Source - RNS
RNS Number : 4402X
Santander UK Group Holdings PLC
10 August 2018
 



Half Yearly Financial Report 2018

 

Santander UK Group Holdings plc

 

PART OF THE BANCO SANTANDER GROUP

 

Important information for readers

 

Santander UK Group Holdings 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 Group Holdings plc

Half Yearly Financial Report 2018

 










Contents




Chief Executive Officer's review 

2



Strategic review progress update

3



Chief Financial Officer's review

4



Directors' responsibilities statement

6



Risk review

7



Financial review

37



Financial statements

47



Shareholder information

71






 

Chief Executive Officer's review

 

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 £903m, 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 £489m, 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. Our focus remains on long-term customer loyalty, with our retail customer satisfaction in line with the average of our three highest performing peers and our corporate customer satisfaction now 11pp above the market average.

 

"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."

 

Nathan Bostock

Chief Executive Officer

 

 

Strategic review progress update

 

Delivering on our 2016-18 commitments (1)

 

Our purpose remains unchanged, to help people and businesses prosper. We aim to be the best retail and commercial bank, earning the lasting loyalty of our people, customers, shareholders and communities, while delivering a culture that is Simple Personal and Fair.

 

Our strategic priorities remain focused on customer loyalty, operational and digital excellence, and steady and sustainable profit growth, while being the best bank for our people and the communities in which we operate. With the publication of our 2017 Sustainability Report, released on 25 July 2018, we have made the first step on our journey to better understand and explain the impact we have on society beyond profit generation. We intend to continue the evolution of our Corporate Social Responsibility and sustainability approach to deliver the maximum value to our business and society.

 

Key performance indicators - Customers

Notes

2018 Target

30 June 2018

31 December 2017

Loyal retail customers(2)

2

4.7 million

4.0 million

3.9 million

Loyal SME and corporate customers


308,000

314,000

305,000

Retail customer satisfaction (FRS)

3

Top 3

64.4%

63.0%

Average of 3 highest performing peers



64.0%

63.1%

Digital customers


6.5 million

5.2 million

5.0 million

-

Ongoing customer demand for higher interest rate products, and some consolidation of savings into our 1I2I3 Current Account, has impacted loyalty conversion. Loyal retail customer target takes into account both primacy and multiple product holdings and therefore, we will not reach our 2018 target.

-

Loyal SME and corporate customers increased, and we further developed our international proposition with three trade corridors established in 2018. Corporate customer satisfaction(4) at 65% was 11pp above the market average.

-

FRS reported our customer satisfaction(3) was broadly in line with the average of our three highest performing peers on a rolling twelve-month basis at 30 June 2018. Ongoing improvement remains at the heart of our plans.

-

Digital acquisition and adoption is driving change in the organisation. This year, we retained 54% of refinanced mortgage loans online, opened 39% of current accounts and 56% of credit cards through digital channels, an increase of 7 percentage points, 5 percentage points and 10 percentage points year-on-year, respectively. Although digital customers have grown 33% since our aspirational 2018 target was set in 2015, we are not on track to meet it.

Key performance indicators - Customers

Notes

2018 Target

30 June 2018

31 December 2017

Adjusted return on tangible equity (Adjusted RoTE) / RoTE

5

9%-10%

9.3%

10.2%

Cost-to-income ratio


50%-52%

56%

51%

Non-performing loan (NPL) ratio


<2.00%

1.25%

1.42%

CET1 capital ratio


c. 12%

12.7%

12.2%

Dividend payout ratio


50%

n.a.

50%

-

Adjusted RoTE (5) was 9.3%, up 60bps in Q218, delivering value despite the competitive and uncertain operating environment.

-

CIR was 56%, as income pressure and increased regulatory, risk and control costs continued to offset ongoing cost savings. Cost discipline is a key priority for management, with business transformation initiatives underway to improve efficiency in the organisation, data and infrastructure, as well as third party and procurement processes. We have achieved some efficiency improvements in the second quarter and anticipate a further reduction in the cost run rate over the second half of the year, although we do not expect to be within our 2018 target range.

