.

 


Stock


New business


30 June 2018


31 December 2017


Half year to 30 June 2018


Half year to 30 June 2017


£m

%


£m

%


£m

%


£m

%

Home movers

68,958

44


68,901

44


5,161

37


4,954

45

Remortgagers

51,821

33


50,473

33


5,351

38


3,673

34

First-time buyers

28,716

18


28,768

19


2,028

15


1,840

17

Buy-to-let

7,680

5


6,802

4


1,318

10


447

4


157,175

100


154,944

100


13,858

100


10,914

100

 

In addition to the new business included in the table above, there were £14.2bn (H117: £11.6bn) of internal remortgages where we kept existing customers with maturing products on new mortgages. We also provided £0.7bn (H117: £0.7bn) of further advances and flexible mortgage drawdowns.

 

30 June 2018 compared to 31 December 2017

The mortgage stock borrower mix remained broadly unchanged, reflecting underlying stability in target market segments, product pricing and distribution strategy. The increase in new business Remortgagers was driven by a specific remortgage campaign that was undertaken in H217.

 

Buy-to-Let (BTL) mortgage balances increased £0.9bn to £7.7bn (2017: £6.8bn). We continue to focus on non-professional landlords, as this segment is closely aligned with residential mortgages and accounts for most of the volume in the BTL market. In H118, we completed 6,500 BTL mortgages (H117: 2,700), representing 10% of the value of our new business flow (H117: 4%), at an average LTV of 62% (H117: 62%).

 

We helped 11,700 first-time buyers (£2.0bn of gross lending) purchase their new home. Average loan size for new business was slightly lower than in 2017 at £198,000 for the UK overall (2017: £196,000), £263,000 for the South East including London (2017: £260,000) and £146,000 for the rest of the UK (2017: £146,000). The loan-to-income multiple of mortgage lending in H118 was stable at 3.13 (2017: 3.16).

 

Interest rate profile

The interest rate profile of our mortgage asset stock was:

 


30 June 2018


31 December 2017


£m

%


£m

%

Fixed rate

109,447

70


102,268

66

Variable rate

27,052

17


29,370

19

Standard Variable Rate (SVR)

20,676

13


23,306

15


157,175

100


154,944

100

 

30 June 2018 compared to 31 December 2017

The proportion of SVR loan balances decreased to 13%, including attrition of £2.4bn (H117: £2.5bn). The calculation of SVR attrition includes balances relating to our Follow-on-Rate product, which was introduced in January 2018. Around 78% of mortgages reaching the end of their incentive period were retained. We continue to see increased customer refinancing into fixed rate products, influenced by low mortgage rates and the competitive mortgage market, where average two year fixed mortgage prices fell by 25bps in 2017.

 

Geographical distribution

The geographical distribution of our mortgage asset stock was:

 


Stock


New business

UK region

30 June 2018
£bn

31 December 2017
£bn


30 June 2018
£bn

31 December 2017
£bn

London

38.3

37.6


3.6

5.8

Midlands and East Anglia

21.0

20.6


2.0

3.4

North

22.3

22.2


1.7

3.0

Northern Ireland

3.5

3.6


0.1

0.2

Scotland

6.8

6.8


0.5

1.0

South East excluding London

48.2

47.2


4.6

8.2

South West, Wales and other

17.1

16.9


1.4

2.6


157.2

154.9


13.9

24.2

 

30 June 2018 compared to 31 December 2017

 

The geographical distribution of the lending profile of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East.

 

Loan-to-value analysis

This table shows the LTV distribution for our mortgage stock, NPL stock and new business. We use our estimate of the property value at the balance sheet date. We include fees added to the loan in the calculation. For flexible products, we only include the drawn amount, not undrawn limits.

 


30 June 2018


31 December 2017



Of which:



Of which:

LTV

Stock
%

NPL stock
%

New business
%


Stock
%

NPL stock
%

New business
%

Up to 50%

47

42

20


48

44

19

>50-75%

39

35

45


39

34

43

>75- 85%

9

8

21


8

8

19

>85-100%

4

7

14


4

7

19

>100%

1

8

-


1

7

-


100

100

100


100

100

100

Collateral value of residential properties(1)(2)

£156,966m

£1,859m

£13,858m


£154,721m

£1,824m

£24,218m










%

%

%


%

%

%

Simple average(3) LTV (indexed)

42

43

62


42

44

62

Valuation weighted average(4) LTV (indexed)

39

38

57


38

38

58

(1)

Includes collateral against loans in negative equity of £1,156m at 30 June 2018 (2017: £1,248m).

(2)

The collateral value we have shown is limited to the balance of each associated individual loan. It does not include the impact of over-collateralisation (where the collateral has a higher value than the loan balance).

(3)

Total of all LTV% divided by the total of all accounts.

(4)

Total of all loan values divided by the total of all valuations.

 

30 June 2018 compared to 31 December 2017

At 30 June 2018, the parts of the loans in negative equity which were effectively uncollateralised before taking account of impairment loss allowances decreased to £209m (2017: £223m).

 

Credit performance


30 June 2018
£m

31 December 2017
£m

Mortgage loans and advances to customers of which:

157,175

154,944

- Stage 1

145,791


- Stage 2

9,386


- Stage 3

1,998


Performing(1)


151,948

Early arrears:


1,128

- 31 to 60 days


702

- 61 to 90 days


426

NPLs:(2)

1,893

1,868

- By arrears

1,398

1,427

- By bankruptcy

13

14

- By maturity default

369

303

- By forbearance

78

95

- By properties in possession (PIPs)

35

29

Loss allowances(3)

252

225

Stage 2 ratio

6.0%


Stage 3 ratio

1.3%


Early arrears ratio(4)


0.73%

NPL ratio(5)

1.2%

1.21%

(1)

Excludes mortgages where the customer did not pay for between 31 and 90 days, arrears, bankruptcy, maturity default, forbearance and PIPs NPLs. Includes £2,661m of mortgages at 31 December 2017 where the customer did not pay for 30 days or less.

(2)

We define NPLs in the 'Credit risk management' section in the 2017 Annual Report. All NPLs are in the UK and continue accruing interest. Our Stage 3 exposures under IFRS 9 and our non-performing loans used in our NPL ratio metric are subject to different criteria. These criteria are under review in parallel with the ongoing regulatory changes to the default definition.

(3)

Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for H118 they are on an expected credit loss basis per IFRS 9.  

(4)

Mortgages in early arrears as a percentage of mortgages.

(5)

Mortgage NPLs as a percentage of mortgages.

