UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 20142015
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report to
Commission file number 001-14928
Santander UK plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
2 Triton Square, Regent’s Place, London NW1 3AN, England
(Address of principal executive offices)
Julian Curtis
2 Triton Square, Regent’s Place, London NW1 3AN, England
Tel +44 (0) 870 607 6000
Fax +44 (0) 20 7756 5628
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| 4.000% Notes due April 27, 2016, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| 1.375% Notes due March 13, 2017, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| Floating Rate Notes due March 13, 2017, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| 1.650% Notes due September 29, 2017, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| Floating Rate Notes due September 29, 2017, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| 3.050% Notes due August 23, 2018, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| Floating Rate Notes due August 24, 2018, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| 2.000% Notes due August 24, 2018, issued by Abbey National Treasury Services plc* | New York Stock Exchange | |
| 2.350% Notes due September 10, 2019, issued by Abbey National Treasury Services plc * | New York Stock Exchange | |
| New York Stock Exchange | ||
| 4.000% Notes due March 13, 2024, | ||
| New York Stock Exchange |
| * | Guaranteed by Santander UK plc |
Securities registered or to be registered pursuant to Section 12 (g) of the Act.
None
Securities registered or to be registered pursuant to Section 15 (d) of the Act.
7.95% Term Subordinated Securities due October 26, 2029
Subordinated Guarantee by Santander UK plc (as successor in interest to Abbey National plc) of the 8.963% Non-Cumulative Perpetual Preferred Limited Partnership Interests issued by Abbey National Capital LP I
Subordinated Guarantee by Santander UK plc (as successor in interest to Abbey National plc) of the 8.963% Non-Cumulative Trust Preferred Securities issued by Abbey National Capital Trust I
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
| Ordinary shares of nominal value of £0.10 each* | 31,051,768,866 | |
| 10 3/8% Non-cumulative Preference Shares of nominal value of £1 each | 200,000,000 | |
| 8 5/8% Non-cumulative Preference Shares of nominal value of £1 each | 125,000,000 | |
| Series A Fixed/Floating Rate Non-cumulative Preference Shares of nominal value of |
| * | All of the issued and outstanding ordinary shares of Santander UK plc are held by Santander UK Group Holdings |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ¨ U.S. GAAP | x International Financial Reporting Standards as issued by the International Accounting Standards Board | ¨ Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
2015 Annual Report
2014 business and | We are pleased to report strong results for 2014, with continued improvement in profitability and strong commercial momentum. We are gaining more personal current account switchers than any other UK bank, while broadening the range of products and services we offer to UK companies.
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Net interest income |
Profit before tax |
Banking NIM(1) | ||||||||||||
| £3,434m | £1,399m | 1.82% | ||||||||||||
| Up 16% in 2014, with higher margins and increased lending across all core segments. | Up 26% in 2014, with continued growth in net interest income, a strong focus on efficiency and well performing retail and corporate loan portfolios. �� | Up 27 basis points in 2014, largely due to lower cost of retail liabilities. | ||||||||||||
Cost-to-income ratio |
CET 1 capital ratio |
Loan-to-deposit ratio | ||||||||||||
| 54% | 11.9% | 124% | ||||||||||||
Unchanged in 2014 with cost efficiency maintained to accommodate investment. Income grew by two percentage points more than expenses.
| Up from 11.6%(1), with the PRA end point T1 leverage ratio at 3.8% from 3.3% in 2013. | Improved two percentage points in 2014, reflecting strong growth in current account balances. | ||||||||||||
Gross mortgage lending |
Lending to corporates |
Retail customer satisfaction | ||||||||||||
| +43% | +8% | 59.7% | ||||||||||||
| Gross mortgage lending of £26.3bn in 2014 with net mortgage lending of £2.0bn. | Up by a net £1.8bn in 2014 to a total of £23.9bn, maintaining positive momentum in an increasingly competitive market. | Gap between Santander UK and the average of 3 highest performing peers largely closed. Santander UK was the most improved bank since December 2012(2).
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This Annual 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’ on page 353. For definitions of terms used in this Annual Report, see ‘Glossary’ on page 348. | ||||||||||||||
Santander UK plc (the ‘Company’) and its subsidiaries (collectively ‘Santander UK’ or the ‘Santander UK group’) operate primarily in the UK, are regulated by the UK Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) and are part of the Banco Santander, S.A. group (the ‘Banco Santander group’).
(1) Non-IFRS measure. See page 355. (2) Retail customer satisfaction as measured by the Financial Research Survey (‘FRS’) run by GfK NOP. See ‘Glossary’ on page 348.
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Santander UK plc
PART OF THE SANTANDER GROUP
Santander UK plc
This Annual 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’ on page 330.
Abbey National Building Society formed with the merger of two long-standing building societies
| Bradford & Bingleysavings business and branches acquired by Santander UK plc | Abbey, Alliance & Leicester and Bradford & Bingley rebranded asSantander UK | ||||||||
1944 | 1989 | 2004 | 2008 | 2009 | 2010 | |||||
Abbey National plc incorporated in 1998. Listed on the London |
Abbey National plc acquired byBanco Santander, S.A. |
Alliance & Leicester plc transferred to Santander UK plc (acquired by Banco | ||||||||
| Stock Exchange in 1989 | Santander, S.A. in 2008)
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Banco Santander group customers 117 million
Banco Santander group is a retail and commercial bank, based in Spain, with a presence in ten main markets and is the largest bank in the eurozone by market capitalisation.
Founded in 1857, the Banco Santander group has over 12,000 branches and 185,000 employees across the globe. The Banco Santander group is also the largest private financial group in Latin America and has a significant presence in the UK, Portugal, Germany, Poland and the US.
The Banco Santander group operates a subsidiary model across the group where businesses, such as Santander UK, are responsible for their own liquidity, funding and capital, but benefit from shared resources, operational capability and branding.
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Strategic
report
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Chair’sSantander UK plc (the Company and together with its subsidiaries, Santander UK or the Santander UK group) is required to set out in this report a fair review
“Since becoming Chair 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 2002,the year and of its position at the end of the year. This information can be found below and in the following sections of this Annual Report, which are incorporated into and form part of this Strategic report. Under the UK banking landscape has changed significantly. As I hand overCompanies Act 2006, a safe harbour limits the stewardship,liability of Directors in respect of statements in and omissions from the Directors’ Report (for which see page 193), the Strategic report and the Remuneration report. Under English law the Directors would be liable to the company, but not to any third party, if one or more of these reports contained errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would otherwise not be liable. Pages 193 to 196 inclusive comprise the Directors’ Report, pages 1 to 4 inclusive comprise the Strategic report and pages 186 to 192 inclusive comprise the Remuneration report, each of which have been drawn up and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with these reports shall be subject to the limitations and restrictions provided by such law. The Directors, in preparing this Strategic report, have complied with s414C of the Companies Act 2006.
Chair’s statement
My first ten months as Chair have affirmed my view that Santander UK is well placedtrue in its intent to succeed in a challenging environment.”
Lord Burns
Chair
24 February 2015
Our purpose is to help people and businesses prosper as we build the Best Bank in the UK –be a bank that is Simple, Personal and Fair but is not complacent about the effort and length of the endeavour.
UK banks need to continue their transformation, focusing more on the needs of people and businesses in the real economy and regaining the trust of customers, investors, regulators, policy makers and the wider public. The UK cannot claim to be a leading global financial centre until it provides its own economy with world-class service.
Santander UK can play a key role in this transformation through its unique position as the only full-service ‘scale challenger’. We have greater reach, high street presence and brand recognition than niche players whilst our market position relative to the ‘big four’ ensures we maintain our incentive to win the loyalty of customers and challenge the incumbents’ ways of doing business. We have demonstrated this, for example, by launching innovative products such as the 1I2I3 World Current Account and our unique international trade proposition which provides the only UK bank export scheme targeted at SMEs. We have sustained our position in the highly competitive mortgage market from our building society heritage, but in other segments Santander UK is still a challenger bank. We have the need and ability to innovate and compete and that is integral to our approach in improving the way we serve our customers.
Transformation on multiple fronts
I do not underestimate the significant challenges our people and systems face in simultaneous implementation on multiple fronts. This ranges from regulatory changes to our balance sheet and operations, to ‘ring-fencing’ our business into a Retail Bank for personal and small business customers, and a unique dedicated Corporate Bank for our business customers from SMEs to the FTSE 100. It includes embedding cultural change, deepening our relationships with customers, innovating and delivering the very best digital banking services. All this needs to be done while ensuring we remain profitable in a persistent low interest rate environment, manage risk effectively in unpredictable markets and a highly uncertain world and continue to win competitive market share.
I am very confident in the ability of Nathan Bostock, our CEO, to deliver his 3-year strategy and lead this multiple transformation with his senior executives and our dedicated and committed employees. He has been left a strong legacy by Ana Botín from her time as CEO. Her continued presence on the Santander UK Board as a Banco Santander-nominated Non-Executive Director demonstrates the strength we gain from the strategic and operational resources of our shareholder.
Embedding the behaviours that underpin our culture
One of the most important programmes we initiated was defining the set of behaviours that underpins the culture we want. It has been an extraordinary task that has taken the senior executives across the country to engage directly with almost 2,000 of our people. Together, they have defined and articulated the behaviourstheyhave said embody our values of Simple, Personal and Fair. We are starting to embed these behaviours in how we operate every day and this has been a great example of the collaborative and inclusive leadership for which I commend Nathan.
Embracing digital opportunities
In the last few years, the way our customers use digital technology in their daily lives has changed at a significant pace. More than two thirds of British adults own a smartphone and use it more than any other device to access the internet. Our customers quite rightly expect to be able to deal with their bank through their channel of choice. We have looked ahead to 2025 to begin to put together a strategy, discussed regularly by the Board, which starts with a vision of enabling customers to do their banking in the way that is most convenient for them. Recent examples of our drive to provide innovative and customer-oriented solutions are our new mobile banking app, Spendlytics, our early adoption of Apple Pay and our active involvement in Banco Santander’s InnoVentures Fin-Tech fund.
Board changes
I would like to pay tribute to my predecessor Lord Burns for his strategic leadership and judgement over 14 years that saw the creation of Santander UK and its safe steerage through the financial crisis. I am personally very grateful for the enormous support and advice he has provided me during and since the period of transition. 2015 has been a year of significant transformation of the Board. Three longstanding Non-Executive Directors, José María Carballo, Rosemary Thorne and Roy Brown, retired from the Board each having completed over or close to nine years’ service. In addition, Antonio Escámez and Mike Amato stood down with effect from 31 December 2015. As José María Fuster leaves his Banco Santander executive role, he will no longer be a Banco Santander nominated Non-Executive Director in the UK as of 1 April 2016. I would like to thank the out-going Non-Executive Directors for their commitment and dedication through formative and challenging times.
I would also like to thank the two Executive Directors who left us during 2015, Steve Pateman, responsible for UK Banking and Stephen Jones, Chief Financial Officer, for their significant contribution to our successes.
Four new Independent Non-Executive Directors were appointed: Chris Jones and Genevieve Shore joined the Board in March 2015. Chris is our designated financial expert and Chair of Board Audit Committee. Ed Giera joined the Board in August 2015 and Annemarie Durbin in January 2016. Ed took over as the Chair of Board Risk Committee in October 2015 from Bruce Carnegie-Brown who I am very pleased remains on the Board as a Banco Santander nominated Non-Executive Director, following his appointment as Lead Independent Director of Banco Santander. Scott Wheway, who has been a Non-Executive Director since October 2013, was appointed as our first Senior Independent Director and is acting as Chair of the Remuneration Committee. In addition, Peter Jacksonwill join the Board (subject to regulatory approvals, as needed) from 1 April 2016 as a Banco Santander nominated Non-Executive Director when he replaces José María Fuster in his group executive function.
As a result of these changes, our Board gender diversity increased from 13% in 2014 to 31% in January 2016. The representation of Independent Non-Executive Directors (as described in ‘UK Group Framework’ on page 2)increased from 38% in 2014 to 54% in January 2016.
I believe this Board has the calibre, skills and judgement to meet our stated goal to be the best governed bank in the UK, and to support our business in its ambition to be the best bank for our people, customers, shareholders and communities.
Overview
Annual Report 2015
2014 wasStrategic report
Corporate governance review
“The Board has been guided in its changes by a desire to improve continuously the assurance and oversight that our investors, customers and regulators rely on as well as the challenge, support and guidance management expect of us.”
Shriti Vadera
Chair
Ambition
Our ambition is to be the best governed bank in the UK that supports Santander UK’s aspiration to become the best retail and commercial bank. 2015 has been a year of many important milestones alongsignificant transformation in our strategic transformation journey.governance. We remain committedarticulated more clearly the terms of our relationship with our parent, made a number of changes to buildingthe Board’s composition and improved our way of working as an effective governing body. The Board has been guided in its changes by a bankdesire to improve continuously the assurance and oversight that our investors, customers and regulators rely on as well as the challenge, support and guidance management expect of us.
UK Group Framework
The first element of change has been to define clearly our responsibilities and relationship with Banco Santander, our sole shareholder, through a UK Group Framework agreed by Santander UK and Banco Santander. This provides Banco Santander with the oversight and controls they need while discharging our responsibilities in the UK in line with best practice as an independent Board. Clarity of roles and responsibilities is simplekey to dealensuring proper accountability for decisions and outcomes. The UK Group Framework therefore sets out, amongst other elements:
| - | The principle that, except for periods of transition or handover, at least 50% of the Board should be Independent Non-Executive Directors (INEDs) and the other 50% either Executive Directors or Banco Santander nominated Non-Executive Directors |
| - | The definition of independence(1), in recognition of our ownership, is a Director who has no current or recent relationship with the Banco Santander group and Santander UK other than through the UK Board role |
| - | The manner in which the Chair, Executive Directors, INEDs, and Banco Santander nominated Non-Executive Directors will be appointed |
| - | The iterative process by which strategy and annual budgets will be approved by Banco Santander and the Santander UK Board |
| - | How remuneration of key executives will be determined. |
Board composition and skills
It is our view that 10-14 is the optimal Board size for Santander UK. Our Board is currently 13 compared to 16 during 2014. Seven, or 54%, including the current Chair are Independent compared to 38% during 2014 and four are women, improving our Board gender diversity to 31% women from 13% in 2014.
The year saw a significant change in the membership of the Board, with has personala number of long serving Directors stepping down, as set out in my statement on the previous page. New appointments were based on wide searches conducted by external firms and focused on ensuring the right mix of skills and experience on the Board as a whole and, critically, enabling the diversity of thinking that underpins the Board’s ability to provide effective challenge and oversight. Across the Board table, we have a core of banking skills combined with recent and relevant financial expertise, complemented with financial markets, retail, wealth management, digital, economics and Government experience. The new INEDs have spent significant time on their induction and we have instituted regular workshops for all Directors to deepen and refresh our understanding of its customerskey business issues.
We appointed, for the first time, a Senior Independent Director in Scott Wheway who has served on the Board since October 2013. In light of the number of Board members retiring, the average tenure of Board Directors has gone from five years in 2014 to three years in 2015. We will be ensuring a phased approach to tenure going forward to allow for smooth transitions between Directors.
Board Committees
All Committees are chaired by INEDs (including myself for Board Nomination Committee) and treats everyone fairly. Our business model is well alignedall have a sizeable majority of INEDs. We have constituted the membership of the Committees so that all INEDs are members of the Board Audit, Board Risk and Board Remuneration Committees to these goalsprovide efficient working and effective oversight.
We reviewed all the Terms of Reference of the Board Committees in line with best practice. Most notably we significantly enhanced the Terms of Reference of the Board Remuneration Committee to addressingenable an active and strengthened function, reflecting the opportunities and trendsagreement in the economy. In 2014,UK Group Framework and a changed environment of executive remuneration in the financial services sector. As a result, the Committee was also renamed from Board Remuneration Oversight Committee to Board Remuneration Committee.
Board fees
We reviewed all Board and Board Committee fees with no changes made except to remove the payment of fees for Board Nomination Committee members which is increasingly the market norm; and increase the fees of Board Remuneration Committee members to bring it into line with that of Board Audit and Board Risk Committees, reflecting better its enhanced role and time commitment.
Board fees are set out on page 192 of the Directors’ Remuneration report.
Board effectiveness
Following an external board effectiveness review in 2013, we continuedconducted an internal review to improvehelp us develop our profitabilityplans for continuous improvement for the year ahead. We will conduct a full external review of board effectiveness during 2016.
The Board agreed in June 2015 a set of five strategic priorities focused on: long term strategy; regulatory trust; customer focus; embedding culture; and talent and succession planning. These are not intended to strengthen further our balance sheet, underpinned byset the strategic transformationstrategy or priorities of the business but to act as a guide to help the Board with what we need to keep front of mind in our deliberations and discussions.
How we spent our time(2)
The integrated nature of Board discussion makes it difficult to categorise how we spent our time and the resultant analysis is somewhat artificial. For instance, time spent on governance will include Board private sessions which often cover our people as their primary topic. Similarly, time spent on regulatory matters often covers topics such as certain types of risk, which would be discussed in the last few years.normal course of Board business, even if it were not a regulatory requirement. Nevertheless, it is a good discipline to understand at a general level how Board time is allocated.
TheIn 2015, we also made the analysis of Board
There have been a number of important leadership changes during time more granular to assist our planning. In particular, the year. As Chief Executive Officer (‘CEO’) of Santander UK, Ana Botín led the business until her appointment as Executive Chairman of Banco Santander in September 2014. During her tenure, she did much, alongside the management team, to drive the business transformation and she left a great legacy and a clear strategy which we will continue to implement. We welcomed back Nathan Bostock as Deputy CEO in August 2014 and the following month he succeeded Ana as CEO upon her appointment as Executive Chairman of Banco Santander. An overview of the CEO appointment process is outlined on the next page.
On 1 January 2015, Shriti Vadera joinedtime the Board as Joint Deputy Chairspends on risk and will succeed me as Non-Executive Chaircontrol has been separated out from other governance and audit matters. We also separated out People so that we can measure and improve the time we spend on 30 March 2015. We are proud and excited to welcome Shriti; her banking experience and deep expertise in UK and global economic issues ensure that she is well placed to develop and leadthis topic given the Board. I know she is committed to buildingimportance we place on our record as a scale challenger in UK banking, and our purpose to help people and businesses prosper.
A number of other significant changes also took place. In April 2014, José Maria Nus leftdelivering the Board to take up a senior role at Banco Santander, S.A.. On 12 February 2015, Bruce Carnegie-Brown was appointed First Vice Chairman and lead Independent Director of the Banco Santander group Board, at which point he ceased to be independent in the UK. Bruce will, however, remain on our Board as a Non-Executive Director.
Ourright culture and people
This year, we continued to embed Simple, Personal, Fair: the Santander Way into our culture, setting out how everyone is expected to act and conduct themselves. We also launched a framework called ‘the Compass’, which is outlined on pages 6 and 7. It helps track our progress against our strategic priorities and the aim of meeting the expectations of our main stakeholders.