-

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 CET1 capital ratio increased 50bps to 12.7%, with capital accretion through retained profits, as well as a reduction in RWAs through enhanced focus on risk-weighted assets and the widening of the scope of our model for large corporates.

 

For definitions of our key performance indicators see the glossary on our website at: www.santander.co.uk/uk/about-santander-uk/investor-relations-glossary


Notes

(1) We report our key performance indicators for people, communities and the customer target for net fee income CAGR on an annual basis.

(2) Loyal retail customers excludes Cater Allen customers.

(3) Customer satisfaction as measured by the Financial Research Survey (FRS),  a monthly personal finance survey of around 5,000 consumers prepared by the independent market research agency, GfK. The 'retail customer satisfaction' score refers to the proportion of extremely and very satisfied customers across mortgages, savings, main current accounts, home insurance, UPLs and credit cards, based on a weighting of those products calculated to reflect the average product distribution across Santander UK and competitor brands. Data shown is for the twelve months ended 30 June 2018, based on 14,131 interviews and compared against twelve months ended data for the period as indicated.

The competitor set used to calculate the product weights is Barclays, Halifax, HSBC, Lloyds Bank, Nationwide and NatWest. The competitor set included in this analysis for the ranking and highest performing peers is Barclays, Halifax, HSBC, Lloyds Bank, and NatWest.

(4) Customer satisfaction as measured by the Charterhouse Business Banking Survey. Our corporate customer satisfaction was 65%, versus 54% for the market. The Charterhouse UK Business Banking Survey is an ongoing telephone based survey designed to monitor usage and attitude of UK businesses towards banks. 15,500 structured telephone interviews are conducted each year among businesses of all sizes from new start-ups to large corporates with annual sales of £1bn. The data is based upon 6,058 interviews made in the year ending Jun18 with businesses turning over £250k to £500m per annum and are weighted by region and turnover to be representative of businesses in Great Britain. Satisfaction is based on a five point scale (% Excellent / Very good). The competitor set included in this analysis is Barclays, RBS, HSBC, Lloyds Bank, TSB and NatWest.

(5) See Shareholder information for reconciliation of RoTE to Return on ordinary shareholders' equity', which is the nearest IFRS measure.

 

Chief Financial Officer's review

 

Consistently profitable, sustainable business

Income statement highlights

Half year to
30 June 2018
£m

Half year to
30 June 2017
£m

Net interest income

1,811

1,922

Non-interest income1

501

591

Operating income

2,312

2,513

Operating expenses before credit impairment losses, provisions and charges

(1,285)

(1,216)

Credit impairment losses2

(91)

(48)

Provisions for other liabilities and charges

(33)

(186)

Profit before tax

903

1,063

Adjusted profit before tax3

920

1,122

Profit after tax

647

740

 

We delivered solid business performance and sustainable profitability in the first half of 2018, although our results have been impacted by a competitive and uncertain operating environment. Profit before tax decreased 15% to £903m (H117: £1,063m) with lower income and higher costs, partially offset by lower provisions for other liabilities and charges.

 

Net interest income was down 6%, impacted by the fall in average new mortgage pricing in 2017 and SVR attrition3 (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 Corporate & Investment Banking (CIB - formerly known as Global Corporate Banking). Additionally, income was impacted by the absence of mark-to-market movements on asset portfolios in the Corporate Centre in H117, partially offset by 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 losses2 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.

 

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%.

 

Maintaining balance sheet strength

 

Customer balances

30 June 2018
£bn

31 December 2017
£bn

Customer loans

201.0

200.3

Customer deposits

172.6

175.9

Loan-to-deposit ratio

117%

113%

 

Customer loans increased to £201.0bn, 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 (CRE) 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.

 

Customer deposits decreased £3.3bn, with management pricing actions driving a reduction in retail savings products of £1.9bn, corporate deposits of £1.5bn and other retail products of £0.7bn. 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 of £0.7bn.