 

Forbearance(1)

Balances at 30 June 2018 and 31 December 2017, analysed by their payment status at the period-end and the forbearance we applied, were:

30 June 2018

Capitalisation
£m

Term extension
£m

Interest-only
£m

Total
£m

Loss allowances(2)
£m

Stage 1

2

7

-

9

-

Stage 2

411

141

414

966

9

Stage 3

222

96

127

445

26


635

244

541

1,420

35

Proportion of portfolio

0.4%

0.2%

0.3%

0.9%








31 December 2017






In arrears

260

63

175

498

22

Performing

392

178

407

977

5


652

241

582

1,475

27

Proportion of portfolio

0.4%

0.2%

0.4%

1.0%


(1)

We base forbearance type on the first forbearance on the accounts.

(2)

Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for H118 they are on an expected credit loss basis per IFRS 9.

 

30 June 2018 compared to 31 December 2017

In 2018, the accounts in forbearance decreased, with the proportion of the mortgage portfolio in forbearance reducing slightly to 0.9% (2017: 1.0%).

 

residential mortgages - PORTFOLIOS of particular interest

 

For a description of the types of mortgage that have higher risk or stand out for different reasons, see the 'Credit risk' section of the Risk review of the 2017 Annual Report.

 

Loan portfolios of particular interest - credit performance

 



Loans of particular interest(1)


30 June 2018

Total
£m

Interest-only
£m

Part interest-
only, part
repayment(
2)
£m

Flexible(3)
£m

LTV >100%
£m

Buy-to-let
£m

Other
portfolio
£m

Mortgage portfolio

157,175

38,640

13,470

13,887

1,366

7,680

99,029

- Stage 1

145,791

33,617

12,068

12,459

909

7,346

94,666

- Stage 2

9,386

4,028

1,122

1,147

313

303

3,768

- Stage 3

1,998

995

280

281

144

31

595

Stage 3 ratio

1.27%

2.58%

2.08%

2.02%

10.54%

0.40%

0.60%

PIPs

35

18

7

6

13

-

8









31 December 2017








Mortgage portfolio

154,944

38,893

13,794(3)

14,787

1,472

6,802

95,779

Performing

151,948

37,505

13,379

14,440

1,303

6,768

94,772

Early arrears:








- 31 to 60 days

702

317

94

67

22

9

296

- 61 to 90 days

426

203

58

35

15

4

168

NPLs

1,868

868

263

245

132

21

543

NPL ratio

1.21%

2.23%

1.91%

1.66%

8.97%

0.31%

0.57%

PIPs

29

17

5

3

10

1

6

(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)

Mortgage balance includes both the interest-only part of £9,910m (2017: £10,121m) and the non-interest-only part of the loan.

(3)

Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our more recent Flexi loan product

 

30 June 2018 compared to 31 December 2017

In H118, the value and proportion of interest-only loans together with part interest-only, part repayment loans reduced, reflecting our strategy to manage down the overall exposure to this lending profile. In addition the value and proportion of flexible mortgages also reduced as they are no longer offered on new mortgages.

 

Forbearance

Total accounts in forbearance decreased by £55m to £1,420m (2017: £1,475m).  We keep the performance and profile of the accounts under review.

 

business banking

June 2018 compared to December 2017

-

We provide ongoing support to start-up businesses and in H118 have opened 39,600 business banking accounts, and have continued to build our SME franchise, attracting 1,400 full service banking relationships and offering over £400m of credit approved facilities.

-

Business banking balances were broadly flat and NPLs decreased by 8.7% to £105m (2017: £115m) with a NPL ratio of 5.83% (2017: 6.01%).

 

Credit performance






30 June

 2018
£m

31 December

 2017
£m

Loans and advances to customers of which:





1,823

1,912

- Stage 1





1,570


- Stage 2





150


- Stage 3





103


- Performing(1)






1,793

- Early arrears






4

- NPLs(2)





105

115

Loss allowances(3)





65

54








NPL ratio(4)





5.83%

6.01%

Stage 3 ratio(5)





5.63%

-

Gross write offs





8

21

(1)

Excludes loans and advances to customers where the customer did not pay for between 0 and 90 days and NPLs.

(2)

We define NPLs in the 'Credit risk management' section in the 2017 Annual Report.

(3)

Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for H118 they are on an expected credit loss basis per IFRS 9.

(4)

NPLs as a percentage of loans and advances to customers.

(5)

Stage 3 assets as a percentage of loans and advances to customers.

 

Forbearance

The balances at 30 June 2018 and 31 December 2017 were:







£m

30 June 2018






69

31 December 2017






85

 

CONSUMER (auto) finance and other unsecured lending

 

June 2018 compared to December 2017

-

Consumer (auto) finance balances were broadly flat at £7.0bn. In H118, consumer (auto) finance gross lending was £1.9bn (H117: £1.7bn).

-

Other unsecured lending was steady as we continue to actively manage growth.

-

Forbearance levels were similar to last year with balances at 30 June 2018 of £77m (2017: £77m).

-

At 30 June 2018, the average Consumer (auto) loan size was £12,500 (2017: £12,500). The average unsecured loan and credit card balances at 30 June 2018 were £5,900 (2017: £9,300) and £1,000 (2017: £1,200), respectively.

-

Consumer (auto) finance NPL ratio was up 17bps, largely due to a small number of loans moving to non-performing. Credit quality remains good with low levels of write-offs of £13m in H118 (H117: £21m).

 

Credit performance



Consumer
 (auto) finance
£m

Other unsecured


30 June 2018


Personal
loans
£m

Credit
cards
£m

Overdrafts
£m

Total other unsecured

£m

Total
£m

Loans and advances to customers of which:


7,032

2,127

2,564

535

5,226

12,258

- Stage 1


6,671

2,050

2,267

402

4,719

11,390

- Stage 2


315

56

263

106

425

740

- Stage 3


46

21

34

27

82

128

NPLs(1)


46




87

133

ECL


86

45

103

50

198

284









NPL ratio(2)


0.66%




1.64%

1.09%

Stage 3 ratio(3)


0.66%




1.58%

1.04%

Gross write-offs


13




64

77









31 December 2017








Loans and advances to customers of which:


6,957

2,169

2,444

565

5,178

12,135

- Performing(4)


6,861

2,129

2,377

516

5,022

11,883

- Early arrears


62

24

19

25

68

130

- NPLs(1)


34

16

48

24

88

122

Impairment loss allowances


77

44

62

29

135

212









NPL ratio(2)


0.49%




1.69%

1.00%

Gross write-offs


32




120

152

(1)

We define NPLs in the 'Credit risk management' section in the 2017 Annual Report.

(2)

NPLs as a percentage of loans and advances to customers.

(3)

Stage 3 as a percentage of loans and advances to customers.

(4)

Excludes loans and advances to customers where the customer did not pay for between 0 and 90 days and NPLs.