Empowering our people
95%
Staff took advantage of the wide training resources available, with 95% undertaking some form of learning in 2014.
Supporting our communities
2,700
The Santander UK Foundation provides grants to UK registered charities, and in 2014 over 2,700 charities benefited from this.
behaviours.
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| (2) | See page 168 for a full breakdown of Board activities. |
2 Santander UK plc
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To help embed the Compass, win the support of our staff for this framework and ultimately progress towards our strategic goals, the CEO and executives delivered a series of roadshows across the country. This was supported by communication packs and newsletters that explained our key objectives.
In May 2014, our crowd-sourcing platform, Better Together, was enhanced so that staff could submit ideas or proposals at any time to make Santander UK more simple, personal and fair. Our employees have responded enthusiastically and so far over 650 ideas have been submitted covering all four compass quadrants. Of the ideas analysed, almost 30% have already being taken forward or delivered, with the rest under review for potential future delivery. To stimulate debate on how to help transform our business we also provided regular updates through CEO comms, corporate newsletters and blogs.
We have continued our transformation towards becoming a sustainable customer-focused business. We have built many more loyal and satisfied customer relationships
while at the same time we have created a corporate banking capability on which we can build a broader and stronger business. We can be pleased with the growth we have achieved and with the progress in our transformation, and we have positioned the business for further improvements going forward.
I would like to thank all of my colleagues, who have responded so well to Simple, Personal, Fair: the Santander Way. They have done so much to further transform the business in the past year. Their pride, commitment and loyalty has been admirable and underpins the success of our business.
Looking forward
I remain confident that Santander UK has the right strategy and leadership so that we can continue to deliver value for our people, customers, shareholders and communities. On the following pages, I outline how we use the Compass to measure progress towards our strategic priorities and how our business model creates value for all stakeholders.
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During 2015, the Board spent more than 50% of its time on business and customer priorities. This is an increase on time spent in 2014, reflecting the drive for digital transformation, the persistent low interest rate environment and Santander UK’s role as a scale challenger in a highly competitive market. The Board also spent significant time on capital and regulatory matters (17%) and on risk and control (15%), reflecting the challenges faced in simultaneous implementation on multiple fronts. While some outside the sector may be surprised by the time spent on regulatory matters, I believe that this is appropriate and to be expected in the current environment, particularly considering the preparations that need to be made to deliver on ring-fencing requirements.
Board future priorities
For 2016, we will continue to work to improve our effectiveness as a board in supporting and challenging the business. Our strategic priorities as stated above will not change significantly although more time will need to be given to implementing a Board governance structure for the holding company and Retail and Corporate banks in preparation for our ring-fenced model. We will continue to monitor the risks of an uncertain global macro-environment and multiple transformation projects, support the management in embedding the behaviours chosen by our people as best defining a culture of Simple, Personal and Fair, while ensuring the business remains true to its long-term strategy and goals through short and medium-term pressures.
Principal activities and business review
The Company and its subsidiaries (collectively, Santander UK or the Santander UK group) is a major financial services provider, offering a wide range of personal financial products and services, and is a growing participant in the corporate banking market.
The Company is authorised and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
Economic environment
The UK economy has now grown for 11 consecutive quarters with steady GDP growth expected in 2016. Labour market prospects are also positive, with the unemployment rate likely to fall a little further towards the pre-crisis low of just under 5%.
Inflation is currently around zero and is likely to remain low through 2016. This should provide some support for household real incomes as nominal earnings growth is likely to remain relatively subdued. Low inflation also underpins the financial market expectation that the low interest rate environment will continue, providing a further impetus to household real incomes.
Overall these are positive trends for our business. While low interest rates create a challenging environment for income growth in the short term, they have, together with house price growth and falling unemployment, contributed to lower arrears. In addition, our balance sheet is well positioned to benefit from interest rate rises.
Development and performance of our business in 2015
Information on the development and performance of our business in the year is set out in the ‘Income statement review’ section of the Financial review.
Our position at 31 December 2015
Information on our position at the end of the year is set out in the ‘Balance sheet review’ section of the Financial review.
Outlook
We believe the UK economy will remain supportive of our business in 2016 although our future earnings will be impacted by the bank corporation tax surcharge and increasing pressure on asset margins. We are also mindful that the recent market volatility from wider macro and geopolitical factors could affect the UK banking sector.
In January 2016, we increased the monthly fee on the 1I2I3 Current Account. The impact on customer acquisition, loyalty and satisfaction will become clearer during the year ahead. Nonetheless, we believe this account will continue to offer significant value to our customers.
We will continue to work on our Banking Reform plans. We are confident that our full-service scale challenger position means that we can continue to innovate, satisfy customers’ new expectations, and for us to continue to grow.
Our principal risks and uncertainties
Information on our principal risks and uncertainties is set out in the Risk review by type of risk, with more detail by business segment. Our Risk factors are set out in the ‘Shareholder Information’ section.
When reading the Risk review, the Risk factors and the other sections of the Annual Report, you should refer to the ‘Forward-looking statements’ section in the Shareholder information.
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Annual Report 2015
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Chief ExecutiveKey performance indicators
Officer’s reviewWell executed 2013-2015 strategy
Our 2015 commitments were established at the end of 2012, when we began the transformation from a combination of three legacy building societies into a leading commercial franchise. Although we have successfully delivered on most of our 2015 commitments, we have not completed our journey to become a fully customer focused and better diversified bank.
| 1. Loyal and satisfied retail customers | 2015 target | 31.12.15 | 31.12.14 | 31.12.13 | ||||||||||||
Loyal customers | 4 million | 3.7 million | 3.3 million | 2.7 million | ||||||||||||
1I2I3 World customers | 4 million | 4.6 million | 3.6 million | 2.4 million | ||||||||||||
Customer satisfaction, Financial Research Survey (FRS) | Top 3 | 62.9% | 59.7% | 57.3% | ||||||||||||
(average of 3 highest performing peers) | (62.0%) | (60.4%) | (61.1%) | |||||||||||||
- Our retail franchise has been increasingly recognised for value, innovation, and leading service, and we have seen a strong turnaround in customer satisfaction, with a 9 percentage point improvement from the end of 2012.
- Our Retail Banking business was transformed through the 1I2I3 World proposition with significantly reduced customer attrition and much improved primacy. We have more than tripled our 1I2I3 World customer base from 1.3 million in 2012 to 4.6 million customers today and in the same timeframe also nearly doubled loyal customers.
- Further improvement in customer satisfaction along with the significant potential for deepening loyalty remain at the heart of our plans.
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| 2. ‘Bank of Choice’ for UK companies | 2015 target | 31.12.15 | 31.12.14 | 31.12.13 | ||||||||||||
Corporate loans percentage of total customer loans | 20% | 13% | 13% | 12% | ||||||||||||
- Over the last three years we have built a corporate bank from the bottom up, with significant progress towards a full corporate and commercial proposition, with a unique international proposition. We now have an extensive product suite, client-centric infrastructure, with 726 Relationship Managers and 70 Corporate Business Centres, firmly establishing us as the only full-service scale challenger.
- Since 2012, we have delivered significant lending growth with double-digit compound rate, despite prolonged market contraction. However as previously stated, we did not want to compromise our prudent risk management and return objectives to achieve our 20% target.
- With the investment now complete in Commercial Banking, we will continue to focus on customer satisfaction and loyalty, build productivity across our platform and utilise our expanded footprint.
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| 3. Consistent profitability and a strong balance sheet | 2015 target | 31.12.15 | 31.12.14 | 31.12.13 | ||||||||||||
Return on tangible equity (RoTE)(1) | 13%-15% | 8.2% | 10.4% | 8.6% | ||||||||||||
Cost-to-income ratio (CIR) | <50% | 52% | 54% | 54% | ||||||||||||
CET 1 capital ratio | > 10.5% | 11.6% | 11.9% | 11.6% | ||||||||||||
Loan-to-deposit ratio | < 125% | 120% | 124% | 126% | ||||||||||||
Non-performing loan (NPL) ratio | ratio maintained | 1.54% | 1.80% | 2.04% | ||||||||||||
Dividend payout ratio | 50% | 51% | 44% | 48% | ||||||||||||
| (1) | Non-IFRS measure. See page 332. |
| - | Since the end of 2012, we remained consistently profitable, and maintained a strong capital position and conservative risk profile, delivering on most of our 2015 financial KPIs. Our returns, however, have been negatively impacted by the higher levels of capital we are now required to hold, causing us to miss our 2015 target range of 13%-15%. |
| - | Operational efficiency and cost discipline has enabled the significant investment in business growth to be largely absorbed. However, fee income pressures and higher regulatory compliance and project costs have adversely impacted our CIR. Credit quality improved substantially, supported by both our conservative risk profile and favourable economic environment. |
| - | Consistent and growing profitability coinciding with an improvement in operational efficiency is central to our strategy as we continue to invest and grow. |
Key performance indicators going forward
With effect from 1 January 2016, the directors of the Company’s immediate parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which includes the Santander UK group) on a business division basis. From that date, key performance indicators have no longer been set, monitored or managed at the Santander UK group level. As a result, 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 going forward.
Environmental matters
The Company faces the same environmental risks as its immediate parent company, Santander UK Group Holdings plc, and therefore operates environmental policies in line with the Santander UK Group Holdings plc group. For more on the Santander UK Group Holdings plc group’s environmental risks, policies and impact, including disclosures on CO2 emissions, see the Santander UK Group Holdings plc 2015 Annual Report.
Employee matters
The Company participates in the Santander UK Group Holdings plc group’s policies for employees. For more on the Santander UK Group Holdings plc group’s employee matters, including disclosures on employee participation and diversity, see the Santander UK Group Holdings plc 2015 Annual Report.
By Order of the Board
“It was an honour to be appointed CEO of Santander UK and to lead a great team that is helping people and businesses prosper across the UK.”
Nathan Bostock
Chief Executive OfficerDirector
24 February 20152016
Our strategic priorities
Our 2014 results demonstrate a strong commercial momentum. We attracted 1.2 million customers to our 1I2I3 World, taking the total to 3.6 million. We also increased lending to UK companies by a net £1.8bn, to £23.9bn, while broadening the range of products and services we offer to them.
Economic and market backdrop
The UK economic climate in 2014 was more positive than it has been for several years. Economic growth strengthened to 2.6%, the unemployment rate fell much faster than the Bank of England had expected and inflation ran below the 2% target throughout the year. Falling oil prices meant that inflation hit a 14-year low at the end of 2014.
The strong growth in the housing market eased as the year progressed, reflecting both fundamental consumer factors – affordability and speculation about rising interest rates – and regulatory action. At the same time, annual corporate borrowing growth continued to show negative readings during the year. Nonetheless, lending activity for UK banks as a whole remains subdued relative to the pre-recession pace and we have done well to maintain the growth of our retail and commercial businesses with a conservative risk appetite.
2014 saw the volume of regulatory demands facing the UK banking sector increase. Most significant of these is the UK Government’s proposals for major banks to separate their wholesale and investment banking functions from their retail operations – a material reform of banking structures in the future.
Also in 2014, the Financial Policy Committee finalised the design for the Leverage Ratio framework and the Prudential Regulation Authority introduced annual concurrent stress testing.
Across each of these developments, we have been heavily engaged in the formal policy consultation process and in close dialogue with our regulators. We support proportionate developments in regulation which increase competition in the market and lead to better outcomes for our customers.
Our customer focused strategy, low risk approach and fewer legacy issues leave us well aligned to the reform agenda. We are satisfied we can meet all of the requirements well within the time frames set. At the same time, we have done much to recover customer confidence, improve customer satisfaction and to begin embedding our cultural values.
Maintaining control of both costs and credit quality and building our digital business remain key priorities for us as is further improvements to customer satisfaction. I am confident 4 Santander UK offers a strong challenge and can continue to grow both its retail and corporate banking propositions profitably.plc
Loyal and satisfied retail customers
In 2014, we continued to develop more targeted products and services which, alongside a significant investment in branch refurbishment, has seen us deliver a number of improvements to our digital and physical offering. Digital improvements include better online and mobile banking platforms, a new public website and a new online bank interface.
Current account switchers(1)
One-in-four
We gained more customers than any other UK bank as part of the Current Account Switch Scheme (‘CASS’) launched in September 2013.
Retail customer satisfaction (‘FRS’)(2)
Most improved
We are the most improved bank for customer satisfaction since December 2012.
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Our loyal customer base grew further, supported by the continued success of the 1I2I3 Current Account. Total deposits held by primary banking customers increased 34%, to £70.3bn at 31 December 2014, enabling us to manage a reduction in higher cost, less loyal customer deposits.Annual Report 2015
We made a significant improvement in retail customer satisfaction. The gap between Santander UK and the average of the three highest performing peers reduced to 0.7 percentage points in December 2014 from 3.8 percentage points a year ago(1).
‘Bank of Choice’ for UK companies
We want to increase the business we do with SMEs as well as larger corporates. To this end, we have continued to invest in new regional Corporate Business Centres and to recruit more relationship managers, while expanding the range of products and services we offer. We now have 66 regional Corporate Business Centres (up from 28 in 2011) and 729 relationship managers (up from 457 in 2011) around the UK to support local businesses.
Commercial bank account openings increased by 33% in 2014 with an acceleration in the usage of our corporate banking platform,
completed in 2013. Business customers benefited from additional services, such as a new corporate internet banking capability, a new trade portal, the Santander Passport and other international financial services.
We continued to deliver improvements in overall corporate customer satisfaction in 2014, rising 8 percentage points to 58%(2). This made us the most improved bank in corporate customer satisfaction over the last year.
In addition, our pioneering Breakthrough programme, aimed at helping the UK’s fast growth companies, has now supported 39 SMEs with £38m of growth capital and £88m of other growth-related finance. This helped these companies prosper and the opportunity to create over 1,300 jobs in the UK.
Consistent profitability and a strong balance sheet
Profit before tax increased 26% to £1,399m in 2014, a strong result in an increasingly competitive environment. The improvement in income supported the increase we have seen in the banking net interest margin. This is a useful measure of profitability and rose by 27 basis points in the year to 1.82%(3).
The ratio of non-performing loans to total customer loans of 1.80% at 31 December 2014 continued to improve (declining from 2.04% in 2013), with retail and corporate loans performing well in a benign credit environment.
We reaffirmed our position as one of the strongest and safest banks on the high street. Our capital position has further improved with an increase of both the Common Equity Tier 1 capital ratio to 11.9% and the leverage ratio to 3.8% at 31 December 2014. We also exceeded the Prudential Regulation Authority stress test threshold of 4.5%, with a stressed Common Equity Tier 1 capital ratio of 7.9%, after PRA allowed management actions.
Looking forward
We look forward to continued improvement in the UK economy, which remains supportive of our business, and prompt completion of the banking reforms under way that will help us to fully contribute to the UK’s economic recovery. A summary of our Key Performance Indicators (‘KPIs’) follows on the next page.Financial review
See ‘Glossary’ on page 348 for definition of customer satisfaction measures.
SUMMARISED CONSOLIDATED INCOME STATEMENT
2015 £m | 2014 £m | 2013 £m | ||||||||||
Net interest income | 3,575 | 3,434 | 2,963 | |||||||||
Non-interest income(1) | 998 | 1,036 | 1,066 | |||||||||
Total operating income | 4,573 | 4,470 | 4,029 | |||||||||
Operating expenses before impairment losses, provisions and charges | (2,400) | (2,397) | (2,195) | |||||||||
Impairment losses on loans and advances | (66) | (258) | (475) | |||||||||
Provisions for other liabilities and charges | (762) | (416) | (250) | |||||||||
Total operating impairment losses, provisions and charges | (828) | (674) | (725) | |||||||||
Profit from continuing operations before tax | 1,345 | 1,399 | 1,109 | |||||||||
Tax on profit from continuing operations | (381) | (289) | (211) | |||||||||
Profit from continuing operations after tax | 964 | 1,110 | 898 | |||||||||
Loss from discontinued operations after tax | - | - | (8) | |||||||||
Profit after tax for the year | 964 | 1,110 | 890 | |||||||||
Attributable to: | ||||||||||||
Equity holders of the parent | 939 | 1,110 | 890 | |||||||||
Non-controlling interests | 25 | - | - | |||||||||
| (1) |
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2015 compared to 2014
Profit from continuing operations before tax decreased by £54m to £1,345m in 2015 (2014: £1,399m). By income statement line, the movements were:
| Non-interest income decreased by £38m or 4% to £998m in 2015 (2014: £1,036m), with a reduction in Retail Banking net banking fees. This was partially offset by higher international payment income, banking and lending fees in Commercial Banking, and revenues from derivative and cash sales activities in Global Corporate Banking. | |||
| Operating expenses before impairment losses, provisions and | |||
| – | Impairment losses on loans and advances decreased by £192m to £66m in 2015 (2014: £258m) with retail and corporate loans performing well in a supportive economic environment. Retail Banking benefited from a £125m release in mortgage provisions as a result of the growth in house prices and the continued strong credit quality of the portfolio with lower write-offs and charges. Commercial Banking, Global Corporate Banking and Corporate Centre continued to perform well and also benefited from supportive market conditions, with releases of £65m arising from loan disposals and restructuring. | ||
| – | Provisions for other liabilities and charges increased by £346m or 83% to £762m in 2015 (2014: £416m), predominantly due to PPI provision charges of £450m and £95m, for 2015 and 2014, respectively. Other provisions include costs for non-PPI related conduct remediation and other operational loss provisions, restructuring charges and vacant property costs. When assessing the adequacy of our PPI provision, we have applied the November 2015 FCA consultation paper including the Plevin case to our current assumptions. The additional £450m provision represents our best estimate of the remaining redress and costs. The additional provision is predicated on the probable two year deadline by which customers would need to make their PPI complaints and the anticipated increase in claim volumes as a result of the finite claim period. Monthly utilisation, excluding pro-active customer contact, during 2015 was £10m per month (including related costs), against an average of £9m in 2014. While we saw a reduction in PPI redress in the first half of the year, we have seen an increase in the third quarter aligning with industry trends, with the fourth quarter remaining flat. Other conduct provisions included £43m of additional provisions taken in the third quarter of 2015 relating to wealth and investment products. The additional provisions were taken following the agreement of the revised approach to redressing portfolio and structured investment customers with the FCA. Regulatory costs relating to the FSCS of £76m (2014: £91m) and the UK Bank Levy of £101m (2014: £74m) were charged in the year. See Note 33 to the Consolidated Financial Statements. | ||
| – | The taxation charge increased by 32% to £381m (2014: £289m), primarily due to higher operating income and the disallowance of certain conduct provisions for tax purposes in 2015. This was partially offset by the reduction in the main corporation tax rate in 2015. The effective tax rate for 2015, based on profit on continuing operations before tax was 28.3% (2014: 20.7%). | ||
| (1) | Non-IFRS measure. See page 332. |
6 Santander UK plc
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(1) Non-IFRS measure. See page 355.