 

Notes

(1) Comprised of 'Net fee income and commission income' and 'Net trading and other income'.

(2) Comparative periods have not been restated following the first application IFRS 9 in 2018.

(3) A number of specific gains, expenses and charges impacted the financial results in H118 and H117, with an aggregate impact before tax of £17m and £59m, respectively.

(4) SVR attrition includes loan balances which have reverted on to SVR and the Follow-on-Rate which was introduced in January 2018.

 

Capital and liquidity

30 June 2018
£bn

31 December 2017
£bn

CET1 capital

10.8

10.6

Risk-weighted assets

85.1

87.0

CET1 capital ratio

12.7%

12.2%

UK leverage ratio

4.4%

4.4%

LCR

138%

120%

LCR eligible liquidity pool

50.5

48.5

 

We continue to build capital towards higher requirements, with the CET1 capital ratio up 50bps to 12.7%, reflecting higher CET1 capital from retained earnings and lower RWAs. RWAs decreased £1.9bn, through enhanced focus on risk-weighted assets and the widening of the scope of our model for large corporates. The total capital ratio increased to 18.1%, with higher CET1 capital, partially offset by the transitional impact of CRD IV Minority Interest rules that reduces recognition of grandfathered capital instruments issued by Santander UK plc. The LCR increased 18 percentage points to 138%, reflecting management of requirements and liquidity planning.

 

Medium term funding balances were higher, with issuance of £8.2bn, of which £1.9bn (sterling equivalent) were senior unsecured notes by Santander UK Group Holdings plc, £2.9bn by Santander UK plc, £2.4bn were covered bonds and £1.0bn from securitisations. The Term Funding Scheme total outstanding was £10.8bn.

 

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. Following the approval we reclassified £22.9bn of assets, and £20.7bn of liabilities, as held for sale in the balance sheet as at 30 June.

 

In June 2018, we transferred customer loans totalling £0.7bn from CIB to Banco Santander London Branch. Remaining transfers to Banco Santander London Branch or Banco Santander, relating to the assets and liabilities classified as held for sale, 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.

 

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, Banking NIM for 2018 is expected 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.

 

Antonio Roman

Chief Financial Officer

 

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 Guidance 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

 

 

Risk review

 










Contents




Risk overview

8



Risk governance

9



Credit risk

10



Santander UK group level

13



Retail Banking

16



Other segments

22



Market risk

27



Trading market risk

27



Banking market risk

27



Liquidity risk

28



Capital risk

32



Other key risks

35






 

Risk overview

 

All our activities involve identifying, assessing, managing and reporting risks. Sound risk management is at the centre of our day-to-day activities. It benefits our business and our customers by helping to ensure balanced and responsible growth.

 

Risk Types

 

Our key risk types help us define the risks to which we are exposed. For key risk type definitions, see 'How we define risk' on page 70 of the 2017 Annual Report. We set out below the main changes in our risk profile across H118 in terms of these key risk types.

 

Credit

Market (Banking market)

Capital

Pension

NPL ratio (%)
30 June 2018: 1.25
31 December 2017: 1.42

 

Our NPL ratio improved in H118. The improvement was mainly driven by the write-off of the Carillion exposures in 2018. The benign credit environment has supported our customers and helped to reduce credit risk. In particular, unemployment, one of the most important factors in mortgage defaults, has been below 5% for over two years. Whilst the UK market continues to show resilience, we are cautious on the outlook in light of recent increases in corporate profit warnings and economic uncertainty.

 

NIM sensitivity +50 bps (£m)
30 June 2018: 178
31 December 2017: 212

 

The interest rate environment in the UK has been low and stable for a prolonged period. Bank rate rose for the first time in ten years in November 2017 from 0.25% to 0.5% and again in August 2018 to 0.75%. Market expectations are for future rate increases to be gradual in nature. As a commercial bank we are positioned to benefit from a rising interest rate environment, although the pace and scale of expected change will moderate any impact on income. We continue to monitor ongoing developments in regulatory requirements to ensure compliance and to reflect the impacts for market risk.