 

Forbearance

The balances at 30 June 2018 and 31 December 2017 were:

 




Other unsecured




Consumer
(auto) finance
£m

 Personal
loans
£m

Credit
cards
£m

Overdrafts
£m

Total other unsecured

£m

Total
£m

30 June 2018


-

1

51

25

77

77

31 December 2017


-

1

48

28

77

77

 

OTHER SEGMENTS - CREDIT RISK REVIEW

 

The following tables show changes in exposures and ECL for Commercial Banking, Corporate & Investment Banking and Corporate Centre in the period. The footnotes to the Santander UK group level analysis on page 21 are also applicable to these tables.


Non-credit impaired


Credit impaired



Stage 1

Subject to 12-month ECL


Stage 2

Subject to lifetime ECL


Stage 3

Subject to lifetime ECL

Total

Exposures(2)

ECL


Exposures(2)

ECL


Exposures(2)

ECL

Exposures(2)

ECL

Commercial Banking

£m

£m


£m

£m


£m

£m

£m

£m

At 1 January 2018

18,362

38


646

25


383

173

19,391

236(8)

Transfer to lifetime ECL (not-credit impaired) (3)

(451)

(2)


429

10


-

-

(22)

8

Transfer to credit impaired(3)

(36)

-


(59)

(1)


86

19

(9)

18

Transfer to 12-month ECL(3)

101

1


(112)

(3)


-

-

(11)

(2)

Transfer from credit impaired(3)

-

-


9

2


(10)

(4)

(1)

(2)

Net movement of ECL arising from transfer of stage(4)

(386)

(1)


267

8


76

15

(43)

22

New assets originated or purchased(5)

2,581

5


55

1


24

5

2,660

11

Other(6)

(34)

(5)


(8)

-


(38)

(17)

(80)

(22)

Assets derecognised(7)

(2,669)

(3)


(134)

(2)


(97)

(51)

(2,900)

(56)

At 30 June 2018

17,854

34


826

32


348

125

19,028

191

Net carrying amount


17,820



794



223


18,837

Movement for the period

(508)

(4)


180

7


(35)

(48)

(363)

(45)

 

 

Corporate & Investment Banking

£m

£m


£m

£m


£m

£m

£m

£m

At 1 January 2018

11,553

8


93

(1)


340

242

11,986

249(8)

Transfer to lifetime ECL (not-credit impaired) (3)

(2)

-


2

-


-

-

-

-

Transfer to credit impaired(3)

-

-


-

-


-

-

-

-

Transfer to 12-month ECL(3)

-

-


-

-


-

-

-

-

Transfer from credit impaired(3)

-

-


45

-


(49)

(13)

(4)

(13)

Net movement of ECL arising from transfer of stage(4)

(2)

-


47

-


(49)

(13)

(4)

(13)

New assets originated or purchased(5)

2,775

-


15

1


3

2

2,793

3

Other(6)

(241)

(4)


(59)

1


(28)

(17)

(328)

(20)

Assets derecognised(7)

(2,731)

(2)


-

-


(253)

(209)

(2,984)

(211)

At 30 June 2018

11,354

2


96

1


13

5

11,463

8

Net carrying amount


11,352



95



8


11,455

Movement for the period

(199)

(6)


3

2


(327)

(237)

(523)

(241)

 

 

Corporate Centre

£m

£m


£m

£m


£m

£m

£m

£m

At 1 January 2018

55,943

7


210

4


20

8

56,173

19(8)

Transfer to lifetime ECL (not-credit impaired) (3)

(111)

(1)


110

1


-

-

(1)

-

Transfer to credit impaired(3)

(1)

-


(4)

-


4

1

(1)

1

Transfer to 12-month ECL(3)

169

1


(172)

(2)


-

-

(3)

(1)

Transfer from credit impaired(3)

-

-


1

-


(1)

-

-

-

Net movement of ECL arising from transfer of stage(4)

57

-


(65)

(1)


3

1

(5)

-

New assets originated or purchased(5)

4,769

-


-

-


-

-

4,769

-

Other(6)

(1,251)

(1)


(64)

-


7

2

(1,308)

1

Assets derecognised(7)

(16,847)

-


60

-


(7)

(2)

(16,794)

(2)

At 30 June 2018

42,671

6


141

3


23

9

42,835

18

Net carrying amount


42,665



138



14


42,817

Movement for the period

(13,272)

(1)


(69)

(1)


3

1

(13,338)

(1)

 

Committed exposures

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. However, committed exposures can be smaller than the asset balances on the balance sheet due to netting. We show Sovereigns and Supranationals net of short positions and Large Corporate reverse repurchase agreement exposures are shown net of repurchase agreement liabilities and include OTC derivatives. In addition, 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. Committed exposures also include off-balance sheet derivatives that are measured at FVTPL and therefore not included in the IFRS 9 credit quality table on page 20.

 

Rating distribution

These tables show our credit risk exposure according to our internal rating scale (see 'Credit quality' in the 'Santander UK group level - credit risk review' section of the 2017 Annual Report) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.

 


Santander UK risk grade


30 June 2018

9
£m

8
£m

7
£m

6
£m

5
£m

4
£m

3 to 1
£m

Other(1)
£m

Total
£m

Commercial Banking

711

3,074

356

2,626

11,190

5,848

821

63

24,689

Corporate & Investment Banking

1,720

5,115

10,092

8,779

794

15

90

-

26,605

Corporate Centre

37,587

9,331

567

530

60

145

31

400

48,651











31 December 2017










Commercial Banking

499

2,600

430

2,578

11,537

5,588

1,062

216

24,510

Corporate & Investment Banking

3,212

7,763

11,329

8,912

676

2

355

-

32,249

Corporate Centre

48,805

5,431

752

434

104

124

37

400

56,087

(1)

Consists of smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.

 

Geographical distribution

We typically classify geographical location according to the counterparty's country of domicile unless there is a full risk transfer guarantee in place, in which case we use the guarantor's country of domicile instead.

30 June 2018

UK
£m

Europe
£m

US
£m

Rest of
World
£m

Total
£m

Commercial Banking

24,577

111

-

1

24,689

Corporate & Investment Banking

20,007

5,333

529

736

26,605

Corporate Centre

32,573

3,293

5,994

6,791

48,651

 

31 December 2017






Commercial Banking

24,393

116

1

-

24,510

Corporate & Investment Banking

20,532

6,852

726

4,139

32,249

Corporate Centre

44,630

2,794

6,240

2,423

56,087

 

30 June 2018 compared to 31 December 2017

Commercial Banking

In H118, lending to trading business customers reflected the slower market activity and continued uncertainty over Brexit. Growth in Social Housing commitments largely offset the reduction in our CRE portfolio. Committed exposures overall increased marginally.

-

Our SME and mid-corporate exposures increased by 1% with repayments largely offsetting new business.

-

Our CRE portfolio decreased by 7% reflecting the impact of our proactive risk management of exposures to certain sectors, as well as slower market activity.