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flows
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2014 compared to 2013
Profit from continuing operations before tax increased by £290m to £1,399m in 2014 (2013: £1,109m). By income statement line, the movements were:
|
See ‘Strategic risk’ on page 36.
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These increases were partly offset by reduced mortgage stock margins and new lending margin pressures reflecting the lower customer rates available on incentive products as the current environment for mortgage lending led to increased activity. We have been successful in the targeted retention of customers into new Santander UK mortgages. | ||
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| – | Regulatory costs relating to the FSCS of £91m (2013: £88m) and the UK Bank Levy of £74m (2013: £59m) were charged in the year. Other increases included a charge of £50m relating to the costs for our on-going branch de-duplication programme. There was a further provision of £140m including related costs, for conduct remediation. Of this, £95m related to PPI, which following a recent review of claims activity indicated that claims are now expected to continue for longer than originally anticipated. Monthly PPI redress costs including pro-active customer contact decreased to a monthly average of £11m for the full year, compared to a monthly average of £18m in 2013. The | |
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Critical factors affecting results
The preparation of our Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the balance sheet date and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in ‘Critical Accounting Policies and Areas of Significant Management Judgement’ in Note 1 to the Consolidated Financial Statements.
The rest of this section contains a summary of the results, and commentary thereon, by income statement line item for each segment.
Annual Report 2015
Financial review
Basis of results presentation
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented. The Company’s board of directors (the Board) is the chief operating decision maker for Santander UK. The segmental information below is presented on the basis used by the Board to evaluate performance and allocate resources. The Board reviews discrete financial information for each segment of the business which follows our normal accounting policies and principles, including measures of operating results, assets and liabilities.
As described in Note 2 to the Consolidated Financial Statements, the internal UK transfer pricing mechanism used to calculate the cost and risks associated with funding and liquidity in each business segment was refined in the fourth quarter of 2015 for Retail Banking and Corporate Centre to reflect the current market environment and rates. The segmental analyses for Retail Banking and Corporate Centre have been adjusted to reflect these changes for prior years.
| 2015 | Retail Banking £m | Commercial Banking £m | Global Corporate Banking £m | Corporate Centre £m | Total £m | |||||||||||||||
Net interest income | 2,985 | 460 | 72 | 58 | 3,575 | |||||||||||||||
Non-interest income(1) | 521 | 109 | 307 | 61 | 998 | |||||||||||||||
Total operating income | 3,506 | 569 | 379 | 119 | 4,573 | |||||||||||||||
Operating expenses before impairment losses, provisions and (charges)/releases | (1,783) | (332) | (287) | 2 | (2,400) | |||||||||||||||
Impairment (losses)/releases on loans and advances | (76) | (39) | 13 | 36 | (66) | |||||||||||||||
Provisions for other liabilities and (charges)/releases | (727) | (24) | (14) | 3 | (762) | |||||||||||||||
Total operating impairment losses, provisions and (charges)/releases | (803) | (63) | (1) | 39 | (828) | |||||||||||||||
Profit from continuing operations before tax | 920 | 174 | 91 | 160 | 1,345 | |||||||||||||||
| 2014 | ||||||||||||||||||||
Net interest income | 2,947 | 373 | 75 | 39 | 3,434 | |||||||||||||||
Non-interest income(1) | 560 | 89 | 300 | 87 | 1,036 | |||||||||||||||
Total operating income | 3,507 | 462 | 375 | 126 | 4,470 | |||||||||||||||
Operating expenses before impairment losses, provisions and charges | (1,753) | (297) | (260) | (87) | (2,397) | |||||||||||||||
Impairment (losses)/releases on loans and advances | (187) | (92) | 4 | 17 | (258) | |||||||||||||||
Provisions for other liabilities and charges | (395) | (12) | (9) | - | (416) | |||||||||||||||
Total operating impairment losses, provisions and (charges)/releases | (582) | (104) | (5) | 17 | (674) | |||||||||||||||
Profit from continuing operations before tax | 1,172 | 61 | 110 | 56 | 1,399 | |||||||||||||||
| 2013 | ||||||||||||||||||||
Net interest income/(expense) | 2,663 | 284 | 65 | (49) | 2,963 | |||||||||||||||
Non-interest income(1) | 599 | 91 | 302 | 74 | 1,066 | |||||||||||||||
Total operating income | 3,262 | 375 | 367 | 25 | 4,029 | |||||||||||||||
Operating expenses before impairment losses, provisions and charges | (1,750) | (258) | (186) | (1) | (2,195) | |||||||||||||||
Impairment losses on loans and advances | (359) | (107) | - | (9) | (475) | |||||||||||||||
Provisions for other liabilities and charges | (226) | (17) | (7) | - | (250) | |||||||||||||||
Total operating impairment losses, provisions and charges | (585) | (124) | (7) | (9) | (725) | |||||||||||||||
Profit/(loss) from continuing operations before tax | 927 | (7) | 174 | 15 | 1,109 | |||||||||||||||
Loss from discontinued operations after tax | - | - | - | (8) | (8) | |||||||||||||||
| (1) | Comprised of Net fee and commission income and Net trading and other income. |
8 Santander UK plc
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Retail Banking offers a wide range of products and financial services to individuals and small businesses (with less than two directors, owners or partners), through a network of branches and ATMs, as well as through telephony, digital, mobile and intermediary channels. Retail Banking also includes Santander Consumer Finance, predominantly a vehicle finance business. Its main products are residential mortgage loans, savings and current accounts, credit cards (excluding the co-branded cards business) and personal loans as well as insurance policies.
Summarised income statement
2015 £m | 2014 £m | 2013 £m | ||||||||||
Net interest income | 2,985 | 2,947 | 2,663 | |||||||||
Non-interest income | 521 | 560 | 599 | |||||||||
Total operating income | 3,506 | 3,507 | 3,262 | |||||||||
Operating expenses before impairment losses, provisions and charges | (1,783) | (1,753) | (1,750) | |||||||||
Impairment losses on loans and advances | (76) | (187) | (359) | |||||||||
Provisions for other liabilities and charges | (727) | (395) | (226) | |||||||||
Total operating impairment losses, provisions and charges | (803) | (582) | (585) | |||||||||
Profit from continuing operations before tax | 920 | 1,172 | 927 | |||||||||
2015 compared to 2014
Profit from continuing operations before tax decreased by £252m to £920m in 20142015 (2014: £1,172m). By income statement line, the movements were:
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| – | Non-interest income decreased by £39m to £521m in 2015 (2014: £560m). The decrease reflected lower net banking fee income through overdraft fees. | |
| – | Operating expenses before impairment losses, provisions and charges increased by £30m to £1,783m in 2015 (2014: £1,753m). The increase was driven by continued investment in the growth of the business, digital enhancements and regulatory compliance costs and increased consumer finance costs due to the commencement of the PSA cooperation, partially offset by strong cost management discipline and network efficiencies. Further information about PSA is presented in Note 46. | |
| – | Impairment losses on loans and advances decreased by £111m to £76m in 2015 (2014: £187m). This was largely due to a release of £125m in mortgages driven by the growth in house prices and the continued strong credit quality of the portfolio with lower write-offs and charges. | |
– | Provisions for other liabilities and charges increased by £332m to £727m in 2015 (2014: £395m). This was predominately due to an additional provision of £450m (2014: £95m) taken in 2015 relating to PPI. When assessing the adequacy of our provision, we have applied the November 2015 FCA consultation paper including the Plevin case to our current assumptions. The additional £450m provision represents our best estimate of the remaining redress and costs. The additional provision is predicated on the probable two year deadline by which customers would need to make their PPI complaints and the anticipated increase in claim volumes as a result of the finite claim period. Monthly utilisation, excluding pro-active customer contact, during 2015 was £10m per month (including related costs), against an average of £9m in 2014. While we saw a reduction in PPI redress in the first half of the year, we have seen an increase in the third quarter aligning with industry trends, with the fourth quarter remaining flat. Other conduct provisions included £43m of additional provisions taken in the third quarter of 2015 relating to wealth and investment products. The additional provisions were taken following the agreement of the revised approach to redressing portfolio and structured investment customers with the FCA. Regulatory costs relating to the FSCS of £75m (2014: £89m) and the UK Bank Levy of £66m (2014: £50m) were charged in the year. See Note 33 to the Consolidated Financial Statements. | |
Strategic priorities:
Annual Report 2015
Financial review
2014 compared to 2013
Profit from continuing operationsbefore tax increased by £245m to £1,172m in 2014 (2013: £927m). By income statement line, the movements were:
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| – | Impairment losses on loans and advances decreased by £172m to £187m in 2014 (2013: £359m). This was largely driven by lower mortgage impairment losses as a result of improving economic conditions, rising house prices, prolonged low interest rates and collections efficiencies introduced both in 2013 and 2014. Impairment losses also decreased across the unsecured portfolios due to continued improvements in credit quality, particularly in credit cards and unsecured personal loan portfolios, which benefitted from the good risk profile of our 1I2I3 World customers. The loan loss charge was 0.12% (2013: 0.22%). | |||||
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Balances and ratios
2015 £bn | 2014 £bn | 2013 £bn | ||||||||||
Total assets | 171.9 | 163.4 | 160.5 | |||||||||
Customer loans | 164.8 | 158.5 | 155.6 | |||||||||
- of which mortgages | 152.8 | 150.1 | 148.1 | |||||||||
- of which other unsecured lending - of which consumer finance |
| 5.7 6.3 |
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Risk-weighted assets (RWAs) | 42.4 | 38.4 | 36.3 | |||||||||
Customer deposits | 137.3 | 129.6 | 123.2 | |||||||||
- of which savings | 70.3 | 73.8 | 79.5 | |||||||||
- of which current accounts | 53.2 | 41.1 | 27.9 | |||||||||
NPL ratio(1) (2) | 1.44% | 1.62% | 1.89% | |||||||||
Coverage ratio(1) (3) | 32% | 34% | 31% | |||||||||
Mortgage NPL ratio(1) (4) | 1.47% | 1.64%(6) | 1.88%(6) | |||||||||
Mortgage coverage ratio(1) (5) | 19% | 24% | 21% | |||||||||
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Officer’s review
“Our 2014 results show increased profitability and a further improved balance sheet. They demonstrate the consistency and strength of 10 Santander UK and position us well for future growth”plc
Stephen Jones
Chief Financial Officer
24 February 2015
Our main business segments:
Retail Banking
Commercial Banking
Corporate & Institutional Banking
Profit before tax increased by 26% to £1,399m in 2014 with continued growth in net interest income, well-controlled underlying costs and robust credit quality.
Income statement highlights(A)
Profit after tax for the year increased 25% to £1,110m in 2014, with RoTE(2) improving to 10.4% (2013: 8.6%).
Net interest income was 16% higher in 2014, driven by margin and volume improvements. Management continued to focus on reducing the cost of retail liabilities, replacing maturing tranches of higher cost eSaver savings products in the second half of 2013 and originating new lower cost ISAs in 2014. In addition, there was increased retail and corporate lending.
Non-interest income was 3% lower in 2014, reflecting lower net banking fees in Retail Banking and lower demand for interest rate and foreign exchange risk management products from Commercial Banking customers.
Cost efficiency was maintained in 2014, with our focus on managing business-as-usual administrative expenses to accommodate investment. We continued to invest in the growth of the businesses serving SME and corporate customers, as well as in the refurbishment of the branch network and enhancements to our digital channels.
Impairment losses on loans and advances were 46% lower in 2014. Credit quality in the retail and corporate loan books continued to
be strong, supported by the improving economic environment and reflecting prudent risk management.
Provisions for other liabilities and charges were 66% higher at £416m in 2014. Excluding the specific charges outlined below, provisions for other liabilities and charges decreased 10% to £226m driven by a reduced provision for restructuring, partially offset by an increase in FSCS charges and UK Bank Levy costs.
Specific gains, expenses and charges
As a result of defined benefit pension scheme changes that limit future entitlements and provide for the longer-term sustainability of our staff pension arrangements, a net gain of £218m arose in administrative expenses.
Following the implementation of our new digital platform and the completion of our product simplification programme, we made write-offs for the decommissioning of redundant systems and charged investment costs, totalling £304m. This included software write-offs of £206m charged to depreciation, amortisation and impairment, and investment costs of £98m relating to technology and digital capability build out, which cannot be capitalised and are therefore charged in administrative expenses.
(A) | Income statement highlights(1) | |||||||||
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| 2014 £m | 2013(3) £m | |||||||||
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Net interest income | 3,434 | 2,963 | ||||||||
| Non-interest income | 1,036 | 1,066 | ||||||||
| Operating expenses | (2,397 | ) | (2,195) | |||||||
| Total operating provisions and charges | (674 | ) | (725) | |||||||
| Profit before tax from continuing operations | 1,399 | 1,109 | ||||||||
Profit after tax
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| 1,110
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| 890
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(1) Income statement highlights statistics reflect continuing operations, and therefore exclude the results and loss on sale of discontinued operations. See Note 11 to the Consolidated Financial Statements. |
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(2) Non-IFRS measure. See page 355. |
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(3) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1 to the Consolidated Financial Statements. |
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flows
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Provisions for other liabilities and charges were impacted by £190m. These included a £50m provision relating to the costs for our ongoing branch de-duplication programme. There was also a further provision of £140m, including related costs, for conduct remediation. Of this, £95m related to PPI following a review of recent claims activity, which indicated that claims are now expected to continue for longer than originally anticipated. There was also a net £45m charge relating to existing remediation activities and an additional provision principally for wealth and investment products.
Changes to business segments
The basis of presentation of our 2014 segmental results has been changed, and prior periods restated, to:
|
|
With the allocation of indirect income, expenses and charges from Corporate Centre and with the three distinct main customer business segments at differing stages of commercial maturity, we are now able to identify better the key drivers of our business performance. This enables a more targeted apportionment of capital and other resources in line with the individual strategies and objectives of each business segment.
| ||||
|
|
|
2015 compared to 2014
| Customer loans increased to £164.8bn at 31 December 2015 (2014: £158.5bn). Mortgage customer loans increased by £2.7bn to £152.8bn at 31 December 2015 (2014: £150.1bn) driven by strong approval volumes and mortgage retention, with approximately 80% of maturities retained on new Santander UK mortgages, offsetting the SVR attrition of £8.1bn (2014: £8.4bn). | |||
– | Other unsecured lending balances, which include bank overdrafts, unsecured personal loans, and | ||
| – | Consumer finance balances increased 91% to £6.3bn at 31 December 2015 (2014: £3.3bn), as we continued to strengthen our broad and well-diversified vehicle finance franchise through the PSA cooperation commencement. | ||
| – | RWAs increased by 10.4% to £42.4bn at 31 December 2015 (2014: £38.4bn), largely reflecting the commencement of the PSA cooperation, accounting for £2.5bn of RWAs we consolidated, and growth in mortgages. | ||
| – | Customer deposits increased 6% to £137.3bn at 31 December 2015 (2014: £129.6bn) as current account balances continued to grow strongly, mainly through our 1I2I3 Current Account which was the main driver of a net inflow of £12.1bn in current account balances. This was partially offset by lower demand for savings products with balances reducing £3.5bn. Retail Banking deposit spread improved to 0.63% in 2015 (2014: 0.76%), mainly due to maturing higher cost ISAs and originating new lower cost Fixed Term Bonds. | ||
| – | The NPL ratio decreased to 1.44% at 31 December 2015 (2014: 1.62%), as a result of lower mortgage non-performing loans and overall growth in retail assets. | ||
| – | The mortgage NPL ratio decreased to 1.47% at 31 December 2015 (2014: 1.64%), with impairment releases and the decrease in NPL and coverage ratios reflecting the continued good performance of the portfolio supported by low interest rates, rising house prices and the supportive economic environment. | ||
| – | The mortgage NPL coverage ratio decreased to 19% at 31 December 2015 (2014: 24%). | ||
Chief Financial
Officer’s review
continued
Customer balances(B)
Customer assets of £190.7bn grew by £3.6bn in 2014. Mortgage lending balances increased £2.0bn, maintaining the positive momentum that commenced in the second quarter of 2014. In an increasingly competitive, and still contracting market, corporate lending balances increased £1.8bn. These increases were partially offset by a reduction in the non-core corporate and legacy portfolios.
Customer deposits increased £6.0bn2014 compared to £152.4bn in 2014, as we focused on retaining and originating accounts held by more loyal customers. Current account balances in Retail Banking grew £13.2bn to a total of £41.1bn, partially offset by lower savings balances as we focused on reducing more price-sensitive retail deposits. Commercial Banking deposits grew by £1.5bn, through enhanced capabilities and building upon strong customer relationships.
The loan-to-deposit ratio (‘LDR’) of 124% was 2 percentage points better, reflecting particularly strong growth in retail current account balances. The customer funding gap reduced £2.4bn to £38.3bn at 31 December 2014 (2013: £40.7bn), with lending growth fully funded by deposit growth.
Credit quality(C)
The Retail Banking NPL ratio fell to 1.62% at 31 December 2014, with an improvement across all of the principal portfolios. The mortgage NPL ratio decreased to 1.64%, with a further fall in NPLs and a growing mortgage book. The banking and consumer credit NPL ratio also reduced due to a continuation of the general improvement in the credit quality of the unsecured portfolios.
The Commercial Banking NPL ratio decreased to 3.56% at 31 December 2014, with credit quality remaining strong. We continue to adhere to our prudent lending criteria as we grow lending.
The Corporate & Institutional Banking NPL ratio increased to 1.01% at 31 December 2014, due to a single infrastructure loan which moved into non-performance.
Liquidity and funding(D)
The LCR eligible liquidity pool increased £6.7bn, to £39.5bn at 31 December 2014 with an LCR of 110%. Wholesale funding with a residual maturity of less than one year increased £1.9bn, to £23.1bn, due to the timing of secured funding maturities. LCR eligible liquidity pool assets significantly exceeded wholesale funding of less than one year, with a coverage ratio of 171% at 31 December 2014.