 

Total capital ratio (%)
30 June 2018: 18.1
31 December 2017: 17.8

 

Regulatory capital requirements have increased significantly since the financial crisis as regulators have attempted to strengthen banks' balance sheets. Santander UK continued to generate capital from profits throughout the financial crisis. We continue to work towards meeting the higher regulatory capital requirements.

 

Funded defined benefit pension

scheme accounting surplus (£m)

30 June 2018: 799
31 December 2017: 204

 

In recent years, UK pension funds have experienced headwinds as a result of falling long-term gilt yields driving an increase in the value of pension liabilities. In many cases these increases in liability values have only been partially offset by increases in the value of hedging assets and return-seeking assets. However, in H118, the pension fund surplus, measured on an accounting basis, improved by £594m to £799m largely as a result of a higher discount rate.

 

Conduct

Operational

Financial crime


Remaining conduct provision (£m)

 

30 June 2018: 332
31 December 2017: 403

 

We continue to receive significant volumes of PPI mis-selling and Plevin related claims, the provision remains in line with our assumptions and claims experience. Following confirmation by the FCA of the August 2019 deadline for customer complaints relating to PPI and the roll out of the related advertising campaigns we continue to monitor our provision levels, and will take account of the impact of any change in claims volumes received.

 

The PSR and the FCA have engaged with the industry on authorised push payment frauds. We are participating in the industry responses and will assess any potential impacts following completion of the PSR and FCA engagement.

 

5% reduction in operational risk losses (excluding PPI)

 

In H118 we completed the implementation of our operational Risk Framework, which is now embedded across the organisation. Cyber risk continues to feature prominently, with various well-known companies targeted with sophisticated cyber-attacks, including Distributed Denial of Service (DDoS) attacks, malware and phishing attacks. In H118, we had no material disruption from cyber-attacks.

 

The risks associated with using third parties to deliver services remains a key operational risk, and we continue to enhance our operating model in this area.

 

£55m incremental investment in financial crime enhancements planned for 2018

 

In H118, we continued to enhance our Financial Crime Control Framework through our Transformation Programme. 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

 


 

TOP RISKS

 

A top risk is a current risk within our business that could have a material impact on our financial results, reputation and the sustainability of our business model. In 2017, we identified our top risks as follows, and discussed them on page 14 of the 2017 Annual Report:

 

- UK's future relationship with the EU

- Mitigating the impact of a low rate environment

- Ring-fencing

- Building and maintaining capital strength

- Pension scheme

- Financial crime

- Managing a complex change agenda

- Cyber-attacks

- Conduct risks

- Third party risks.

 

For how our top risks are linked to our 2016-2018 strategic priorities, see pages 16 and 17 of the 2017 Annual Report.

 

30 June 2018 compared to 31 December 2017

 

In H118, our top risks remained largely the same. However, we have seen an improvement in the risk associated with the continued low interest rate environment and as a result, this is no longer considered one of our top risks.

 

Emerging risks

 

An emerging risk is a risk with largely uncertain outcomes which may develop or crystallise in the future. Crystallisation of an emerging risk could have a material effect on long-term strategy. In 2017, we identified our emerging risks as follows, and discussed them on page 15 of the 2017 Annual Report:

 

- Changing customer behaviour

- Rapid technological change

- Strong market competition

- Demanding regulatory agenda

- Uncertain macro environment.

 

30 June 2018 compared to 31 December 2017

 

In H118, we saw further competitive pressure build in our key mortgage market, set against a backdrop of growing regulatory capital requirements.

 

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

2,540

-


-

-


2,540


17,256

-


-

-


17,256

Adjusted net carrying amount







261,047









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







48,187

Non-financial assets







7,391









Total assets per the Consolidated Balance Sheet







316,625

(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 15 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 15 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 15 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

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