-

Our social housing portfolio increased by 13%, driven by refinancing of longer-dated loans, previously managed in Corporate Centre, onto shorter maturities and current market terms.

 

Corporate & Investment Banking

Our committed exposures decreased by 17% due to decreases in our Sovereign and Supranational portfolios, which are now managed in our CFO division in Corporate Centre.

-

Large corporate exposures decreased slightly. Credit quality was relatively stable overall.

-

Financial institutions exposures decreased by 12%, largely driven by the transfer of prohibited activity to Banco Santander London Branch as part of ring-fencing.

 

Corporate Centre

In H118, committed exposures decreased by 13% largely driven by reductions in our Sovereign and Supranational portfolio.

-

Sovereign and Supranational exposures largely consist of highly-rated liquid assets that we hold as part of normal liquid asset portfolio management and Government securities. The decrease in the overall exposure was largely driven by a decrease in deposits in the UK.

-

Legacy portfolios in run-off reduced by 14% in H118.

-

Social housing exposures reduced in 2018 to £5.2bn (2017: £6.0bn) as we continue to refinance longer-dated loans onto shorter maturities and current market terms that are then managed in Commercial Banking.

 

Credit performance

We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in 'Monitoring' in the 'Credit risk management' section of the 2017 Annual Report). The table below shows the exposures we monitor, and those we classify as non-performing by portfolio at 30 June 2018 and 31 December 2017.

 

30 June 2018

Committed exposure

Loss allowances(3)
£m


Watchlist



Fully
performing
£m

Enhanced
monitoring
£m

Proactive
management
£m

Non-performing exposure(1)
£m

Total(2)
£m

Commercial Banking

22,430

1,402

498

359

24,689

207

Corporate & Investment Banking

25,620

784

163

38

26,605

26

Corporate Centre

48,601

22

5

23

48,651

18

Total ECL






251








31 December 2017







Commercial Banking

22,713

975

429

393

24,510

155

Corporate & Investment Banking

31,466

285

108

390

32,249

236

Corporate Centre

56,035

26

6

20

56,087

6

Total observed impairment loss allowances






397

Allowance for IBNO(4)






52

Total impairment loss allowances






449

(1)

Non-performing exposure includes committed facilities and derivative exposures. So it can exceed the NPLs in the table on page 19 which only include drawn balances.

(2)

Includes committed facilities and derivative exposures. We define 'Enhanced Monitoring' and 'Proactive Management' in the 'Monitoring' section of the 2017 Annual Report.

(3)

Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for H118 they are on an expected credit loss basis per IFRS 9.

(4)

We define Allowance for IBNO losses in Note 1 to the Consolidated Financial Statements of the 2017 Annual Report. 

 

 

30 June 2018 compared to 31 December 2017

Commercial Banking

Commercial Banking exposures subject to enhanced monitoring increased by 44%, largely as a result of three large Social Housing cases added in 2018 due to governance issues rather than credit concerns. Proactive management increased by 16%, largely in the care and service industries. NPEs decreased, however, as a result of successful exits.

 

Corporate & Investment Banking

Large corporate exposures subject to enhanced monitoring increased by 176% largely driven by the downgrade of a number of cases in construction and related industries. However, NPEs decreased to £38m (2017: £390m) as we exited the Carillion plc exposure through write-offs and made some recoveries on single name cases.

 

Corporate Centre

Legacy portfolios in run-off exposures subject to enhanced monitoring and proactive management remained relatively stable. NPEs also remained broadly stable at £23m (2017: £20m). Social Housing exposures subject to enhanced monitoring remained stable at £4m (2017: £4m).

 

Forbearance

The balances at 30 June 2018 and 31 December 2017, analysed by IFRS 9 stage (H118) and their payment status (2017) at the period-end and the forbearance we applied, were:

 


30 June 2018


31 December 2017


Commercial
Banking
£m

Corporate & Investment Banking
£m

Corporate
Centre
(1)
£m


Commercial
Banking
£m

Corporate & Investment Banking
£m

Corporate
Centre
(2)
£m

Stock(2)








Term extension

74

55

-


136

55

-

-              Interest-only

146

-

11


152

-

14

-              Other payment rescheduling

182

33

11


127

299

13


402

88

22


415

354

27

Of which:








-              Stage 1

49

-

2





-              Stage 2

79

55

11





-              Stage 3

274

33

9





-              Non-performing





273

347

11

-              Performing





142

7

16


402

88

22


415

354

27

Proportion of portfolio

1.6%

0.2%

2.9%


1.7%

1.1%

2.6%

(1)

Exposure within the Legacy Portfolios in run-off only.

(2)

We base forbearance type on the first forbearance we applied. Tables only show accounts open at the period-end. Amounts are drawn balances and include off balance sheet balances.

 

30 June 2018 compared to 31 December 2017

In Commercial Banking, the cumulative forbearance stock reduced by 3% to £402m at 30 June 2018 (2017: £415m). This decrease was mainly due to the successful resolution of NPL cases, and performing cases exiting forbearance according to defined criteria. Forbearance in CIB reduced by 75%, largely as a result of the write off of Carillion plc exposure. At 30 June 2018, there were four forborne cases (2017: five cases) in CIB.

 

OTHER SEGMENTS - PORTFOLIOS OF PARTICULAR INTEREST

Commercial Real Estate

 

Credit performance

The table below shows the main CRE credit performance metrics at 30 June 2018 and 31 December 2017.

 


Customer loans(1)
£m

NPLs(2)(3)
£m

NPL ratio(4)
%

Gross write-offs
£m

Loss allowances(5)
 £m

30 June 2018

7,514

49

0.65

12

32

31 December 2017

8,144

69

0.85

11

54

(1)

Comprises CRE drawn loans in the business banking portfolio of our Retail Banking segment of £232m (2017: £257m) and in the CRE portfolio of our Commercial Banking segment of £7,282m (2017: £7,886m).

(2)

We define NPLs in the 'Credit risk management' section in the 2017 Annual Report.

(3)

All NPLs continue accruing interest.

(4)

NPLs as a percentage of customer loans.

(5)

Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for H118 they are on an expected credit loss basis per IFRS 9.

 

LTV analysis

This table shows the LTV distribution for our CRE loan stock and NPL stock (based on the drawn balance and our latest estimate of the property's current value) of the portfolio at 30 June 2018 and 31 December 2017.

 


30 June 2018


31 December 2017

Loans and advances to customers

£m

%


£m

%

≤50%

4,079

54


4,146

51

>50-70%

2,618

35


3,035

37

>70-100%

52

1


36

-

>100% i.e. negative equity

37

-


52

1

Standardised portfolio(1)

585

8


629

8

Total with collateral

7,371

98


7,898

97

Development loans

143

2


246

3


7,514

100


8,144

100

(1)

Consists of smaller value transactions, mainly commercial mortgages.