(B) | Customer balances | |||||||||
| ||||||||||
| 31 December | 2014 £bn | 2013 £bn | ||||||||
| ||||||||||
Total customer loans | 190.7 | 187.1 | ||||||||
| Total customer deposits | 152.4 | 146.4 | ||||||||
Loan-to-deposit ratio
| 124% | 126% | ||||||||
| ||||||||||
(C) | Credit quality | |||||||||
| ||||||||||
| 31 December | 2014 % | 2013 % | ||||||||
| ||||||||||
Retail Banking NPL ratio | 1.62 | 1.89 | ||||||||
| Commercial Banking NPL ratio | 3.56 | 3.83 | ||||||||
| Corporate & Institutional Banking NPL ratio | 1.01 | 0.33 | ||||||||
| Corporate Centre NPL ratio | 1.62 | 2.36 | ||||||||
Total NPL ratio
| 1.80 | 2.04 | ||||||||
| ||||||||||
2013
| Total assets increased to £163.4bn at 31 December 2014 (2013: £160.5bn), mainly due to the rise in customer loans described below. | ||
| – | Customer loans increased to £158.5bn at 31 December 2014 (2013: £155.6bn). Mortgage customer loans increased by £2.0bn. Increased gross mortgage lending and much-improved retentions activity resulted in modest expansion of the mortgage book. SVR mortgage loan balances decreased by £8.4bn at 31 December 2014 to £43.9bn. We have been successful in retaining 80% of customers with maturing products on Santander UK mortgages. Interest-only mortgage balances decreased to £56.9bn (2013: £59.0bn) while Buy-to-Let mortgages increased to £3.1bn (2013: £2.2bn). | |
| – | Unsecured consumer and vehicle finance balances, which include bank overdrafts, unsecured personal loans, credit cards and consumer finance, increased 12%. This was in line with the planned rollout of our 1I2I3 World loyalty strategy. | |
| – | RWAs increased by 6% to £38.4bn at 31 December 2014 (2013: £36.3bn), reflecting growth in both mortgages and unsecured lending described above, as well as a small increase in the average mortgage risk weight. | |
| – | Customer deposits increased 5% to £129.6bn at 31 December 2014 (2013: £123.2bn) as current account balances continued to grow strongly. The 1I2I3 Current Account remains central to our retail customer relationship model and was the main driver of a net inflow of £13.2bn in current account balances during the year. This was partially offset by a continued managed reduction in deposits without a broader customer relationship, as we continued to focus on retaining and originating accounts held by more loyal customers. | |
| – | The NPL ratio decreased to 1.62% at 31 December 2014 (2013: 1.89%), with an improvement across all the principal portfolios. There was a particular improvement in unsecured personal lending and 1I2I3 Credit Cards which benefitted from the good risk profile of our 1I2I3 World customers. | |
| – | The mortgage NPL ratio decreased to 1.64% at 31 December 2014 (2013: 1.88%) with a further decrease in NPLs which reflected the good credit quality of the portfolio, and a growing mortgage book, supported by the improving economic environment for UK households, with low interest rates, rising house prices and falling unemployment. We remain aware that these trends may not continue and we take account of this in setting our provisions. | |
| – | The mortgage NPL coverage ratio increased to 24% at 31 December 2014 (2013: 21%). | |
Annual Report 2015
Financial review
Business volumes
2015 £bn | 2014 £bn | 2013 £bn | ||||||||||
Mortgage gross lending | 26.5 | 26.3 | 18.4 | |||||||||
Mortgage net lending | 2.7 | 2.0 | (8.5) | |||||||||
Consumer finance gross lending | 3.0 | 1.6 | 0.2 | |||||||||
Consumer finance net lending | 0.5 | 0.2 | - | |||||||||
Other unsecured net lending | 0.6 | 0.8 | - | |||||||||
2015 compared to 2014
| – | Mortgage gross lending increased slightly to £26.5bn in 2015 (2014: £26.3bn), with applications up 5% over the year, while we helped 30,900 first-time buyers (£4.5bn of gross lending) purchase their new home. Interest-only mortgage balances decreased £1.8bn to £55.1bn (2014: £56.9bn) while Buy-to-let mortgage balances increased by £1.9bn to £5.0bn (2014: £3.1bn). We have continued to build our Buy-to-let book, which represents 3% of our total mortgage book, focusing on non-professional landlords, as this segment is more closely aligned with residential mortgages, and also accounts for the majority of the Buy-to-let market. In 2015, we completed 12,700 Buy-to-let mortgages, representing 10% of new business flow, at an average LTV of 70%. | |
| – | Consumer finance gross lending was £3.0bn (2014: £1.6bn) and net lending was £0.5bn (2014: £0.2bn), driven by increases in new car registrations and an expansion in business streams, including motorbikes and leisure vehicles. | |
| – | Other unsecured net lending decreased by £0.2bn to £0.6bn (2014: £0.8bn), with continued strong growth in 1I2I3 Credit Card balances more than offset by lower unsecured personal loan (UPL) lending in the more competitive market environment. | |
2014 compared to 2013
| – | Mortgage gross lending was strong, increasing to £26.3bn with applications up 26% in 2014, due to improved markets, including gross lending driven by the UK | |
| – | Consumer finance net lending increased to £0.2bn in 2014 (2013: £nil), benefiting from a continued increase in customer confidence. | |
| – | Other unsecured net lending increased by £0.8bn to £0.8bn (2013: £nil), due to increasing UPL new business and a strong uptake of 1I2I3 Credit Cards. | |
| – | The number of 1I2I3 World customers increased by 50% to 3.6 million in 2014 (2013: 2.4 million), with a continued growing transactional primary customer base. In 2014, we further expanded the 1I2I3 World by launching the 1I2I3 Mini, a new current account for children, 166,000 of which have been opened. In addition, we launched the 1I2I3 student products, which include 1I2I3 Student, 1I2I3 Graduate and 1I2I3 Post-Graduate new accounts (excluding automatic conversions), which grew to 107,000 customers. This makes 1I2I3 World accessible to the whole family and is helping us to deepen customer relationships. | |
| The 1I2I3 World is transforming our customer profile, building deeper, more durable and more valuable relationships: 93% of 1I2I3 Current Accounts are a primary banking relationship (compared to 46% for our non-1I2I3 customers); on average 1I2I3 customers hold 2.3 products (compared to 1.5 products for non-1I2I3 customers); and average 1I2I3 account balances are 5 times higher than non-1I2I3 account balances. | ||
| 1I2I3 World continued to expand, with almost 40% of customers holding both the 1I2I3 Current Account and 1I2I3 Credit Card. 1I2I3 World provides a qualitative improvement of customer relationships underpinning our retail interest margins. At 31 December 2014, £70.3bn (54%) of retail deposit balances were derived from 1I2I3 Current Account and other primary bank accounts with associated savings balances held by the same customers; an increase of 34% in the year. | ||
12 Santander UK plc
| Income | Balance | Cash | ||||||||||||
| statement review | sheet review | flows | ||||||||||||
Business development in 2015
| – | 1I2I3 World continues to transform our customer profile, building deeper, more durable and more valuable relationships: 96% of 1I2I3 Current Account holders have a primary banking relationship (vs. 46% for our non-1I2I3 Current Account); on average 1I2I3 World customers hold 2.2 products (vs.1.5); and average liabilities (banking and savings) held by 1I2I3 Current Account holders are 5.3x higher than for non-1I2I3 Current Account customers. | |
| In September 2015, we announced changes to the 1I2I3 Current Account and the 1I2I3 Credit Card. We thought long and hard about these changes, the first since the launch of the products, and have made them in response to continuing challenges in the market and the ‘low for longer’ Base Rate environment. The fee changes are effective from January 2016 with the 1I2I3 World Current Account fee increasing from £2 per month to £5 per month, and the credit card fee from £24 annually to £3 per month, with a cap on cashback of £9 per month.
We are still in the early stages of knowing the real impact of the fee and cashback changes on customer acquisition, loyalty and satisfaction. The core terms of the 1I2I3 World Current Account and the 1I2I3 Credit Card have not changed and both remain leading products which offer significant value. | |
| – | We are growing our Wealth Management business, building on existing foundations, to provide an innovative proposition that improves customer loyalty. During 2015, we established a Financial Planning service and now offer investment advice to customers, on a range of products via our branch network. | |
| – | In September 2015, we withdrew from the UK | |
| – | We continue to invest in digital technology and have made a number of improvements in our digital platforms. In July 2015, we were one of the first UK banks to adopt the Apple Pay service, launched new apps such as ‘Spendlytics’ (which now includes touch ID) and ‘KiTTi’, and an online mortgage decision ‘in principle’ tool. In August 2015, as part of our ‘Go Smart’ programme, we introduced tablets into our branch network to enhance the customer experience. | |
| – | We gained an average of 1,500 new active mobile users every day, and in the fourth quarter of 2015 34% of our mortgages were retained online and 31% of total openings of current accounts and 51% of credit cards were made through digital channels. In 2015 we continued to focus on digital developments, in particular security, new services, increased functionality across platforms and devices, a single consolidated account view for each customer and consolidation of our credentials processes facilitating digital access and re-access for customers. | |
Annual Report 2015
Financial review
Commercial Banking offers a wide range of products and financial services to customers through a network of regional Corporate Business Centres (CBCs) and through telephony and digital channels. The management of our customers is organised according to their annual turnover (£250,000 to £50m for SMEs, and £50m to £500m for mid corporates), enabling us to offer a differentiated service to SMEs and mid corporate customers. Commercial Banking products and services include loans, bank accounts, deposits, treasury services, invoice discounting, cash transmission, trade finance and asset finance. Commercial Banking also includes specialist commercial real estate and Social Housing lending businesses.
Summarised income statement
2015 £m | 2014 £m | 2013 £m | ||||||||||
Net interest income | 460 | 373 | 284 | |||||||||
Non-interest income | 109 | 89 | 91 | |||||||||
Total operating income | 569 | 462 | 375 | |||||||||
Operating expenses before impairment losses, provisions and charges | (332) | (297) | (258) | |||||||||
Impairment losses on loans and advances | (39) | (92) | (107) | |||||||||
Provisions for other liabilities and charges | (24) | (12) | (17) | |||||||||
Total operating impairment losses, provisions and charges | (63) | (104) | (124) | |||||||||
Profit/(loss) from continuing operations before tax | 174 | 61 | (7) | |||||||||
2015 compared to 2014
Profit from continuing operations before tax increased by £113m to £174m in 2015 (2014: £61m). By income statement line, the movements were:
| – | Net interest income increased by £87m to £460m in 2015 (2014: £373m), principally as a result of continued growth in customer loans and an improvement in deposit margins through the enhanced franchise and broader range of services. | |
| – | Non-interest income increased by £20m to £109m in 2015 (2014: £89m) principally due to improved levels of banking fees, international payment income, interest rate management income and lending fees. | |
| – | Operating expenses before impairment losses, provisions and charges increased by £35m to £332m in 2015 (2014: £297m). The increase reflected the investment in growth of the business serving SME and corporate customers and our expanded footprint and network of CBCs. | |
| – | Impairment losses on loans and advances decreased by £53m to £39m in 2015 (2014: £92m) due to an improvement in the credit quality of the loan book and releases driven by loan disposals and restructurings. This was supported by our cautious lending policy and the supportive economic environment. | |
| – |
Regulatory costs relating to the FSCS of £1m (2014: £2m) and the UK Bank Levy of £23m (2014: £17m) were charged in the year. | |
2014 compared to 2013
Profit from continuing operations before tax increased by £68m to £61m in 2014 (2013: loss of £7m). By income statement line, the movements were:
| – | Net interest income increased by £89m to £373m in 2014 (2013: £284m), principally as a result of continued growth in customer loans and an improvement in stock deposit margins. Much of the loan growth was generated through our expanding network of regional CBCs and the increased number of relationship managers. | |
| – | Non-interest income decreased by £2m to £89m in 2014 (2013: £91m) due to a lower demand for interest rate and foreign exchange risk management products in a relatively stable, low interest rate environment. | |
– | Operating expenses before impairment losses, provisions and charges increased by £39m to £297m in 2014 (2013: £258m). The increase reflected continued investment in the growth of the businesses serving SME and corporate customers, including continued investment in systems to improve and support new transactional capabilities for our customers as we continue to open new CBCs and recruited new relationship managers. | |
| – | We are also investing in new platforms specifically for corporate customers and building on the expertise and presence of the wider Banco Santander group. In 2014, we launched a new corporate internet banking capability (Connect), a new trade portal and trade club and the Santander Passport service. Our global alliances with other major international financial institutions, together with the extensive network provided by the Banco Santander group allow us to offer a broad range of international financial services for our customers. | |
| – | Impairment losses on loans and advances decreased by £15m to £92m in 2014 (2013: £107m), with a loan loss rate of 0.52% (2013: 0.66%). Credit quality in the loan books continued to be good, supported by the improving economic environment and our cautious lending policy. | |
| – | Provisions for other liabilities and charges decreased by £5m to £12m in 2014 (2013: £17m). Regulatory costs relating to the FSCS of £2m (2013: £2m) and the UK Bank Levy of £17m (2013: £13m) were charged in the year. There was also a modest conduct provision release of £10m. | |
14 Santander UK plc
| Income | Balance | Cash | ||||||||||||
| statement review | sheet review | flows | ||||||||||||
Balances and ratios
2015 £bn | 2014 £bn | 2013 £bn | ||||||||||
Total assets | 20.9 | 18.7 | 17.0 | |||||||||
Customer loans | 20.9 | 18.7 | 17.0 | |||||||||
- of which SMEs | 13.6 | 12.6 | 11.7 | |||||||||
- of which mid corporate | 7.3 | 6.1 | 5.3 | |||||||||
Risk-weighted assets | 20.9 | 19.9 | 17.0 | |||||||||
Customer deposits | 18.1 | 15.3 | 13.8 | |||||||||
NPL ratio(1) (2) | 2.80% | 3.56% | 3.83% | |||||||||
Coverage ratio(1) (3) | 44% | 46% | 43% | |||||||||
| (1) | The balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account. |
| (2) | NPLs as a percentage of customer loans. |
| (3) | Impairment loss allowance as a percentage of NPLs. |
2015 compared to 2014
| ||
| – | Total assets increased by 12% to £20.9bn at 31 December 2015 (2014: £18.7bn), due to the increase in customer loans described below. | |
| – | Customer loans increased by 12% to £20.9bn at 31 December 2015 (2014: £18.7bn) maintaining a positive momentum despite an increasingly competitive and challenging market. This growth was predominantly driven by our expanded network of regional CBCs and our additional relationship managers, through our investment in growing our SME business. | |
| – | Risk-weighted assets increased by 5% to £20.9bn at 31 December 2015 (2014: £19.9bn) principally in line with customer loan growth. | |
| – | Customer deposits increased by 18% to £18.1bn at 31 December 2015 (2014: £15.3bn). We continued to attract deposit balances through our strong customer relationships, supported by an expanded product range and our enhanced banking platform. | |
| – | The NPL ratio decreased to 2.80% at 31 December 2015 (2014: 3.56%), with credit quality remaining strong. We continue to adhere to our prudent lending criteria as we grow lending. | |
2014 compared to 2013
Officer’s review
| – | Total assets increased by 10% to £18.7bn at 31 December 2014 (2013: £17.0bn) driven by the growth in customer loans described below. | |
| – | Customer loans increased by 10% to £18.7bn at 31 December 2014 (2013: £17.0bn) maintaining a positive momentum despite an increasingly competitive and still contracting market. This growth was predominantly driven by our network of regional CBCs and our additional relationship managers as we continue to invest in growing our SME business. Following a periodic review in the first quarter of 2014, the management of a number of customers was transferred from the SME portfolio to our mid corporate portfolio as the annual turnover of their businesses had increased. Prior years have not been restated. The balance associated with these loans was £327m. Lending to SME customers increased 8% including the transfer (11% excluding the transfer), and with growth of 15% in mid corporates during the year (9% increase excluding transfer). | |
| – | Risk-weighted assets increased by 17% to £19.9bn at 31 December 2014 (2013: £17.0bn) reflecting growth in customer loans as described above and a recalibration of risk models. | |
| – | Customer deposits increased by 11% to £15.3bn at 31 December 2014 (2013: £13.8bn). We continued to attract deposit balances where we have a strong customer relationship and building on our new enhanced corporate cash management and deposit capabilities. Deposit growth fully funded the increase in lending and grew at a faster rate than in recent years. | |
| – | The NPL ratio decreased to 3.56% at 31 December 2014 (2013: 3.83%), largely due to credit quality remaining strong. We continue to adhere to our prudent lending criteria as we further deliver on our business plan to expand lending. | |
Annual Report 2015
Financial review
Business volumes
| 2015 | 2014 | 2013 | ||||||||||
New facilities | £9.0bn | £7.9bn | £6.5bn | |||||||||
Bank account openings (No.) | 7,890 | 7,570 | 5,680 | |||||||||
Online banking (Connect) active users (No.) | 25,120 | 21,810 | 12,380 | |||||||||
2015 compared to 2014
| – | New facilities increased 14% to £9.0bn in 2015 (2014: £7.9bn), with increases across most portfolios as a result of our expanded network of Relationship Managers (RM), more comprehensive suite of products and services and leveraging our expertise in international and structured finance. | |
| – | Bank account openings showed strong growth, increasing 4% to 7,890 in 2015 (2014: 7,570), driven by our expanded footprint. There was a continuation in the pickup of our corporate banking platform Connect, with active users increasing 15% in the last year. | |
2014 compared to 2013
| – | New facilities increased 22% to £7.9bn in 2014 (2013: £6.5bn). We also expanded our coverage in the renewable energy, manufacturing and education sectors in the year. We have in place a new scalable platform and are able to deliver a broader product suite with a wide range of ancillary services and we have extended our footprint and our capacity to service mid corporates and SMEs with the increase in the number of RMs in our growing network of regional CBCs. | |
| – | Bank account openings showed strong growth increasing 33% to 7,570 in 2014 (2013: 5,680) with an acceleration in the usage of our corporate banking platform in 2015, completed in 2013. | |
Business development
| – | We are seeing a strong increase in productivity across our platform, utilising the broader product suite and expanded footprint we have in place, including 726 RMs and 70 CBCs at 31 December 2015. As part of this expanded footprint, new RMs are building business portfolios and will follow our established productivity maturity curve. | |
| – | The new platforms developed specifically for corporates, building on the expertise and presence of the wider Banco Santander group, allow us to offer an enhanced product suite to customers. Through our Connect platform, Trade Portal and Trade Club and the Santander Passport service, and with the extensive network provided by the Banco Santander group, we can offer a broad range of international financial services to our corporate customers. | |
| – |
Also, our Breakthrough Growth Capital team assisted 33 businesses in accessing £157m of facilities, helping to create over 2,000 jobs. Since the inception of the Growth Capital team they have supported 73 companies with £254m of facilities, helping to create almost 4,000 jobs. | |
| – | As part of the Breakthrough programme, this year we have launched a new £100m scheme targeted at SME housebuilders, to provide much needed support to an area of the market where access to finance is a primary constraint. The flexibility of the arrangements offered, in particular bullet repayment facilities, provide additional benefits to housebuilders at the smaller end of the market. | |
| – | In October 2015, the Santander InnoVentures fund invested in the international payments firm Ripple Inc., which provides global financial settlement solutions and develops banking infrastructure technology to reduce settlement costs for banks. | |
16 Santander UK plc
| Income | Balance | Cash | ||||||||||||
| statement review | sheet review | flows | ||||||||||||
Global Corporate Banking (formerly known as Corporate & Institutional Banking) services corporate clients and financial institutions that, because of their size, complexity or sophistication, require specially-tailored services or value-added wholesale products. It offers risk management and other value-added financial services to large corporates with a turnover above £500m per annum, and financial institutions, as well as to the rest of Santander UK’s businesses. The main businesses areas include: working capital management (trade and export finance and cash management), financing (Debt Capital Markets, and corporate and specialised lending) and risk management (foreign exchange, rates and liability management). As part of a rebrand across the Banco Santander group, Corporate & Institutional Banking (the UK segment of Santander Global Banking & Markets) has been branded as Global Corporate Banking, to reflect the build out of a corporate client franchise, and the refinement of the customer centred strategy.
Summarised income statement
2015 £m | 2014 £m | 2013 £m | ||||||||||
Net interest income | 72 | 75 | 65 | |||||||||
Non-interest income | 307 | 300 | 302 | |||||||||
Total operating income | 379 | 375 | 367 | |||||||||
Operating expenses before impairment losses, provisions and charges | (287) | (260) | (186) | |||||||||
Impairment releases on loans and advances | 13 | 4 | - | |||||||||
Provisions for other liabilities and charges | (14) | (9) | (7) | |||||||||
Total operating provisions and charges | (1) | (5) | (7) | |||||||||
Profit from continuing operations before tax | 91 | 110 | 174 | |||||||||
2015 compared to 2014
Profit from continuing operations before tax decreased by £19m to £91m in 2015 (2014: £110m). By income statement line, the movements were:
| – | Net interest income decreased to £72m in 2015 (2014: £75m), with continued ongoing demand for project and acquisition finance transactions, syndicated loans, transactional services and factoring products mostly offset by margin compression. | |
| – | Non-interest income increased by £7m to £307m in 2015 (2014: £300m) principally due to increased revenues from our client derivative and cash sales activities, partially offset by lower demand in some market making activities. | |
| – | Operating expenses before impairment losses, provisions and charges increased by £27m to £287m in 2015 (2014: £260m), mainly reflecting investment in developing transactional, interest rate, foreign exchange and fixed income capabilities, transfer of a number of sales functions to London from Madrid in 2014, as well as the associated costs from related controls, systems and processes. | |
| – | Impairment releases on loans and advances benefitted from releases of £13m in 2015 (2014: £4m), reflecting loan disposals and restructurings. | |
| – | Provisions for other liabilities and charges increased by £5m to £14m in 2015 (2014: £9m) due to an increase in the UK Bank Levy. | |
2014 compared to 2013
Profit from continuing operations before tax decreased by £64m to £110m in 2014 (2013: £174m). By income statement line, the movements were:
| – | Net interest income increased by £10m to £75m in 2014 (2013: £65m), driven by a deposit margin improvement. | |
– | Non-interest income decreased by £2m to £300m in 2014 (2013: £302m), principally due to lower demand for interest rate and foreign exchange risk management products and a risk reduction strategy in a volatile second half of the year. This was partially offset by an increase in the short-term markets activity of clients. | |
| – | We continued to develop the client franchise, in particular the large corporate segment, through a focused client approach, an increase in the number of bankers providing coverage as well as improved product offerings. We continued to refocus the business mix towards core banking activities, such as global transaction banking, debt capital markets, supply chain finance and cash management. We also exited from a number of non-core activities where we lack scale and expertise. | |
| – | Operating expenses before impairment losses, provisions and charges increased by £74m to £260m in 2014 (2013: £186m), mainly reflecting investment in developing transactional, interest rate and fixed income capabilities (including a new cash management platform, specific foreign exchange tools and infrastructure for supply chain finance), as well as the related controls, systems and processes. | |
| – | Impairment losses on loans and advances benefitted from a release of £4m in 2014 (2013: £nil) reflecting improved performance of loans due to general improvements in economic conditions. | |
| – | Provisions for other liabilities and charges remained broadly stable at £9m in 2014 (2013: £7m). | |
Annual Report 2015
Financial review
Balances and ratios
2015 £bn | 2014 £bn | 2013 £bn | ||||||||||
Total assets | 36.6 | 38.3 | 37.9 | |||||||||
Customer loans | 5.5 | 5.2 | 5.1 | |||||||||
Other assets | 31.1 | 33.1 | 32.8 | |||||||||
Risk-weighted assets | 15.4 | 16.8 | 16.5 | |||||||||
Customer deposits | 3.0 | 2.3 | 2.6 | |||||||||
NPL ratio(1) (2) | 0.18% | 1.01% | 0.33% | |||||||||
Coverage ratio(1) (3) | 330% | 138% | 453% | |||||||||
| (1) | The balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account. |
| (2) | NPLs as a percentage of customer loans. |
| (3) | Impairment loss allowance as a percentage of NPLs. The impairment loan loss allowance includes provisions against both NPLs and other loans where a provision is required. As a result the ratio can exceed 100%. |
2015 compared to 2014
| – | Total assets principally consist of derivatives, fixed income products and customer loans. Total assets decreased by 4% to £36.6bn at 31 December 2015 (2014: £38.3bn). | |
| – | Customer loans increased to £5.5bn at 31 December 2015 (2014: £5.2bn), driven by refinancing and origination activities related to syndicated loans, project and acquisition finance and transactional services. We continue to develop our larger corporate and institutional client franchise and our product offering in banking and capital markets. We are focusing the business mix towards core banking activities, such as global transaction banking, Debt Capital Markets solutions, supply chain finance and cash management, and have recently added private placement capabilities in order to offer products our customers require. | |
| – | Other assets principally consist of derivatives and fixed income products. Other assets decreased by £2.0bn to £31.1bn at 31 December 2015 (2014: £33.1bn) due to decrease in holdings of debt securities and the reduction in fair value of interest rate and cross currency derivative assets principally driven by movements in yield curves and foreign exchange rates. This was partially offset by the higher levels of securities purchased under resale agreements. | |
| – | Risk-weighted assets decreased slightly to £15.4bn at 31 December 2015 (2014: £16.8bn) reflecting decreases in market and counterparty credit risk. | |
| – | Customer deposits increased to £3.0bn at 31 December 2015 (2014: £2.3bn) as we continued to attract deposit balances where we have strong customer relationships. | |
| – | The NPL ratio decreased to 0.18% at 31 December 2015 (2014: 1.01%), due to further loan disposals. | |
2014 compared to 2013
| – | Total assets principally consist of derivatives, fixed income products and customer loans. Total assets increased by 1% to £38.3bn at 31 December 2014 (2013: £37.9bn). The increase was driven by the growth in customer loans described below. | |
| – | Customer loans increased to £5.2bn at 31 December 2014 (2013: £5.1bn), despite volatile market conditions and an acceleration of refinancing activities. | |
| – | Other assets principally consist of derivatives and fixed income products. Other assets increased slightly by 1% to £33.1bn at 31 December 2014 (2013: £32.8bn). | |
| – | Risk-weighted assets increased slightly to £16.8bn at 31 December 2014 (2013: £16.5bn) reflecting customer loan growth. | |
| – | Customer deposits decreased to £2.3bn at 31 December 2014 (2013: £2.6bn) as part of a plan to focus more on the management of our relationship driven deposit base. | |
| – | The NPL ratio increased to 1.01% at 31 December 2014 (2013: 0.33%), due to a single infrastructure loan which moved to non-performance. | |
Business development in 2015
| – | We continue to develop our larger corporate and institutional client franchise and our product offering in banking and capital markets. We anticipate a further two years of investment in order to complete a service offering complementary to the one we now have in place for our smaller corporate customers. We are starting to see some revenue momentum from the investment in service capability of our core banking services. | |
| – | We continue to focus the business mix on core banking activities, such as global transaction banking, Debt Capital Markets solutions, supply chain finance, cash management and private placement capabilities in order to offer products our customers require. | |
| – | In conjunction with Commercial Banking, we have developed a digital foreign exchange platform, ‘Santander Flame’. This platform allows our customers to execute and manage their foreign exchange risk in one place with the capability to access the platform on the move. | |
18 Santander UK plc
| Income | Balance | Cash | ||||||||||||
| statement review | sheet review | flows | ||||||||||||
Corporate Centre predominantly consists of the non-core corporate and treasury legacy portfolios. Corporate Centre is also responsible for managing capital and funding, balance sheet composition and structure and strategic liquidity risk. The non-core corporate and treasury legacy portfolios include aviation, shipping, infrastructure, commercial mortgages, Social Housing loans and structured credit assets, all of which are being run-down and/or managed for value. In addition, the co-brand credit cards business sold in 2013 was managed in Corporate Centre prior to its sale and presented as discontinued operations.
Summarised income statement
2015 £m | 2014 £m | 2013 £m | ||||||||||
Net interest income/(expense) | 58 | 39 | (49) | |||||||||
Non-interest income | 61 | 87 | 74 | |||||||||
Total operating income | 119 | 126 | 25 | |||||||||
Operating expenses before impairment losses, provisions and charges | 2 | (87) | (1) | |||||||||
Impairment releases/(losses) on loans and advances | 36 | 17 | (9) | |||||||||
Provisions for other liabilities and charges | 3 | - | - | |||||||||
Total operating impairment losses, provisions and charges | 39 | 17 | (9) | |||||||||
Profit from continuing operations before tax | 160 | 56 | 15 | |||||||||
| ||||||||||||
Loss from discontinued operations after tax | - | - | (8) | |||||||||
2015 compared to 2014
Profit from continuing operations before tax increased by £104m to £160m in 2015 (2014: £56m). By income statement line, the movements were:
| – | Net interest income increased by £19m to £58m in 2015 (2014: £39m), reflecting the differing maturity and behavioural profiles between the commercial balance sheet and the improved funding cost. | |
| – | Non-interest income decreased by £26m to £61m in 2015 (2014: £87m), reflecting reduced mark-to-market movements in debt issuance and other portfolios are effectively hedged in line with Santander UK’s risk management policies. | |
| – | Operating expenses before impairment losses, provisions and charges decreased by £89m to £2m income in 2015 (2014: £87m). In 2014, the benefit was principally due to a net gain of £218m which arose as a result of scheme changes that limit future defined benefit pension entitlements and provide for the longer term sustainability of our staff pension arrangement. This was more than offset by additional project costs of £98m, including those relating to our investment programme, which were borne centrally, and software write-offs of £206m for the decommissioning of redundant systems following the implementation of our new digital platform and the completion of our product simplification programme. | |
| – | Impairment releases on loans and advances increased by £19m to £36m in 2015 (2014: £17m) mainly due to provision releases in the non-core portfolio as a result of asset disposals and repayments. | |
| – | Provisions for other liabilities and charges decreased by £3m to releases of £3m (2014: £nil), as a result of loan disposals during the year. | |
2014 compared to 2013
Profit from continuing operations before tax increased by £41m to £56m in 2014 (2013: £15m). By income statement line, the movements were:
| – | Net interest income increased by £88m to £39m in 2014 (2013: £49m expense) driven by lower funding costs reflecting debt re-pricing and a smaller customer funding gap. | |
| – | Non-interest income increased by £13m to £87m in 2014 (2013: £74m) largely reflecting mark-to-market gains. | |
| – | Operating expenses before impairment losses, provisions and charges increased by £86m to £87m in 2014 (2013: £1m) principally due to pension gains of £218m and write-off and other costs of £304m. The pension gain arose as a result of scheme changes that limit future defined benefit pension entitlements and provide for the longer term sustainability of our staff pension arrangement. Also following the implementation of our new digital platform and the completion of our product simplification programme we made write-offs for the decommissioning of redundant systems and charged investment costs, totalling £304m. This included software write-offs of £206m charged to depreciation, amortisation and impairment, and investment costs of £98m relating to technology and digital capability build out, which cannot be capitalised. The write-offs are expected to reduce our future depreciation charge. | |
| – | Impairment losses on loans and advances decreased by £26m to releases of £17m in 2014 (2013: charge of £9m) due to a £25m release in the non-core portfolio as a result of the improving economic environment and disposal of assets, utilising lower provisions than allocated. | |
Loss from discontinued operations after tax of £nil in 2014 (2013: £8m) reflected the sale of the co-brand credit cards business in 2013.
Annual Report 2015
Financial review
Balances and ratios
2015 £bn | 2014 £bn | 2013 £bn | ||||||||||
Total assets | 52.0 | 55.6 | 55.0 | |||||||||
Customer loans (non-core) | 7.4 | 8.3 | 9.4 | |||||||||
- of which Social housing | 6.2 | 6.7 | 7.1 | |||||||||
Risk-weighted assets | 7.1 | 7.2 | 7.9 | |||||||||
Customer deposits | 3.9 | 5.2 | 6.8 | |||||||||
NPL ratio(1) (2) | 1.18% | 1.62% | 2.36% | |||||||||
Coverage ratio(1) (3) | 117% | 134% | 125% | |||||||||
| (1) | The balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account. |
| (2) | NPLs as a percentage of customer loans. |
| (3) | Impairment loan loss allowance as a percentage of NPLs. The impairment loan loss allowance includes provisions against both NPLs and other loans where a provision is required. As a result the ratio can exceed 100%. |
2015 compared to 2014
| – | Total assets principally consists of liquid assets and non-core customer loans. Total assets decreased by 6% to £52.0bn at 31 December 2015 (2014: £55.6bn). | |
| – | Customer loans decreased by 11% to £7.4bn at 31 December 2015 (2014: £8.3bn) due to the run-down of the non-core corporate and legacy portfolios as we continued to successfully implement our ongoing exit strategy from individual loans and leases. Disposals of assets continued across the portfolios with no significant impact on the income statement. The Social Housing loan portfolio remained relatively stable, reflecting its long-term, low risk nature. | |
| – | Risk-weighted assets decreased by 1.4% to £7.1bn at 31 December 2015 (2014: £7.2bn) with the reduction in non-core customer loan exposures and the continued run-down of the other non-core corporate and legacy portfolios offset by an increased operational risk charge. | |
| – | Customer deposits decreased by 25% to £3.9bn at 31 December 2015 (2014: £5.2bn), as we focused on rebalancing the deposit base tenure. | |
| – | The NPL ratio decreased to 1.18% at 31 December 2015 (2014: 1.62%), due to further loan disposals. | |
2014 compared to 2013
| – | Total assets increased by 1% to £55.6bn at 31 December 2014 (2013: £55.0bn) principally driven by an increase in liquid assets, partially offset by the reduction in non-core customer loans described below. Liquid asset balances continued to be managed against liquidity requirements with a focus on efficiency, given stability in capital markets and as a consequence of historic actions taken to strengthen the balance sheet. | |
| – | Customer loans decreased by 12% to £8.3bn at 31 December 2014 (2013: £9.4bn) due to the rundown of the non-core corporate and legacy portfolios as we continued to successfully implement our on-going exit strategy from individual loans and leases. Disposals of assets continued across the portfolios with no significant impact on the income statement. The Social Housing loan portfolio remained relatively stable, reflecting its long-term, low risk nature. | |
| – | Risk-weighted assets decreased by 9% to £7.2bn at 31 December 2014 (2013: £7.9bn) largely reflecting the reduction in customer loans due to the continued run-down of the non-core corporate and legacy portfolios. | |
| – | Customer deposits decreased by 24% to £5.2bn at 31 December 2014 (2013: £6.8bn), as part of a plan to focus on the management of our more relationship-driven deposit base. | |
| – | The NPL ratio decreased to 1.62% at 31 December 2014 (2013: 2.36%), reflecting the on-going sale and run-off of the non-core corporate and legacy portfolios which continued with no significant impact on the income statement. Social Housing loans comprised 81% of customer loans in Corporate Centre at 31 December 2014, and this portfolio is fully performing. | |
20 Santander UK plc
| Income | Balance sheet | Cash | ||||||||||||
| statement review | review | flows | ||||||||||||
This Financial review describes Santander UK’s significant assets and liabilities and its strategy and reasons for entering into such transactions. In this section, references to UK and non-UK, in the geographical analysis, refer to the location of the office where the transaction is recorded.
SUMMARISED CONSOLIDATED BALANCE SHEET
2015 £m | 2014 £m | |||||||
Assets | ||||||||
Cash and balances at central banks | 16,842 | 22,562 | ||||||
Trading assets | 23,961 | 21,700 | ||||||
Derivative financial instruments | 20,911 | 23,021 | ||||||
Financial assets designated at fair value | 2,398 | 2,881 | ||||||
Loans and advances to banks | 3,548 | 2,057 | ||||||
Loans and advances to customers | 198,045 | 188,691 | ||||||
Loans and receivables securities | 52 | 118 | ||||||
Available for sale securities | 9,012 | 8,944 | ||||||
Macro hedge of interest rate risk | 781 | 963 | ||||||
Interest in other entities | 48 | 38 | ||||||
Property, plant and equipment | 1,597 | 1,624 | ||||||
Retirement benefit assets | 556 | 315 | ||||||
Tax, intangibles and other assets | 3,655 | 3,063 | ||||||
Total assets | 281,406 | 275,977 | ||||||
Liabilities | ||||||||
Deposits by banks | 8,278 | 8,214 | ||||||
Deposits by customers | 164,074 | 153,606 | ||||||
Trading liabilities | 12,722 | 15,333 | ||||||
Derivative financial instruments | 21,508 | 22,732 | ||||||
Financial liabilities designated at fair value | 2,016 | 2,848 | ||||||
Debt securities in issue | 49,615 | 51,790 | ||||||
Subordinated liabilities | 3,885 | 4,002 | ||||||
Macro hedge of interest rate risk | 110 | 139 | ||||||
Retirement benefit obligations | 110 | 199 | ||||||
Tax, other liabilities and provisions | 3,429 | 2,921 | ||||||
Total liabilities | 265,747 | 261,784 | ||||||
Equity | ||||||||
Total shareholders’ equity | 15,524 | 14,193 | ||||||
Non-controlling interests | 135 | - | ||||||
Total equity | 15,659 | 14,193 | ||||||
Total liabilities and equity | 281,406 | 275,977 | ||||||
A more detailed consolidated balance sheet is contained in the Consolidated Financial Statements.
2015 compared to 2014
Assets
Cash and balances at central banks
Cash and balances held at central banks decreased by 25% to £16,842m at 31 December 2015 (2014: £22,562m). The decrease was mainly attributable to a reduction in balances at central banks reflecting lower liquidity requirements.
Trading assets
Trading assets increased by 10% to £23,961m at 31 December 2015 (2014: £21,700m), reflecting changes in the mix of assets held for liquidity purposes, with higher levels of securities purchased under resale agreements and equities partially offset by decreased holdings of debt securities.
Derivative financial instruments - assets
Derivative assets decreased by 9% to £20,911m at 31 December 2015 (2014: £23,021m). The decrease was mainly attributable to decreases in the fair value of interest rate and cross currency derivative assets principally driven by movements in yield curves and foreign exchange rates.
Financial assets designated at fair value through profit and loss
Financial assets designated at fair value through profit and loss decreased by 17% to £2,398m at 31 December 2015 (2014: £2,881m), mainly driven by the decrease in the valuation of assets and maturities within the portfolio. In accordance with Santander UK’s policy, new loans are no longer being designated at fair value.