 

Sector analysis

The table below shows the sector analysis of the portfolio at 30 June 2018 and 31 December 2017.

Sector

30 June 2018


31 December 2017

£m

%


£m

%

Office

1,973

26


2,181

27

Retail

1,289

17


1,389

17

Industrial

1,039

14


1,176

14

Residential

981

13


1,001

12

Mixed use

1,085

14


1,146

14

Student accommodation

119

2


133

2

Hotels and leisure

322

4


304

4

Other

121

2


185

2

Standardised portfolio(1)

585

8


629

8


7,514

100


8,144

100

(1)

Consists of smaller value transactions, mainly commercial mortgages.

 

30 June 2018 compared to 31 December 2017

CRE loans written before 2009 totalled £281m (2017: £380m). The CRE 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.

 

The CRE portfolio of £7,514m (2017: £8144m) is well diversified across sectors, with no significant regional or single name concentration. The portfolio represents 29% (2017: 30%) of our total lending to corporates and 4% (2017: 4%) of total customer loans.

 

At 30 June 2018, the LTV profile of the portfolio remained conservative with £6,697m (2017: £7,181m) of the non-standardised portfolio assets at or below 70% LTV. Loans with development risk were only 2% (2017: 3%) of the CRE portfolio. Development lending is typically on a non-speculative basis with significant pre-lets in place and/or pre-sales in place. The average loan balance at 30 June 2018 was unchanged at £4.7m (2017: £4.7m) and the top ten exposures made up 10% (2017: 10%) of the CRE portfolio.

 

Refinancing risk

For CRE loans approaching maturity, we look at the prospects of refinancing the loan on current market terms and applicable credit policy. Where this seems unlikely we put the case on our Watchlist.

 

At 30 June 2018, CRE loans of £1,197m (2017: £1,090m) were due to mature within 12 months. Of these, £29m, i.e. 2% (2017: £59m, i.e. 5%) had an LTV ratio higher than is acceptable under our current credit policy. At 30 June 2018, £26m of this (2017: £53m) had been put on our Watchlist or recorded as NPL and had an impairment loss allowance of £15m (2017: £27m).

 

Market risk


Overview



Key metrics



Market risk comprises trading market risk and banking market risk.

 

Market risk management

In H118, there were no significant changes in the way we manage market risk as described in the 2017 Annual Report.

 

Market risk review

In this section, we analyse our key trading and banking market risk metrics.



Net Interest Margin (NIM) sensitivity
to +50bps decreased to £178m and to -‑50bps decreased to £(42)m (2017: £212m and £(125)m)





Economic Value of Equity (EVE) sensitivity to +50bps decreased to £29m and to ‑50bps decreased to £(133)m (2017: £95m and £(213)m)


 

Trading market risk review

 

VaR

This table shows our Internal VaR for exposure to each of the main classes of risk at 30 June 2018 and 31 December 2017. The VaR figures show how much the fair values of all our tradeable instruments could have changed. Since trading instruments are recorded at fair value, these are also the amounts by which they could have increased or reduced our net income.

 


Period-end exposure


Average exposure


Highest exposure


Lowest exposure


30 June

2018
£m

31 December 2017
£m


30 June

2018
£m

31 December 2017
£m


30 June

2018
£m

31 December 2017
£m


30 June

2018
£m

31 December 2017
£m

Trading instruments

Interest rate risks

1.4

2.6


2.4

2.5


3.9

3.5


1.2

1.8

Equity risks

0.3

0.3


0.3

0.6


0.6

2.0


0.1

0.2

Foreign exchange risks

0.7

0.3


0.5

0.4


0.9

1.6


0.2

-

Diversification offsets(1)

(1.2)

(0.7)


(0.9)

(0.8)


-

-


-

-

Total correlated one-day VaR

1.2

2.5


2.3

2.7


3.8

3.7


1.2

2.0

(1)

The highest and lowest exposures for each risk type did not necessarily happen on the same day as the highest and lowest total correlated one-day VaR. It is impossible to calculate a corresponding correlation offset effect, so we have not included it.

 

30 June 2018 compared to 31 December 2017

As part of our ring-fencing plans, we transferred some market making activity and the associated market risk to Banco Santander London Branch in H118, and some market risk positions have been in run-off (positions allowed to mature, expire or close) since the start of 2018. This has changed our market risk profile at 30 June 2018 which can be seen in the table above. Additional transfers of market making activity and the associated market risk are planned to be made to Banco Santander London Branch in H218. Once all other non-permitted market risk positions have been run off by the end of 2018, there will be a small amount of trading market risk left from permitted products and permitted customers left in the ring-fenced bank. For more on our ring-fencing plans, see Note 26 to the Condensed Consolidated Interim Financial Statements.

 

BANKING market risk review

 

Interest rate risk

Yield curve risk

The table below shows how our key risk metrics would be affected by a 50 basis point parallel shift (both up and down) applied instantaneously to the yield curve at 30 June 2018 and 31 December 2017.

 


30 June 2018


31 December 2017


+50bps
£m

-50bps
£m


+50bps
£m

-50bps
£m

NIM sensitivity

178

(42)


212

(125)

EVE sensitivity

29

(133)


95

(213)

 

30 June 2018 compared to 31 December 2017

The movement in sensitivities in H118 was largely due to less margin compression as a result of higher levels of the yield curve and changes in the underlying assumptions we used for risk measurement purposes. We updated our assumptions to better reflect the current rate environment.

 

Liquidity risk


Overview



Key metrics



Liquidity risk is the risk that, while still being solvent, we do not have the liquid financial resources to meet our obligations when they fall due, or we can only obtain them at high cost.

 

Liquidity risk management

In H118, there were no significant changes in the way we manage liquidity risk as described in the 2017 Annual Report.

 

Liquidity risk review

In this section, we analyse our key liquidity metrics, including our Liquidity Coverage Ratio (LCR), our Liquidity Risk Appetite (LRA), and our wholesale funding. We also provide details on asset encumbrance.



LCR increased to 138% (2017: 120%)





LCR eligible liquidity pool increased to £50.5bn (2017: £48.5bn)












 

liquidity risk review

 

Liquidity Coverage Ratio

This table shows our LCR and LRA at 30 June 2018 and 31 December 2017. It reflects the stress testing methodology in place at that time.

 


LCR


LRA(1)


30 June 2018
£bn

31 December 2017
£bn


30 June 2018
£bn

31 December 2017
£bn

Eligible liquidity pool (liquidity value)

46.5

47.4


45.4

45.7

Net stress outflows

(33.8)

 (39.7)


(28.8)

(34.7)

Surplus

12.7

7.7


16.6

11.0

Eligible liquidity pool as a percentage of anticipated net cash flows

138%

120%


158%

132%

(1) The LRA is a three month Santander UK specific requirement.

 

At 30 June 2018, the carrying value of the assets in our LCR eligible liquidity pool was £50.5bn (2017: £48.5bn) and £46.5bn (2017: £47.4bn) on a liquidity value basis.

 

30 June 2018 compared to 31 December 2017

Throughout H118, we maintained robust risk management controls to monitor and manage the levels of our eligible liquidity pool and encumbrance. The LCR increased to 138% at 30 June 2018 (2017: 120%), whilst the LRA increased to 158% at 30 June 2018 (2017: 132%), reflecting increased medium term funding activity in H118 as part of prudent liquidity planning.

 

OUR Funding STRATEGY AND STRUCTURE

Maturity profile of wholesale funding

Our overall funding strategy remains to develop and sustain a diversified funding base. We also need to fulfil regulatory requirements as well as support our credit ratings.

 

This table shows our main sources of wholesale funding. It does not include securities financing repurchase and reverse repurchase agreements. The table is based on exchange rates at issue and scheduled repayments and call dates. It does not reflect the final contractual maturity of the funding.

 

30 June 2018

≤1 month
£bn

>1 and
≤3 months
£bn

>3 and
≤ 6 months
£bn

>6 and
≤9 months
£bn

>9 and
≤12 months
£bn

Sub-total
≤1 year
£bn

>1 and
≤2 years
£bn

>2 and
≤5 years
£bn

>5 years
£bn

Total
£bn

Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1)







Senior unsecured - public benchmark

-

-

-

-

-

-

-

5.1

2.6

7.7

Senior unsecured - privately placed

-

-

-

-

-

-

-

-

0.1

0.1

Subordinated liabilities and equity (incl. AT1)

-

-

-

-

0.5

0.5

0.3

0.8

1.5

3.1


-

-

-

-

0.5

0.5

0.3

5.9

4.2

10.9

Other Santander UK plc











Deposits by banks

0.3

0.1

-

-

-

0.4

-

-

-

0.4

Certificates of deposit and commercial paper

2.2

3.4

2.2

0.8

0.1

8.7

-

-

-

8.7

Senior unsecured - public benchmark

-

1.3

-

2.3

-

3.6

2.8

5.2

1.4

13.0

Senior unsecured - privately placed

-

-

-

-

1.0

1.0

1.2

0.6

0.3

3.1

Covered bonds

-

-

-

-

-

-

3.1

7.5

4.1

14.7

Securitisation and structured issuance(2)

-

0.1

1.3

0.6

0.1

2.1

0.7

1.6

0.1

4.5

Term Funding Scheme (TFS)

-

-

-

-

-

-

-

10.8

-

10.8

Subordinated liabilities

-

-

0.1

-

-

0.1

-

-

2.3

2.4


2.5

4.9

3.6

3.7

1.2

15.9

7.8

25.7

8.2

57.6

Other group entities











Securitisation and structured issuance(3)

-

-

0.1

0.1

0.3

0.5

0.8

0.8

-

2.1


-

-

0.1

0.1

0.3

0.5

0.8

0.8

-

2.1

Total at 30 June 2018

2.5

4.9

3.7

3.8

2.0

16.9

8.9

32.4

12.4

70.6

Of which:











- Secured

-

0.1

1.4

0.7

0.4

2.6

4.6

20.7

4.2

32.1

- Unsecured

2.5

4.8

2.3

3.1

1.6

14.3

4.3

11.7

8.2

38.5























Total at 31 December 2017

4.8

3.9

3.3

1.4

1.5

14.9

7.9

28.9

11.2

62.9

Of which:











- Secured

0.9

-

1.4

-

1.3

3.6

2.9

18.3

3.4

28.2

- Unsecured

3.9

3.9

1.9

1.4

0.2

11.3

5.0

10.6

7.8

34.7

(1)

Currently all our senior debt issued out of Santander UK Group Holdings plc is downstreamed into Santander UK plc on an equivalent rankings basis (e.g. senior unsecured is downstreamed as senior unsecured, subordinated capital instruments are downstreamed as subordinated capital instruments, etc.). However, under the end-state MREL/TLAC regime, senior unsecured debt issued out of Santander UK Group Holdings plc will be downstreamed in a form that is subordinated to senior unsecured debt, but senior to subordinated capital instruments issued out of Santander UK plc.

(2)

This includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator.

(3)

This includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator.

 

Term issuance

In H118, our external term issuance (sterling equivalent) was:


Sterling
£bn

US Dollar
£bn

Euro
£bn

Other
£bn

Total H118
£bn

Total H117
£bn

Downstreamed from Santander UK Group Holdings plc to Santander UK plc







Senior unsecured - public benchmark

0.5

0.7

0.7

-

1.9

1.2

Senior unsecured - privately placed

-

-

-

-

-

0.1

Subordinated debt and equity (incl. AT1)

-

-

-

-

-

0.5


0.5

0.7

0.7

-

1.9

1.8

Other Santander UK plc







Securitisations

0.3

0.7

-

-

1.0

-

Covered bonds

1.5

-

0.9

-

2.4

1.0

Senior unsecured - public benchmark

0.4

1.6

-

-

2.0

-

Senior unsecured - privately placed

0.3

-

0.6

-

0.9

-

Term Funding Scheme

2.3

-

-

-

2.3

3.0


4.8

2.3

1.5

-

8.6

4.0

Other group entities







Senior unsecured - privately placed

-

-

-

-

-

0.1


-

-

-

-

-

0.1

Total gross issuances

5.3

3.0

2.2

-

10.5

5.9

 

30 June 2018 compared to 31 December 2017

Our total wholesale funding increased by £7.7bn (inclusive of TFS) to £70.6bn (2017: £62.9bn). The increase in funding has resulted in a higher LCR, this is part of our prudent liquidity planning, reducing our reliance on wholesale funding markets in H218.

 

Debt capital markets experienced pockets of volatility during the first half of 2018, however generally market conditions were receptive. As a result, we continued to see good demand from investors for high quality paper. Our total term funding was £10.5bn (H117: £5.9bn), of which £8.2bn (H117: £2.4bn) was medium-term issuance and £2.3bn (H117: £3.0bn) was TFS, there were no capital issuances (H117: £0.5bn).

 

The £8.2bn medium-term funding included £1.9bn of downstreamed funding from issuances by our immediate parent (this is currently in the form of loans that rank pari passu with our existing senior unsecured liabilities), £2.9bn of senior unsecured notes by the Company, £2.4bn of covered bonds and £1.0bn of securitisations. Maturities in H118 were £4.0bn (H117: £6.3bn).

 

At 30 June 2018, 76% (2017: 75%) of wholesale funding had a maturity of greater than one year, with an overall residual duration of 40 months (2017: 43 months). The total drawdown outstanding from the TFS, which ended in February 2018, was £10.8bn (2017: £8.5bn). The total drawdowns of UK Treasury Bills under the Funding for Lending Scheme, which ended in January 2018, decreased to £2.7bn (2017: £3.2bn).