Loans and advances to banks
Loans and advances to banks increased by 72% to £3,548m at 31 December 2015 (2014: £2,057m). The increase was mainly driven by medium-term securities purchased under resale agreements and an increase in short-term positions with other entities.
Loans and advances to customers
Loans and advances to customers increased by 5% to £198,045m at 31 December 2015 (2014: £188,691m) principally due to the increase in corporate portfolios and mortgages, maintaining a positive momentum despite an increasingly competitive and challenging market. Alongside this, unsecured and vehicle finance increased driven by the commencement of the PSA cooperation.
Annual Report 2015
Financial review
Loans and receivables securities
Loans and receivables securities decreased by 56% to £52m at 31 December 2015 (2014: £118m) principally due to sales and maturities of non-core assets in line with our business strategy to exit this market.
Available for sale securities
Available for sale securities increased by 1% to £9,012m at 31 December 2015 (2014: £8,944m) primarily as part of normal liquid asset portfolio management activity.
Macro hedge of interest rate risk - assets
The macro hedge of interest rate risk decreased by 19% to £781m at 31 December 2015 (2014: £963m), mainly driven by general movements in yield curves.
Property, plant and equipment
Property, plant and equipment decreased by 2% to £1,597m at 31 December 2015 (2014: £1,624m). The decrease was mainly driven by the depreciation and impairment charge for the year offset by additional investments made in respect of the branch network offices refurbishment.
Retirement benefit assets
Retirement benefit assets increased by 77% to £556m at 31 December 2015 (2014: £315m). For those sections of the Santander UK Group Pension Scheme which had surpluses, the key drivers of the increase were actuarial gains arising from experience adjustments and modest improvements in the discount rate and life expectancy together with the acquisition of the PSA retirement benefit scheme.
Tax, intangibles and other assets
Tax, intangibles and other assets increased by 19% to £3,655m at 31 December 2015 (2014: £3,063m). The increase was primarily driven by an increase in trade and other receivables relating to settlement of transactions.
Liabilities
Deposits by banks
Deposits by banks increased by 1% to £8,278m at 31 December 2015 (2014: £8,214m) driven by maturities of medium-term securities sold under agreements to repurchase offset by increase in other assets.
Deposits by customers
Deposits by customers increased by 7% to £164,074m at 31 December 2015 (2014: £153,606m) as we continued to focus on retaining and originating accounts held by more loyal customers. Retail Banking current account balances increased and Commercial Banking deposits increased through enhanced capabilities and building on strong customer relationships.
Trading liabilities
Trading liabilities decreased by 17% to £12,722m at 31 December 2015 (2014: £15,333m) as a result of a decrease in short positions and short-term deposits and collateral held, as part of normal trading activity.
Derivative financial instruments - liabilities
Derivative liabilities decreased by 5% to £21,508m at 31 December 2015 (2014: £22,732m). The decrease was mainly attributable to decreases in the fair value of interest rate and cross currency derivative liabilities mainly driven by movements in yield curves and foreign exchange rates.
Financial liabilities designated at fair value through profit and loss
Financial liabilities designated at fair value through profit and loss decreased by 29% to £2,016m at 31 December 2015 (2014: £2,848m). The decrease principally reflected reduced issuances in the different programmes of financial liabilities designated at fair value through profit or loss.
Debt securities in issue
Debt securities in issue decreased by 4% to £49,615m at 31 December 2015 (2014: £51,790m), driven by maturities in the year, partially offset by additional medium-term funding assumed in connection with the commencement of the PSA cooperation.
Subordinated liabilities
Subordinated liabilities decreased by 3% to £3,885m at 31 December 2015 (2014: £4,002m). The decrease was attributable to a capital management exercise in the year partially offset by new issuances of dated subordinated notes.
Macro hedge of interest rate risk - liabilities
Macro hedge of interest rate risk decreased by 21% to £110m at 31 December 2015 (2014: £139m) driven by movements in yield curves.
Retirement benefit obligations
Retirement benefit obligations decreased by 45% to £110m at 31 December 2015 (2014: £199m). The key drivers of the decrease were actuarial gains arising from experience adjustments and modest improvements in the discount rate and life expectancy.
Tax, other liabilities and provisions
Tax, other liabilities and provisions increased by 17% to £3,429m at 31 December 2015 (2014: £2,921m). The increase was attributable to increase in unsettled financial transactions and increase in tax liabilities reflected other liabilities outstanding to be settled at year end and additional conduct provisions provided in 2015.
Equity
Total shareholders’ equity
Total shareholders’ equity increased by 9% to £15,524m at 31 December 2015 (2014: £14,193m). The increase was principally attributable to the issuance of £750m Perpetual Capital Securities, actuarial gains on defined benefit pension fund and profit for the year, partially offset by dividends approved.
Non-controlling interests
Non-controlling interests increased to £135m at 31 December 2015 (2014: £nil) due to the acquisition of 50% of the ordinary shares of PSA Finance UK Limited. For further details, see Notes 37 and 46 to the Consolidated Financial Statements.
22 Santander UK plc
| Income | Balance sheet | Cash | ||||||||||||
| statement review | review | flows | ||||||||||||
RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET
In the rest of the Balance sheet review, our assets and liabilities are summarised by their nature, rather than by how they are classified in the Consolidated Balance Sheet. These two presentations can be reconciled as follows:
| 2015 | Financial review section | |||||||||||||||||||||||||||||||||
| Balance sheet line item | Note | Securities | Loans and advances to banks | Loans and advances to customers | Derivatives | Tangible fixed assets | Retirement benefit assets | Other | Balance sheet total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||
Cash and balances at central banks | - | - | - | - | - | - | 16,842 | 16,842 | ||||||||||||||||||||||||||
Trading assets | 12 | 12,568 | 5,433 | 5,960 | - | - | - | - | 23,961 | |||||||||||||||||||||||||
Derivative financial instruments | 13 | - | - | - | 20,911 | - | - | - | 20,911 | |||||||||||||||||||||||||
Financial assets designated at fair value | 14 | 507 | - | 1,891 | - | - | - | - | 2,398 | |||||||||||||||||||||||||
Loans and advances to banks | 15 | - | 3,548 | - | - | - | - | - | 3,548 | |||||||||||||||||||||||||
Loans and advances to customers | 16 | - | - | 198,045 | - | - | - | - | 198,045 | |||||||||||||||||||||||||
Loans and receivables securities | 19 | - | 1 | 51 | - | - | - | - | 52 | |||||||||||||||||||||||||
Available for sale securities | 20 | 9,012 | - | - | - | - | - | - | 9,012 | |||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | - | 781 | 781 | ||||||||||||||||||||||||||
Interests in other entities | 21 | - | - | - | - | - | - | 48 | 48 | |||||||||||||||||||||||||
Property, plant and equipment | 23 | - | - | - | - | 1,597 | - | - | 1,597 | |||||||||||||||||||||||||
Retirement benefit assets | 34 | - | - | - | - | - | 556 | - | 556 | |||||||||||||||||||||||||
Tax, intangibles and other assets | - | - | - | - | - | - | 3,655 | 3,655 | ||||||||||||||||||||||||||
| 22,087 | 8,982 | 205,947 | 20,911 | 1,597 | 556 | 21,326 | 281,406 | |||||||||||||||||||||||||||
Deposits by banks | Deposits by customers | Debt securities in issue | Derivatives | Retirement benefit obligations | Other | Balance sheet total | ||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||
Deposits by banks | 26 | 8,278 | - | - | - | - | - | 8,278 | ||||||||||||||||||||||||||
Deposits by customers | 27 | - | 164,074 | - | - | - | - | 164,074 | ||||||||||||||||||||||||||
Trading liabilities | 28 | 2,777 | 7,151 | 2,794 | - | - | - | 12,722 | ||||||||||||||||||||||||||
Derivative financial instruments | 13 | - | - | - | 21,508 | - | - | 21,508 | ||||||||||||||||||||||||||
Financial liabilities designated at fair value | 29 | - | - | 2,016 | - | - | - | 2,016 | ||||||||||||||||||||||||||
Debt securities in issue | 30 | - | - | 49,615 | - | - | - | 49,615 | ||||||||||||||||||||||||||
Subordinated liabilities | 31 | - | - | 3,885 | - | - | - | 3,885 | ||||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | 110 | 110 | |||||||||||||||||||||||||||
Retirement benefit obligations | 34 | - | - | - | - | 110 | - | 110 | ||||||||||||||||||||||||||
Tax, other liabilities and provisions | - | - | - | - | - | 3,429 | 3,429 | |||||||||||||||||||||||||||
| 11,055 | 171,225 | 58,310 | 21,508 | 110 | 3,539 | 265,747 | ||||||||||||||||||||||||||||
| 2014 | Financial review section | |||||||||||||||||||||||||||||||||
| Balance sheet line item | Note | Securities | Loans and advances to banks | Loans and advances to customers | Derivatives | Tangible assets | Retirement benefit assets | Other | Balance sheet total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||
Cash and balances at central banks | - | - | - | - | - | - | 22,562 | 22,562 | ||||||||||||||||||||||||||
Trading assets | 12 | 12,757 | 5,936 | 3,007 | - | - | - | - | 21,700 | |||||||||||||||||||||||||
Derivative financial instruments | 13 | - | - | - | 23,021 | - | - | - | 23,021 | |||||||||||||||||||||||||
Financial assets designated at fair value | 14 | 622 | - | 2,259 | - | - | - | - | 2,881 | |||||||||||||||||||||||||
Loans and advances to banks | 15 | - | 2,057 | - | - | - | - | - | 2,057 | |||||||||||||||||||||||||
Loans and advances to customers | 16 | - | - | 188,691 | - | - | - | - | 188,691 | |||||||||||||||||||||||||
Loans and receivables securities | 19 | - | 9 | 109 | - | - | - | - | 118 | |||||||||||||||||||||||||
Available for sale securities | 20 | 8,944 | - | - | - | - | - | - | 8,944 | |||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | - | 963 | 963 | ||||||||||||||||||||||||||
Interests in other entities | 21 | - | - | - | - | - | - | 38 | 38 | |||||||||||||||||||||||||
Property, plant and equipment | 23 | - | - | - | - | 1,624 | - | - | 1,624 | |||||||||||||||||||||||||
Retirement benefit assets | 34 | - | - | - | - | - | 315 | - | 315 | |||||||||||||||||||||||||
Tax, intangibles and other assets | - | - | - | - | - | - | 3,063 | 3,063 | ||||||||||||||||||||||||||
| 22,323 | 8,002 | 194,066 | 23,021 | 1,624 | 315 | 26,626 | 275,977 | |||||||||||||||||||||||||||
Deposits by banks | Deposits by customers | Debt securities in issue | Derivatives | Retirement benefit obligations | Other | Balance sheet total | ||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||
Deposits by banks | 26 | 8,214 | - | - | - | - | - | 8,214 | ||||||||||||||||||||||||||
Deposits by customers | 27 | - | 153,606 | - | - | - | - | 153,606 | ||||||||||||||||||||||||||
Trading liabilities | 28 | 7,223 | 4,899 | 3,211 | - | - | - | 15,333 | ||||||||||||||||||||||||||
Derivative financial instruments | 13 | - | - | - | 22,732 | - | - | 22,732 | ||||||||||||||||||||||||||
Financial liabilities designated at fair value | 29 | - | - | 2,848 | - | - | - | 2,848 | ||||||||||||||||||||||||||
Debt securities in issue | 30 | - | - | 51,790 | - | - | - | 51,790 | ||||||||||||||||||||||||||
Subordinated liabilities | 31 | - | - | 4,002 | - | - | - | 4,002 | ||||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | 139 | 139 | |||||||||||||||||||||||||||
Retirement benefit obligations | 34 | - | - | - | - | 199 | - | 199 | ||||||||||||||||||||||||||
Tax, other liabilities and provisions | - | - | - | - | - | 2,921 | 2,921 | |||||||||||||||||||||||||||
| 15,437 | 158,505 | 61,851 | 22,732 | 199 | 3,060 | 261,784 | ||||||||||||||||||||||||||||
Annual Report 2015
Financial review
Securities are only a small proportion of our total assets. We hold securities mainly in our trading portfolio or classified as available-for-sale.
Analysis by type of issuer
The following table sets out our securities at 31 December 2015, 2014 and 2013. For more information, see the Notes to the Consolidated Financial Statements.
2015 £m | 2014 £m | 2013 £m | ||||||||||
Trading assets | ||||||||||||
Debt securities: | ||||||||||||
UK Government | 548 | 905 | 989 | |||||||||
US Treasury and other US Government agencies and corporations | 119 | 309 | 399 | |||||||||
Other OECD governments | 3,827 | 5,788 | 5,243 | |||||||||
Other issuers: | ||||||||||||
- Fixed and floating rate notes - Government guaranteed | 968 | 979 | 1,081 | |||||||||
- Fixed and floating rate notes – Other | - | - | 147 | |||||||||
Ordinary shares and similar securities | 7,106 | 4,776 | 705 | |||||||||
| 12,568 | 12,757 | 8,564 | ||||||||||
Available for sale securities | ||||||||||||
Debt securities: | ||||||||||||
UK Government | 2,964 | 4,163 | 2,912 | |||||||||
US Treasury and other US Government agencies and corporations | 192 | - | - | |||||||||
Other OECD governments | 224 | - | - | |||||||||
Bank and building society: | ||||||||||||
- Certificates of deposit and bonds | 4,271 | 4,177 | 2,023 | |||||||||
Other issuers | 1,232 | 579 | 46 | |||||||||
Ordinary shares and similar securities | 129 | 25 | 24 | |||||||||
| 9,012 | 8,944 | 5,005 | ||||||||||
Financial assets designated at fair value through profit and loss | ||||||||||||
Debt securities: | ||||||||||||
Other issuers: | ||||||||||||
- Mortgage-backed securities | 209 | 226 | 229 | |||||||||
- Other asset-backed securities | 62 | 134 | 87 | |||||||||
- Other securities | 236 | 262 | 212 | |||||||||
| 507 | 622 | 528 | ||||||||||
| 22,087 | 22,323 | 14,097 | ||||||||||
Debt securities
UK Government
UK Government securities are Treasury Bills and UK Government guaranteed issues by other UK banks. We hold these securities for trading and liquidity purposes. For more information, see ‘Country Risk Exposure’ in the Risk review.
US Treasury and other US Government agencies and corporations
US Treasury and other US Government agencies’ and corporations’ securities are US Treasury Bills, including cash management bills. We hold these securities for trading and liquidity purposes. For more information, see ‘Country Risk Exposure’ in the Risk review.
Other OECD governments
Other OECD government securities are issues by OECD governments, other than the US and UK Governments, principally Japan and Italy (2014: principally Japan, Italy and Switzerland). We hold these securities for trading and liquidity management purposes. For more information, see ‘Country Risk Exposure’ in the Risk review.
Bank and building society
Certificates of deposit and bonds
Bank bonds are fixed securities with short to medium-term maturities issued by banks. We hold these securities for liquidity purposes.
Other issuers
Fixed and floating rate notes
Fixed and floating rate notes have regular interest rate profiles and are either managed within the overall position for the relevant book or are hedged into one of the main currencies. We hold these securities for trading and yield purposes. For more information on Government-guaranteed fixed and floating rate notes, see ‘Country Risk Exposure’ in the Risk review.
Mortgage-backed securities
This category mainly comprises UK residential mortgage-backed securities. These securities are of good quality and contain no sub-prime element. We hold these securities as part of the FMIR portfolio. See Note 14 to the Consolidated Financial Statements.
Other asset-backed securities
This category mainly comprises floating-rate asset-backed securities. See Note 14 to the Consolidated Financial Statements.
Other securities
This category mainly comprises reversionary UK property securities. See Note 14 to the Consolidated Financial Statements.
24 Santander UK plc
| Income | Balance sheet | Cash | ||||||||||||
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Ordinary shares and similar securities
This category mainly comprises equity securities listed in the UK and other countries held for trading purposes. See Note 12 to the Consolidated Financial Statements.
Contractual maturities
For contractual maturities for trading assets, available-for-sale debt securities and financial assets designated as fair value through profit or loss, see Notes 20 and 43 to the Consolidated Financial Statements.
Significant exposures
The following table shows the book value (which equals market value) of securities of individual counterparties where the total amount of those securities exceeded 10% of our shareholders’ funds at 31 December 2015 as set out in the Consolidated Balance Sheet. The table also shows where we classify the securities in the Consolidated Balance Sheet.
| Trading assets £m | Available-for-sale £m | Total £m | ||||||||||
UK Government and UK Government guaranteed | 966 | 2,964 | 3,930 | |||||||||
Japanese Government | 2,679 | - | 2,679 | |||||||||
Loans and advances to banks include loans to banks and building societies and balances with central banks (excluding central bank balances which can be withdrawn on demand).
Geographical analysis
The geographical analysis below is based on the location of the office of lending, rather than the domicile of the borrower. For geographical analysis based on the domicile of the borrower, see ‘Country Risk Exposure’ in the Risk review, including details of balances with other Banco Santander group companies.
The balances include loans and advances to banks classified in the balance sheet as trading assets, financial assets designated at fair value, or loans and receivables securities.
2015 £m | 2014 £m | 2013 £m | 2012 £m | 2011 £m | ||||||||||||||||
UK | 4,982 | 5,181 | 8,966 | 11,763 | 10,727 | |||||||||||||||
Non-UK | 4,000 | 2,821 | 2,953 | 1,153 | 861 | |||||||||||||||
| 8,982 | 8,002 | 11,919 | 12,916 | 11,588 | ||||||||||||||||
Maturity analysis
The following table shows loans and advances to banks by maturity at 31 December 2015.
On demand £m | In not more than £m | In more than three £m | In more than one £m | In more than five £m | In more than ten years £m | Total £m | ||||||||||||||||||||||
UK | 2,995 | 171 | 33 | 1,284 | 499 | - | 4,982 | |||||||||||||||||||||
Non-UK | 3,009 | 700 | 291 | - | - | - | 4,000 | |||||||||||||||||||||
| 6,004 | 871 | 324 | 1,284 | 499 | - | 8,982 | ||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Fixed interest rate | 2,381 | 717 | 164 | - | 77 | - | 3,339 | |||||||||||||||||||||
– Variable interest rate | 3,209 | 154 | 160 | 1,284 | 422 | - | 5,229 | |||||||||||||||||||||
– Non interest-bearing | 414 | - | - | - | - | - | 414 | |||||||||||||||||||||
| 6,004 | 871 | 324 | 1,284 | 499 | - | 8,982 | ||||||||||||||||||||||
Annual Report 2015
Financial review
LOANS AND ADVANCES TO CUSTOMERS
We provide lending facilities primarily to personal customers in the form of mortgages secured on residential properties and lending facilities to corporate customers. Purchase and resale agreements represent business with professional non-bank customers by the Short-Term-Markets business.