 

Encumbrance

Encumbrance of customer loans and advances

We have issued prime retail mortgage-backed and other asset-backed securitised products to a diverse investor base through our mortgage-backed and other asset-backed funding programmes.

 

We have raised funding with mortgage-backed notes, both issued to third parties and retained (the latter being central bank eligible collateral for funding purposes in other Bank of England facilities) and other asset-backed notes. We also have a covered bond programme. Under this, we issue securities to investors secured by a pool of residential mortgages.

 

For more on how we have issued notes from our secured programmes externally and also retained them, and what we have used them for, see Notes 12 and 22 to the Condensed Consolidated Interim Financial Statements.

 

30 June 2018 compared to 31 December 2017

Our level of encumbrance from external and internal issuance of securitisations and covered bonds remained broadly static in H118, as planned.

 

Credit ratings

Independent credit rating agencies review our creditworthiness. They base their work on a wide range of business and financial attributes. These include governance, risk management, capital strength, earnings, funding, liquidity, and disclosure. 

 


Standard & Poor's

Fitch

Moody's

30 June 2018




Senior unsecured

A

A

Aa3

Outlook

Stable

Rating Watch Positive

Stable

Short-term

A-1

F-1

P-1

Standalone

bbb+

a

a3

 

Capital risk


Overview



Key metrics



Capital risk is the risk that we do not have an adequate amount or quality of capital to meet our internal business needs, regulatory requirements and market expectations, including dividend and AT1 distributions.

Capital risk management

In H118, there were no significant changes in the way we manage capital risk as described in the 2017 Annual Report.

 

Capital risk review

In this section, we set out a brief update on emerging regulation. We then analyse our capital resources and key capital ratios.



CET1 capital ratio of 12.7% (2017: 12.2%)





Total capital resources of £16.9bn (2017: £17.1bn)













 

THE SCOPE OF OUR CAPITAL ADEQUACY

Regulatory supervision

 

30 June 2018 compared to 31 December 2017

Santander UK plc is incorporated in the UK. For capital purposes, we are subject to prudential supervision by the:

-

PRA: as a UK banking group

-

ECB: as a member of the Banco Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM).

 

Although we are part of the Banco Santander group, we do not have a guarantee from our ultimate parent Banco Santander SA and we operate as an autonomous subsidiary. As we are part of the UK sub-group that is regulated by the PRA, we have to meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the support of our parent. Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior management appointments.

 

Santander UK Group Holdings plc is the holding company of Santander UK plc and is the head of the Santander UK group for regulatory capital and leverage purposes. The basis of consolidation for our capital disclosures is the same one we use for our Consolidated Financial Statements.

 

CAPITAL RISK REVIEW

Key capital ratios



30 June 2018
%

31 December 2017
%

CET1 capital ratio


12.7

12.2

AT1


2.4

2.4

Grandfathered Tier 1


0.8

0.8

Tier 2


3.9

4.3

Total capital ratio


19.8

19.7

 

The total subordination available to Santander UK plc bondholders was 19.8% (2017: 19.7%) of RWAs.

 

30 June 2018 compared to 31 December 2017

We complied with the PRA's capital adequacy rules throughout H118. Our CET1 capital ratio improved 50bps to 12.7% at 30 June 2018 (2017: 12.2%), with capital accretion through retained profits, as well as a reduction in RWAs through enhanced focus on RWAs and an extension of our model for large corporates. Our total capital ratio improved slightly to 19.8% (2017: 19.7%), with higher CET1 capital, partially offset by the decrease in Tier 2 capital due to buyback for Tier 2 instruments in H118.

 

Regulatory capital resources

 

This table provides an analysis of our regulatory capital.

 


30 June 2018
£m

31 December 2017
£m

 

CET1 capital

10,818

10,620

 

AT1 capital

2,690

2,762

 

Tier 1 capital

13,508

13,382

 

Tier 2 capital

3,359

3,741

 

Total regulatory capital(1)

16,867

17,123

 

(1)

Capital resources include a transitional IFRS 9 benefit of £22m

 

Other key risks


Overview



Key metrics



Other key risks management

In H118, there were no significant changes in the way we manage and monitor other key risks, as described in the 2017 Annual Report.

 

Other key risks review

In this section, we discuss pension risk, conduct and regulatory risk, operational risk and financial crime risk.



Pension Deficit at Risk was £1,500m (2017: £1,540m)

 





Remaining PPI provision was £301m (2017: £356m)












 

PENSION RISK

30 June 2018 compared to 31 December 2017

The funding Deficit at Risk decreased to £1,500m (2017: £1,540m). This was driven by the ongoing increase in interest rate hedging that began in December 2017. At 30 June 2018, the interest rate hedging ratio on a funding basis was 61% (2017: 57%). The inflation rate hedging ratio of the Scheme on a funding basis was 67% (2017: 64%).

 

We continue to focus on achieving the right balance between risk and reward. In H118, overall asset returns were broadly flat. Our long-term objective is to reduce the risk of the Scheme and eliminate the deficit on a funding valuation basis.

 

Accounting position

In H118, the accounting surplus of the Scheme and other funded arrangements increased, with sections in surplus of £868m at 30 June 2018 (2017: £449m) and sections in deficit of £69m (2017: £245m). The overall position of the funded arrangements was a surplus of £799m (2017: £204m). There were also unfunded scheme liabilities of £39m at 30 June 2018 (2017: £41m). The improvement in the overall position was mainly driven by rising corporate bond yields which led to a higher discount rate being adopted and hence a lower value being placed on the liabilities.

 

For more on our pension obligations, including the current asset allocation, see Note 20 to the Condensed Consolidated Interim Financial Statements.

 

Conduct AND REGULATORY Risk

 

30 June 2018 compared to 31 December 2017

To make sure we fully consider customer impacts across our business, we continue to maintain a strong focus on robust oversight and control over the full customer journey. Compliance teams are established across all our key business divisions. Conduct risk frameworks are in place across all business divisions and are operating alongside the wider Risk Framework to identify, assess, manage and report conduct and regulatory risk.

In H118, we continued to build on the progress we made in 2017 and take a customer-focused approach in how we develop our strategy, products and policies that support fair customer outcomes and market integrity. As part of this, we:

 

-

Assessed the views and new policy areas in the FCA's 2018/19 Business Plan and built them into our three year business planning activities.

-

Developed the reporting for regulatory and conduct matters to the Board Responsible Banking Committee (BRBC), which was established in H217. This included enhancing the visibility and reporting of conduct related measures to support fair customer outcomes.

-

Delivered change to meet the evolving regulatory landscape, including changes brought about by Markets in Financial Instruments Directive II (MiFID II), Second Payment Services Directive (PSDII), General Data Protection Regulation, Banking Reform and implementing the Banking Reform compliance model.

-

Maintained an open and constructive relationship with Banco Santander to ensure that our approaches to conduct and regulatory risk share a common understanding and minimum standards.

-

Refined the Conduct Risk Framework with focus on our Corporate,  Commercial Banking and Corporate & Investment Banking divisions in line with the FCA's 5 Conduct Questions Programme.

-

Developed stronger links between Compliance and HR on the Santander UK culture agenda.

 

For more on our conduct remediation provision, including sensitivities, see Note 19 to the Condensed Consolidated Interim Financial Statements. We explain more about these sensitivities in 'Critical accounting policies and areas of significant management judgement' in Note 1 to the Consolidated Financial Statements in the 2017 Annual Report.

 

OPERATIONAL RISK

 

30 June 2018 compared to 31 December 2017

2018 is the final year of delivery to embed the Operational Risk Transformation Programmes into the business. This involved the roll-out of the operational risk system to more areas of the business. Open Banking and PSDII have brought significant opportunities for us to develop new products and services for customers but they have also introduced new risks for both us and our customers. In 2017 we carried out operational risk reviews in relation to these initiatives, in order to identify, assess, manage and report the key risks involved, mainly in relation to fraud, data security and third party providers. Our focus on managing these risks continues, with further reviews being performed throughout H118.

 

Third party provider risk remains one of our top risks. This is based on our increasing use of third parties for cloud, innovations, new partnerships and new digital services. Our digital transformation and cloud strategy to outsource critical services could expose us to new operational risks. To manage these risks, we continue to build and enhance our Third Party Risk Management control framework.

 

In H118, we had no material disruption from cyber-attacks despite a rise in cyber threats in the UK banking industry. Investments made to improve our ability to detect and respond to malicious activity targeting our internet services have increased levels of protection for our customers and shareholders. Our efforts are intelligence led via the UK's Cyber Defence Centre from where security tests and event scenarios are coordinated and assessed. Our insights into the cyber threat landscape drive our system security and control programmes and our investment in security services. Threats such as denial of service, phishing and hacking drive improvement in systems, processes, controls and, most importantly, staff training. This helps to reduce cyber risk to our customers, systems and data. Together with our focus on data-centre resilience, this approach ensures we have a solid base that supports our digital transformation strategy.

 

Programmes of change affecting IT infrastructure or customer facing services naturally increase the risk of disruption to service. Strong technical and management controls are therefore central to our IT Governance, Risk and Compliance framework, especially those controls focused on IT changes and thorough testing of systems prior to deployment.  Similar approaches to both cyber security and IT governance will ensure that we support future growth in an environment of improved cyber resilience and reduced legacy IT issues.

 

Over the past 24 months we have worked to ensure that we meet the requirements of the new European General Data Protection Regulation. This will soon be replaced by the UK Data Protection Act 2018 and we will continue to monitor and improve how we manage personal data.

 

We are due to complete our ring-fencing plans ahead of the Banking Reform regulatory deadline. Updates have been sent to all potentially impacted customers, and we have moved business not permitted in the ring-fenced bank across to Banco Santander London Branch and Banco Santander. For more on ring-fencing, see Note 26 in the Notes to the Condensed Consolidated Interim Financial Statements.

 

FINANCIAL CRIME risk

 

30 June 2018 compared to 31 December 2017

In H118, we continued to enhance our Financial Crime Control Framework through our Transformation Programme with oversight from the BRBC. It aims to deliver a sustainable operating model for how we manage financial crime across our business. The Programme will build on our current capabilities and take account of the evolving demands of financial crime regulations, as well as the expectations of our regulators and industry practice.

 

As part of this in H118, we:

-

Agreed a financial crime target operating model and what steps we need to take to get there. This includes a plan to implement end to end systems and data architecture to build an operating model to migrate our operations to, which clearly defines our key risk metrics.

-

Delivered specific financial crime training and launched our financial crime strategy. Our strategy underpins our commitment to Deter, Disrupt and Detect financial crime and focuses on increasing awareness and fostering an anti-financial crime culture.


Whilst we have well established anti-money laundering systems and controls, there is further investment and work required to complete our Transformation Programme, delivering strengthening measures to ensure ongoing adherence to regulatory standards during a period of intense regulatory change. We continue to track our progress through key phases of the Transformation Programme. The Financial Crime Steering Committee, chaired by the CLRO and the CEO and attended by senior management from businesses and technology, governs our Transformation Programme and provides senior management oversight (and challenges) of progress. The Transformation Programme is a key priority for the Board and is subject to Board-level oversight and reporting.

 

Financial statements






Contents




Independent review report

42



Primary financial statements

43



Consolidated Income Statement

43



Consolidated Statement
of Comprehensive Income

44



Consolidated Balance Sheet

45



Consolidated Cash Flow Statement

46



Consolidated Statement
of Changes in Equity

47



Notes to the financial statements

48



 

Independent review report to Santander UK plc

 

Report on the Condensed Consolidated Interim Financial Statements

 

Our conclusion

We have reviewed Santander UK plc's Condensed Consolidated Interim Financial Statements (the "interim financial statements") in the Half Yearly Financial Report of Santander UK plc for the 6 month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

-

-      the consolidated balance sheet as at 30 June 2018;

-

-      the consolidated income statement and consolidated statement of comprehensive income for the period then ended;

-

-      the consolidated cash flow statement for the period then ended;

-

-      the consolidated statement of changes in equity for the period then ended; and

-

-      the explanatory notes to the interim financial statements.

The interim financial statements included in the Half Yearly Financial Report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

 

Responsibilities for the interim financial statements and the review

 

Our responsibilities and those of the directors

The Half Yearly Financial Report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half Yearly Financial Report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

Our responsibility is to express a conclusion on the interim financial statements in the Half Yearly Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of the interim financial statements involves

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

We have read the other information contained in the Half Yearly Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

 

9 August 2018

 

 

Condensed Consolidated Interim Financial Statements

Consolidated Income Statement (unaudited)

 

For the half year to 30 June 2018 and the half year to 30 June 2017


Notes

 Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Interest and similar income


3,001

2,977

Interest expense and similar charges


(1,190)

(1,055)

Net interest income


1,811

1,922

Fee and commission income


584

609

Fee and commission expense


(204)

(200)

Net fee and commission income


380

409

Net trading and other income

3

121

182

Total operating income


2,312

2,513

Operating expenses before credit impairment losses, provisions and charges

4

(1,283)

(1,215)

Credit impairment losses

5

(91)

(48)

Provisions for other liabilities and charges

5

(33)

(186)

Total credit impairment losses, provisions and charges


(124)

(234)

Profit before tax


905

1,064

Tax on profit

6

(256)

(323)

Profit after tax for the period


649

741





Attributable to:




Equity holders of the parent