Geographical analysis
The geographical analysis below is based on the location of the office of lending. For geographical analysis based on the domicile of the borrower rather than the office of lending, see ‘Country risk exposure’ in the Risk review, including details of balances with other Banco Santander group companies.
The balances are stated before deducting impairment loss allowances and include loans and advances to customers classified in the balance sheet as trading assets, financial assets designated at fair value, or loans and receivables securities.
2015 £m | 2014 £m | 2013 £m | 2012 £m | 2011 £m | ||||||||||||||||
UK | ||||||||||||||||||||
Advances secured on residential property | 153,259 | 150,436 | 149,017 | 157,304 | 166,841 | |||||||||||||||
Corporate loans | 33,464 | 32,262 | 29,799 | 29,571 | 29,988 | |||||||||||||||
Finance leases | 6,306 | 2,639 | 3,158 | 3,061 | 2,944 | |||||||||||||||
Other secured advances | 13 | 15 | - | - | - | |||||||||||||||
Other unsecured advances | 7,916 | 7,043 | 5,732 | 6,733 | 7,545 | |||||||||||||||
Purchase and resale agreements | 1,516 | 1,237 | 4,210 | 2,512 | 6,150 | |||||||||||||||
Loans and receivables securities | 51 | 42 | 855 | 769 | 814 | |||||||||||||||
Amounts due from fellow subsidiaries, associates and joint ventures | 1,369 | 797 | 813 | 347 | 32 | |||||||||||||||
Total UK | 203,894 | 194,471 | 193,584 | 200,297 | 214,314 | |||||||||||||||
Non-UK | ||||||||||||||||||||
Advances secured on residential property | 2 | 4 | 5 | 6 | 6 | |||||||||||||||
Corporate loans | 337 | - | - | - | 1 | |||||||||||||||
Other unsecured advances | 35 | - | 31 | 25 | - | |||||||||||||||
Purchase and resale agreements | 2,836 | 963 | - | 4,950 | 188 | |||||||||||||||
Loans and receivables securities | - | 67 | - | - | - | |||||||||||||||
Total non-UK | 3,210 | 1,034 | 36 | 4,981 | 195 | |||||||||||||||
Total | 207,104 | 195,505 | 193,620 | 205,278 | 214,509 | |||||||||||||||
Less: impairment loss allowances | (1,157) | (1,439) | (1,555) | (1,802) | (1,563) | |||||||||||||||
Total, net of impairment loss allowances | 205,947 | 194,066 | 192,065 | 203,476 | 212,946 | |||||||||||||||
For analysis of the impairment loss allowance and loans and receivables securities, see Notes 16 and 19 to the Consolidated Financial Statements.
No single concentration of loans and advances above, except for advances secured on residential properties and corporate loans, is more than 10% of total loans and advances, and no individual country, except the UK, is more than 5% of total loans and advances.
26 Santander UK plc
| Income | Balance sheet | Cash | ||||||||||||
| statement review | review | flows | ||||||||||||
Maturity analysis
The following table shows loans and advances to customers by maturity at 31 December 2015. Overdrafts are included as ‘on-demand’. Loans and advances are included at their contractual maturity; no account is taken of a customer’s ability to repay early where it exists.
On £m | In not more £m | In more than £m | In more than one £m | In more than five £m | In more than £m | Total £m | ||||||||||||||||||||||
UK | ||||||||||||||||||||||||||||
Advances secured on residential property | 2 | 550 | 816 | 6,635 | 17,168 | 128,088 | 153,259 | |||||||||||||||||||||
Corporate loans | 641 | 1,268 | 2,738 | 15,191 | 3,947 | 9,679 | 33,464 | |||||||||||||||||||||
Finance leases | 30 | 1,329 | 1,578 | 3,192 | 80 | 97 | 6,306 | |||||||||||||||||||||
Other secured advances | - | - | - | 2 | 11 | - | 13 | |||||||||||||||||||||
Other unsecured advances | 1,509 | 278 | 555 | 3,531 | 908 | 1,135 | 7,916 | |||||||||||||||||||||
Purchase and resale agreements | - | 1,070 | 446 | - | - | - | 1,516 | |||||||||||||||||||||
Loans and receivables securities | - | - | 2 | - | 9 | 40 | 51 | |||||||||||||||||||||
Amounts due from fellow subsidiaries, associates and joint ventures | 5 | 1,349 | - | - | 15 | - | 1,369 | |||||||||||||||||||||
Total UK | 2,187 | 5,844 | 6,135 | 28,551 | 22,138 | 139,039 | 203,894 | |||||||||||||||||||||
Non-UK | ||||||||||||||||||||||||||||
Advances secured on residential property | - | - | - | - | 1 | 1 | 2 | |||||||||||||||||||||
Corporate loans | - | - | - | 337 | - | - | 337 | |||||||||||||||||||||
Other unsecured advances | 35 | - | - | - | - | - | 35 | |||||||||||||||||||||
Purchase and resale agreements | - | 2,836 | - | - | - | - | 2,836 | |||||||||||||||||||||
Total non-UK | 35 | 2,836 | - | 337 | 1 | 1 | 3,210 | |||||||||||||||||||||
Total | 2,222 | 8,680 | 6,135 | 28,888 | 22,139 | 139,040 | 207,104 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Fixed interest rate | 64 | 5,892 | 2,387 | 9,375 | 7,942 | 84,686 | 110,346 | |||||||||||||||||||||
– Variable interest rate | 2,158 | 2,788 | 3,748 | 19,513 | 14,197 | 54,354 | 96,758 | |||||||||||||||||||||
Total | 2,222 | 8,680 | 6,135 | 28,888 | 22,139 | 139,040 | 207,104 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Interest-only advances secured on residential property | - | 595 | 777 | 5,118 | 9,773 | 38,788 | 55,051 | |||||||||||||||||||||
Our policy is to hedge fixed-rate loans and advances to customers using derivatives, or by matching with other on-balance sheet interest rate exposures.
We manage our balance sheet on a behavioural basis, rather than on the basis of contractual maturity. Many loans are repaid before their legal maturity, particularly advances secured on residential property.
Impairment loss allowances
See Note 1 to the Consolidated Financial Statements for our impairment loss allowances policy. See Note 16 to the Consolidated Financial Statements for more on our impairment loss allowances on loans and advances to customers.
DERIVATIVE ASSETS AND LIABILITIES
2015 £m | 2014 £m | 2013 £m | ||||||||||
Assets | ||||||||||||
- held for trading | 18,509 | 20,235 | 17,433 | |||||||||
- held for hedging | 2,402 | 2,786 | 2,616 | |||||||||
| 20,911 | 23,021 | 20,049 | ||||||||||
Liabilities | ||||||||||||
- held for trading | 18,905 | 20,462 | 17,297 | |||||||||
- held for hedging | 2,603 | 2,270 | 1,566 | |||||||||
| 21,508 | 22,732 | 18,863 | ||||||||||
We hold derivatives for trading or for risk management purposes. All derivatives are classified as held at fair value through profit or loss. For accounting purposes, we choose to designate some derivatives in a hedging relationship if they meet specific criteria. Our main hedging derivatives are interest rate and cross-currency swaps, which we use to hedge fixed-rate lending and structured savings products and medium-term note issuances, capital issuances and other capital markets funding. For more on our derivative activities, see Note 13 to the Consolidated Financial Statements.
Commercial Banking and Global Corporate Banking deal with commercial customers who wish to enter into derivative contracts. Any market risk arising from such transactions is hedged by Global Corporate Banking. Global Corporate Banking is responsible for implementing our derivative hedging with the external market together with its own trading activities. For more on market risk, see the Risk review.
Annual Report 2015
Financial review
2015 £m | 2014 £m | 2013 £m | ||||||||||
Property, plant and equipment | 1,597 | 1,624 | 1,521 | |||||||||
Capital expenditure incurred during the year | 271 | 370 | 258 | |||||||||
For details of capital expenditure contracted but not provided for, see Note 23 to the Consolidated Financial Statements. We had 1,173 property interests at 31 December 2015 (2014: 1,291). They consisted of 299 freeholds (2014: 340) and 875 operating lease interests (2014: 952), and occupied a total floor space of 468,834 square metres (2014: 519,193 square metres).
The number of property interests is more than the number of individual properties as we have more than one interest in some properties. Most of our property interests are retail branches. We did not occupy 127 of our properties (2014: 118) at 31 December 2015. 897 (2014: 967) of our individual properties are in the UK and none in Europe and the US (2014: none). There are no material environmental issues associated with the use of our properties.
At 31 December 2015, we had 16 principal sites including our headquarters (2014: 14). We use them for our significant business operations, including Technology and Operations; People and Talent; Retail Banking; Commercial Banking; Global Corporate Banking; Telephone Sales and Servicing; Complaints handling; Debt management; Finance; Compliance; Marketing; and IT operations including Data Centres.
We believe our existing properties (including properties we lease) and those under construction are adequate and suitable for our current business and our future business needs. All our properties are adequately maintained.
2015 £m | 2014 £m | 2013 £m | ||||||||||
Retirement benefit assets | 556 | 315 | 118 | |||||||||
Retirement benefit obligations | (110) | (199) | (672) | |||||||||
We operate defined contribution and defined benefit pension schemes, and post-retirement medical benefit plans. For more, see Note 34 to the Consolidated Financial Statements.
The balances below include deposits by banks classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
2015 £m | 2014 £m | 2013 £m | ||||||||||
Year-end balance(1) | 11,055 | 15,437 | 19,987 | |||||||||
Average balance(2) | 8,680 | 16,018 | 27,395 | |||||||||
Average interest rate(2) | 0.99% | 1.01% | 1.53% | |||||||||
(1) The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £326m (2014: £308m, 2013: £614m). (2) Calculated using monthly data.
At 31 December 2015, deposits by foreign banks were £6,629m (2014: £3,840m, 2013: £14,186m). The following table shows the average balances of deposits by banks by geography.
|
| |||||||||||
| Average: year ended 31 December | ||||||||||||
2015 £m | 2014 £m | 2013 £m | ||||||||||
UK | 8,539 | 16,016 | 27,307 | |||||||||
Non-UK | 141 | 2 | 88 | |||||||||
| 8,680 | 16,018 | 27,395 | ||||||||||
28 Santander UK plc
| Income | Balance sheet | Cash | ||||||||||||
| statement review | review | flows | ||||||||||||
The balances below include deposits by customers classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
2015 £m | 2014 £m | 2013 £m | ||||||||||
Year-end balance | 171,225 | 158,505 | 154,236 | |||||||||
Average balance(1) | 160,670 | 155,001 | 154,881 | |||||||||
Average interest rate(1) | 1.24% | 1.34% | 1.74% | |||||||||
| (1) | Calculated using monthly data. |
The following tables show the average balances of deposits by geography and customer type.
2015 £m | 2014 £m | 2013 £m | ||||||||||
UK | ||||||||||||
Demand deposits | 116,462 | 102,346 | 89,441 | |||||||||
Time deposits | 32,506 | 37,219 | 46,113 | |||||||||
Other deposits | 8,031 | 8,854 | 13,307 | |||||||||
| 156,999 | 148,419 | 148,861 | ||||||||||
Non-UK | ||||||||||||
Demand deposits | 2,002 | 2,202 | 1,245 | |||||||||
Time deposits | 953 | 1,307 | 1,574 | |||||||||
Other deposits | 716 | 3,073 | 3,201 | |||||||||
| 3,671 | 6,582 | 6,020 | ||||||||||
| 160,670 | 155,001 | 154,881 | ||||||||||
We obtain retail demand and time deposits either through our branch network, cahoot or remotely (such as postal accounts). We also obtain retail demand and time deposits outside the UK, mainly through Abbey National International Limited and the Isle of Man branch of Santander UK plc. They are all interest-bearing and interest rates are varied from time to time in response to competitive conditions.
Demand deposits
Demand deposits consist of savings and current accounts. Savings products comprise Individual Savings Accounts, instant saver accounts, remote access accounts, and other accounts which allow the customer a limited number of notice-free withdrawals per year depending on the account balance. These accounts are treated as demand deposits because the entire balance may be withdrawn on demand without penalty as one of the notice-free withdrawals.
Time deposits
Time deposits consist of notice accounts, which require customers to give notice before making a withdrawal, and bond accounts, which require a minimum deposit. In each of these accounts there is an interest penalty for early withdrawal.
Other deposits
Other deposits are either obtained through the money markets or for which interest rates are quoted on request rather than publicly advertised. These deposits have a fixed maturity and their interest rates reflect inter-bank money market rates.
Annual Report 2015
Financial review
We include short-term borrowings in deposits by banks, trading liabilities, financial liabilities designated at fair value and debt securities in issue. We do not show short-term borrowings separately on our balance sheet. The US Securities and Exchange Commission (the SEC) defines short-term borrowings as amounts payable for short-term obligations that are US Federal funds purchased and securities sold under repurchase agreements, commercial paper, borrowings from banks, borrowings from factors or other financial institutions and any other short-term borrowings reflected on the balance sheet. The table below shows short-term borrowings for each of the years ended 31 December 2015, 2014 and 2013.
2015 £m | 2014 £m | 2013 £m | ||||||||||
Securities sold under repurchase agreements | ||||||||||||
- Year-end balance | 10,567 | 9,420 | 14,844 | |||||||||
- Year-end interest rate | 0.23% | 0.35% | 0.49% | |||||||||
- Average balance(1) | 15,833 | 16,816 | 20,573 | |||||||||
- Average interest rate(1) | 0.39% | 0.35% | 0.54% | |||||||||
- Maximum balance(1) | 23,677 | 22,066 | 26,215 | |||||||||
Commercial paper | ||||||||||||
- Year-end balance | 2,744 | 4,364 | 3,996 | |||||||||
- Year-end interest rate | 0.41% | 0.24% | 0.27% | |||||||||
- Average balance(1) | 3,772 | 4,404 | 4,453 | |||||||||
- Average interest rate(1) | 0.30% | 0.29% | 0.28% | |||||||||
- Maximum balance(1) | 5,066 | 5,412 | 5,291 | |||||||||
Borrowings from banks (Deposits by banks)(2) | ||||||||||||
- Year-end balance | 3,711 | 2,983 | 3,057 | |||||||||
- Year-end interest rate | 0.07% | 0.38% | 0.02% | |||||||||
- Average balance(1) | 3,004 | 3,135 | 2,721 | |||||||||
- Average interest rate(1) | 0.05% | 0.07% | 0.03% | |||||||||
- Maximum balance(1) | 3,905 | 4,518 | 3,401 | |||||||||
Negotiable certificates of deposit | ||||||||||||
- Year-end balance | 4,468 | 3,806 | 2,646 | |||||||||
- Year-end interest rate | 0.43% | 0.36% | 1.56% | |||||||||
- Average balance(1) | 4,468 | 4,044 | 2,529 | |||||||||
- Average interest rate(1) | 0.41% | 0.39% | 1.51% | |||||||||
- Maximum balance(1) | 5,666 | 5,142 | 3,173 | |||||||||
Other debt securities in issue | ||||||||||||
- Year-end balance | 5,238 | 4,446 | 5,434 | |||||||||
- Year-end interest rate | 2.60% | 2.52% | 3.37% | |||||||||
- Average balance(1) | 4,133 | 4,858 | 4,919 | |||||||||
- Average interest rate(1) | 2.60% | 2.89% | 3.00% | |||||||||
- Maximum balance(1) | 5,238 | 5,975 | 7,245 | |||||||||
| (1) | Calculated using monthly weighted average data. |
| (2) | The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £326m (2014: £308m, 2013: £614m). |
Abbey National Treasury Services plc and Abbey National North America LLC (ANNA LLC) issue commercial paper. Abbey National Treasury Services plc issues commercial paper with a minimum issuance amount of Euro 100,000 with a maximum maturity of 364 days. ANNA LLC and Abbey National Treasury Services plc, US Branch issue commercial paper with minimum denominations of US$100,000 and US$250,000, respectively, with maturity of up to 270 days from the date of issue.
On 1 July 2015, Abbey National Treasury Services plc, US Branch set up a US$20bn Commercial Paper Programme for the issuance of commercial paper. The new programme will replace the ANNA LLC US$20bn Commercial Paper Programme, and ANNA LLC will not issue any further commercial paper going forward.
Certificates of deposit and certain time deposits
The following table shows the maturities of our certificates of deposit and other large wholesale time deposits from non-banks over £50,000 (or the non-sterling equivalent of £50,000) at 31 December 2015. A proportion of our retail time deposits also exceeds £50,000 at any given date; however, the ease of access and other terms of these accounts means that they may not have been in excess of £50,000 throughout 2015. Also, the customers may withdraw their funds on demand by paying an interest penalty. For these reasons, no maturity analysis is presented for such deposits.
Not more than three £m | In more than three months but £m | In more than six months but £m | In more than one £m | Total £m | ||||||||||||||||
Certificates of deposit: | ||||||||||||||||||||
- UK | 2,326 | 933 | 342 | - | 3,601 | |||||||||||||||
- Non-UK | 664 | 95 | 108 | 5 | 872 | |||||||||||||||
Wholesale time deposits: | ||||||||||||||||||||
- UK | 943 | 60 | 187 | 110 | 1,300 | |||||||||||||||
| 3,933 | 1,088 | 637 | 115 | 5,773 | ||||||||||||||||
30 Santander UK plc
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| statement review | review | flows | ||||||||||||
We have issued debt securities in a range of maturities, interest rate structures and currencies, to meet our liquidity, funding and capital needs.
| Note | 2015 £m | 2014 £m | 2013 £m | |||||||||||
Trading liabilities | 28 | 2,794 | 3,211 | 2,918 | ||||||||||
Financial liabilities designated at fair value | 29 | 2,016 | 2,848 | 3,407 | ||||||||||
Debt securities in issue | 30 | 49,615 | 51,790 | 50,870 | ||||||||||
Subordinated liabilities | 31 | 3,885 | 4,002 | 4,306 | ||||||||||
| 58,310 | 61,851 | 61,501 | ||||||||||||
We classify most of the debt securities that we have issued as ‘Debt securities in issue’ in our balance sheet. We classify the rest of them separately in the balance sheet, either because they qualify as ‘Trading liabilities’ or we designated them upon initial recognition as ‘Financial liabilities designated at fair value’, or there are key differences in their legal terms, such as liquidation preferences, or subordination of the rights of holders to the rights of holders of certain other liabilities (Subordinated liabilities). See Notes 28 to 31 to the Consolidated Financial Statements.
Our commercial balance sheet is almost entirely denominated in sterling. So when we raise funding by issuing debt securities in currencies other than sterling (mainly euro, US dollars and Japanese yen) we enter into cross-currency derivatives which swap the foreign currency liabilities back into sterling.
For the amounts and maturities of contractual obligations in respect of guarantees, see Note 35 to the Consolidated Financial Statements. Other contractual obligations, including payments of principal and interest where applicable, are shown in the table below. Interest payments are included in the maturity column of the interest payments themselves, and are calculated using current interest rates.
| Payments due by period | ||||||||||||||||||||
Total £m | Less than 1 year £m | 1-3 years £m | 3-5 years £m | Over 5 years £m | ||||||||||||||||
Deposits by banks(1) (2) | 11,055 | 9,315 | 1,447 | 185 | 108 | |||||||||||||||
Deposits by customers - repos(1) | 7,012 | 6,512 | - | - | 500 | |||||||||||||||
Deposits by customers - other(2) | 164,213 | 153,194 | 9,375 | 1,586 | 58 | |||||||||||||||
Derivative financial instruments | 21,508 | 2,882 | 2,465 | 2,238 | 13,923 | |||||||||||||||
Debt securities in issue(3) | 54,425 | 12,363 | 13,123 | 8,198 | 20,741 | |||||||||||||||
Subordinated liabilities | 3,885 | 60 | 63 | 54 | 3,708 | |||||||||||||||
Retirement benefit obligations | 9,004 | 263 | 581 | 662 | 7,498 | |||||||||||||||
Operating lease obligations | 495 | 79 | 144 | 128 | 144 | |||||||||||||||
Purchase obligations | 430 | 430 | - | - | - | |||||||||||||||
| 272,027 | 185,098 | 27,198 | 13,051 | 46,680 | ||||||||||||||||
| (1) | Securities sold under repurchase agreements. |
| (2) | Includes deposits by banks and deposits by customers classified in the balance sheet as trading liabilities. |
| (3) | Includes debt securities in issue classified in the balance sheet as trading liabilities and financial liabilities designated at fair value. |
The table is based on contractual maturities, so it takes no account of call features in our Subordinated liabilities. The repayment terms of the debt securities may be accelerated in line with the covenants in the loan agreements.
For details of deposits by banks and deposits by customers, see Notes 26 and 27 to the Consolidated Financial Statements. We have entered into outsourcing contracts where, in some circumstances, there is no minimum specified spending requirement. In these cases, anticipated spending volumes have been included within purchase obligations.
Under current conditions, our working capital is expected to be sufficient for our present needs and to pursue our planned business strategies.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we issue guarantees on behalf of customers. The main guarantees we issue are standby letters of credit under which we take on credit on behalf of customers when actual funding is not required. This is normally because a third party won’t accept the credit risk of the customer. We include these guarantees in our impairment loss allowance assessment with other forms of credit exposure.
In addition, we give representations, indemnities and warranties on the sale of our subsidiaries, businesses and other assets, as is normal in such activity. The maximum potential amount of any claims made against these is usually much higher than actual settlements. We make provisions for our best estimate of the likely outcome, either at the time of sale, or later if we receive more information.
See Note 35 to the Consolidated Financial Statements for more information on our guarantees, commitments and contingencies. See Note 21 to the Consolidated Financial Statements for more information on our off-balance sheet arrangements.
In the ordinary course of business, we also enter into securitisation transactions as set out in Note 17 to the Consolidated Financial Statements. We consolidate the securitisation companies and we continue to administer the assets. The securitisation companies provide us with an important source of long-term funding.
Annual Report 2015
Financial review
Interest rate sensitivity is the relationship between interest rates and net interest income caused by the periodic repricing of assets and liabilities. Our largest administered rate items are residential mortgages and retail deposits, most of which bear interest at variable rates.
We mitigate the impact of interest rate movements on net interest income by repricing our variable rate mortgages and variable rate retail deposits separately, subject to competitive pressures. We also offer fixed-rate mortgages and savings products on which the interest rate is fixed for an agreed period at the start of the contract. We manage the margin on fixed-rate products by using derivatives matching the fixed-rate profiles. We reduce the risk of prepayment by imposing early termination charges if the customers end their contracts early.
We manage the risks from movements in interest rates as part of our overall non-trading position. We do this within limits as set out in the Risk review.
Changes in net interest income - volume and rate analysis
The following table shows changes in interest income, interest expense and net interest income (including amounts classified in discontinued operations). It allocates the effects between changes in volume and changes in rate. Volume and rate changes have been calculated on the movement in the average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities. The changes caused by movements in both volume and rate have been allocated to rate changes.
| 2015/2014 | 2014/2013 | |||||||||||||||||||||||
Total change | Changes due to increase/(decrease) in | Total change | Changes due to increase/(decrease) in | |||||||||||||||||||||
| £m | Volume £m | Rate £m | £m | Volume £m | Rate £m | |||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans and advances to banks: | ||||||||||||||||||||||||
- UK | (12) | 9 | (21) | (20) | (36) | 16 | ||||||||||||||||||
- Non-UK | (14) | (11) | (3) | 11 | 7 | 4 | ||||||||||||||||||
Loans and advances to customers: | ||||||||||||||||||||||||
- UK | (58) | 290 | (348) | (392) | (44) | (348) | ||||||||||||||||||
- Non-UK | 1 | - | 1 | - | - | - | ||||||||||||||||||
Other interest earning financial assets: | ||||||||||||||||||||||||
- UK | (19) | 13 | (32) | 31 | 29 | 2 | ||||||||||||||||||
- Non-UK | - | - | - | (3) | (3) | - | ||||||||||||||||||
Total interest income | ||||||||||||||||||||||||
- UK | (89) | 312 | (401) | (381) | (51) | (330) | ||||||||||||||||||
- Non-UK | (13) | (11) | (2) | 8 | 4 | 4 | ||||||||||||||||||
| (102) | 301 | (403) | (373) | (47) | (326) | |||||||||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits by banks: | ||||||||||||||||||||||||
- UK | (18) | 3 | (21) | (107) | (39) | (68) | ||||||||||||||||||
Deposits by customers - demand: | ||||||||||||||||||||||||
- UK | 188 | 157 | 31 | (8) | 165 | (173) | ||||||||||||||||||
- Non-UK | (8) | (2) | (6) | 8 | 10 | (2) | ||||||||||||||||||
Deposits by customers - time: | ||||||||||||||||||||||||
- UK | (258) | (98) | (160) | (502) | (245) | (257) | ||||||||||||||||||
- Non-UK | (12) | (8) | (4) | (23) | (9) | (14) | ||||||||||||||||||
Deposits by customers - other: | ||||||||||||||||||||||||
- UK | (4) | (8) | 4 | (61) | (68) | 7 | ||||||||||||||||||
- Non-UK | 1 | - | 1 | - | 1 | (1) | ||||||||||||||||||
Subordinated liabilities: | ||||||||||||||||||||||||
- UK | (13) | (15) | 2 | 45 | 12 | 33 | ||||||||||||||||||
Debt securities in issue: | ||||||||||||||||||||||||
- UK | (110) | - | (110) | (192) | (68) | (124) | ||||||||||||||||||
- Non-UK | 4 | (1) | 5 | (6) | 1 | (7) | ||||||||||||||||||
Other interest-bearing financial liabilities: | ||||||||||||||||||||||||
- UK | (13) | (10) | (3) | 2 | 1 | 1 | ||||||||||||||||||
Total interest expense | ||||||||||||||||||||||||
- UK | (228) | 29 | (257) | (823) | (242) | (581) | ||||||||||||||||||
- Non-UK | (15) | (11) | (4) | (21) | 3 | (24) | ||||||||||||||||||
| (243) | 18 | (261) | (844) | (239) | (605) | |||||||||||||||||||
Net interest income | 141 | 283 | (142) | 471 | 192 | 279 | ||||||||||||||||||
32 Santander UK plc
| Income | Balance sheet | Cash | ||||||||||||
| statement review | review | flows | ||||||||||||
Year-end balances may not reflect activity throughout the year, so we present average balance sheets below. They show averages for our significant categories of assets and liabilities, and the related interest income and expense.
| 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||
Average Balance(1) £m | Interest(4,5) £m | Average rate % | Average balance(1) £m | Interest(4,5) £m | Average rate % | Average balance(1) £m | Interest(4,5) £m | Average rate % | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Loans and advances to banks: | ||||||||||||||||||||||||||||||||||||
- UK | 20,859 | 99 | 0.47 | 19,263 | 111 | 0.58 | 26,432 | 131 | 0.50 | |||||||||||||||||||||||||||
- Non-UK | 6,432 | 16 | 0.25 | 10,078 | 30 | 0.30 | 7,453 | 19 | 0.25 | |||||||||||||||||||||||||||
Loans and advances to customers:(3) | ||||||||||||||||||||||||||||||||||||
- UK | 196,148 | 6,490 | 3.31 | 187,843 | 6,548 | 3.49 | 189,048 | 6,940 | 3.67 | |||||||||||||||||||||||||||
- Non-UK | 179 | 1 | 0.56 | 5 | - | - | 6 | - | - | |||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||||||
- UK | 9,300 | 89 | 0.96 | 8,312 | 108 | 1.30 | 6,009 | 77 | 1.28 | |||||||||||||||||||||||||||
- Non-UK | - | - | - | - | - | - | 166 | 3 | 1.81 | |||||||||||||||||||||||||||
Total average interest-earning assets, interest income(2) | 232,918 | 6,695 | 2.87 | 225,501 | 6,797 | 3.01 | 229,114 | 7,170 | 3.13 | |||||||||||||||||||||||||||
Impairment loss allowances | (1,315) | - | - | (1,502) | - | - | (1,704) | - | - | |||||||||||||||||||||||||||
Trading business | 19,756 | - | - | 18,549 | - | - | 25,032 | - | - | |||||||||||||||||||||||||||
Assets designated at FVTPL | 2,737 | - | - | 2,793 | - | - | 3,140 | - | - | |||||||||||||||||||||||||||
Other non-interest-earning assets | 32,278 | - | - | 34,204 | - | - | 38,414 | - | - | |||||||||||||||||||||||||||
Total average assets | 286,374 | - | - | 279,545 | - | - | 293,996 | - | - | |||||||||||||||||||||||||||
Non-UK assets as a % of total | 2.31% | - | - | 3.61% | - | - | 2.59% | - | - | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits by banks: | ||||||||||||||||||||||||||||||||||||
- UK | (7,122) | (63) | 0.88 | (6,855) | (81) | 1.18 | (8,624) | (188) | 2.18 | |||||||||||||||||||||||||||
- Non-UK | (139) | - | - | (2) | - | - | (13) | - | - | |||||||||||||||||||||||||||
Deposits by customers - demand: | ||||||||||||||||||||||||||||||||||||
- UK | (116,462) | (1,326) | 1.14 | (102,346) | (1,138) | 1.11 | (89,441) | (1,146) | 1.28 | |||||||||||||||||||||||||||
- Non-UK | (2,002) | (13) | 0.65 | (2,202) | (21) | 0.95 | (1,245) | (13) | 1.04 | |||||||||||||||||||||||||||
Deposits by customers - time: | ||||||||||||||||||||||||||||||||||||
- UK | (32,506) | (514) | 1.58 | (37,219) | (772) | 2.07 | (46,113) | (1,274) | 2.76 | |||||||||||||||||||||||||||
- Non-UK | (953) | (16) | 1.68 | (1,307) | (28) | 2.14 | (1,574) | (51) | 3.24 | |||||||||||||||||||||||||||
Deposits by customers - other: | ||||||||||||||||||||||||||||||||||||
- UK | (6,092) | (108) | 1.77 | (6,542) | (112) | 1.71 | (10,766) | (173) | 1.61 | |||||||||||||||||||||||||||
- Non-UK | (703) | (2) | 0.28 | (1,141) | (1) | 0.09 | (628) | (1) | 0.16 | |||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||||||
- UK | (46,531) | (911) | 1.96 | (46,517) | (1,021) | 2.19 | (49,292) | (1,213) | 2.46 | |||||||||||||||||||||||||||
- Non-UK | (4,427) | (15) | 0.34 | (4,730) | (11) | 0.23 | (4,512) | (17) | 0.38 | |||||||||||||||||||||||||||
Subordinated liabilities: | ||||||||||||||||||||||||||||||||||||
- UK | (3,871) | (138) | 3.56 | (4,285) | (151) | 3.52 | (3,860) | (106) | 2.75 | |||||||||||||||||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
- UK | (269) | (14) | 5.20 | (422) | (27) | 6.40 | (406) | (25) | 6.16 | |||||||||||||||||||||||||||
Total average interest-bearing liabilities, interest expense(2) | (221,077) | (3,120) | 1.41 | (213,568) | (3,363) | 1.57 | (216,474) | (4,207) | 1.94 | |||||||||||||||||||||||||||
Trading business | (18,873) | - | - | (22,242) | - | - | (30,546) | - | - | |||||||||||||||||||||||||||
Liabilities designated at FVTPL | (2,391) | - | - | (3,556) | - | - | (4,997) | - | - | |||||||||||||||||||||||||||
Other non-interest bearing liabilities | (28,876) | - | - | (26,603) | - | - | (29,003) | - | - | |||||||||||||||||||||||||||
Equity | (15,157) | - | - | (13,576) | - | - | (12,976) | - | - | |||||||||||||||||||||||||||
Total average liabilities and equity | (286,374) | - | - | (279,545) | - | - | (293,996) | - | - | |||||||||||||||||||||||||||
Non-UK liabilities as a % of total | 2.87% | - | - | 3.36% | - | - | 2.71% | - | - | |||||||||||||||||||||||||||
| (1) | Average balances are based on monthly data. |
| (2) | The ratio of average interest-earning assets to interest-bearing liabilities for the year ended 31 December 2015 was 105.36% (2014: 105.59%, 2013: 105.84%). |
| (3) | Loans and advances to customers include non-performing loans. See the ‘Credit risk’ section of the Risk review. |
| (4) | The net interest margin for the year ended 31 December 2015 was 1.53% (2014: 1.52%, 2013: 1.29%). Net interest margin is calculated as net interest income divided by average interest earning assets. This differs from the Banking Net Interest Margin, a non-IFRS measure (see page 332) and discussed in the CEO’s review, which is calculated as net interest income divided by average customer assets. |
| (5) | The interest spread for the year ended 31 December 2015 was 1.46% (2014: 1.44%, 2013: 1.19%). Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities. |
Annual Report 2015
Financial review
2015 £m | 2014 £m | 2013 £m | ||||||||||
Net cash (outflow)/inflow from operating activities | (3,897) | (5,533) | 4,757 | |||||||||
Net cash (outflow)/inflow from investing activities | (518) | (4,145) | 182 | |||||||||
Net cash (outflow)/inflow from financing activities | (2,914) | (361) | (8,428) | |||||||||
Decrease in cash and cash equivalents | (7,329) | (10,039) | (3,489) | |||||||||
The major activities and transactions that affected Santander UK’s cash flows during 2015, 2014 and 2013 were as follows:
In 2015 the net cash outflow from operating activities of £3,897m resulted from the increase in trading balances, increased customer lending partially offset by an increase in customer savings and deposits from other banks. In 2015 the net cash outflow from investing activities of £518m principally reflected the purchase and sale of available-for-sale securities, purchase of property, plant and equipment and the acquisition of PSA Finance UK Limited. In 2015 the net cash outflow from financing activities of £2,914m principally reflected the repayment of debt securities maturing in the year of £16,098m offset by new issues of debt securities of £13,267m, the issuance of £750m Perpetual Capital Securities and the payment of interim dividends on ordinary shares and other equity instruments of £701m. In 2015 cash and cash equivalents decreased by £7,329m principally from the decrease in cash held at central banks and also debt securities both of which are held as part of the liquidity pool. This has decreased due to a reduction in wholesale funding with a maturity of less than 30 days.
In 2014, the net cash outflow from operating activities of £5,533m resulted from lower trading balances and higher customer lending partly offset by higher customer savings and deposits from other banks. In 2014, the net cash outflow from investing activities of £4,145m mainly reflected purchases and sales of available-for-sale securities. In 2014, the net cash outflow from financing activities of £361m reflected repayments of debt securities that matured of £20,310m offset by new issues of debt securities of £19,936m and the issuance of £800m Perpetual Capital Securities. We also paid interim dividends of £447m on ordinary shares and £40m of dividends on other equity instruments. In 2014, cash and cash equivalents decreased by £10,039m mainly from the increase in customer lending and purchase of available-for-sale securities.
In 2013, the net cash inflow from operating activities of £4,757m resulted from the continued reduction in our lending portfolios, partly offset by lower customer savings and deposits from other banks. In 2013, the net cash inflow from investing activities of £182m was in principle derived from the purchase and sale of UK Treasury bills, partly offset by purchases of property, plant and equipment. In 2013, the net cash outflow from financing activities of £8,428m reflected repayments of debt securities that matured of £32,880m partly offset by new issues of debt securities of £25,469m. We also paid dividends of £665m on ordinary shares. In 2013, cash and cash equivalents decreased by £3,489m mainly from the repayments of matured debt securities offset by lower customer lending.
34 Santander UK plc
This Risk review consists of audited financial information except where it is marked as unaudited.
The audited financial information is an integral part of the Consolidated Financial Statements.
Annual Report 2015
Risk review
Risk developments in 2015(unaudited)
| Each and every one of us at Santander UK takes personal responsibility for managing risk. | We have also developed a framework to help improve the way we manage risks associated with the various models we use to make risk-based decisions. We continued to make progress against our Operational Risk Transformation Programme, updating our strategic systems and IT, helping us maintain our robust risk management infrastructure. | |||
 | �� | 2015 performance Retail and corporate credit quality remained robust in a supportive credit environment. Continuing improvements in the UK economy, coupled with prudent lending criteria, helped improve our NPL ratio to 1.54% from 1.80% in 2014. Reflecting this, our loan loss allowances decreased to £1,157m from £1,439m in 2014. We have also maintained a strong CET 1 capital ratio of 11.6% and an improved leverage ratio of 4.0%. Capital risk continued to be of key focus. The Santander UK Group Holdings plc group (including the Santander UK group) exceeded the Bank of England’s 2015 stress test threshold requirement of 4.5%, with a stressed CET 1 capital ratio of 9.5%. This shows our resilience to potential deterioration in global and domestic economic conditions. In November 2015, the FCA published a consultation paper covering, among other things, proposed time restrictions on future claims for the mis-selling of PPI, and the Plevin case. In response to this we have increased our PPI conduct remediation provision by £450m to £465m. This represents our best estimate of the remaining redress and costs, notwithstanding the ongoing nature of the consultation. Risk management in 2015 During 2015, we made significant progress in embedding our Risk Framework across the business to align with our values of being Simple, Personal and Fair. This included the ongoing roll-out of our I AM Risk programme where we have been particularly successful in raising awareness of personal accountability for risk management. We have also made further improvements to our risk governance and Risk Framework. These include giving greater prominence to financial crime risk, reflecting the increasing importance of this discipline as technology in the banking industry develops. This has been reinforced via our Financial Crime Transformation Programme. | In 2015, our Conduct Risk Strategy Programme has enhanced the way we report and monitor conduct risk, and how we assess conduct risk in our business decisions. In addition, we continue to improve the outcomes that we deliver to our customers through: – Guidance on how we treat and help vulnerable customers – Simplification of our retail product range, which has helped customers and staff understand and take better advantage of our products – Further enhancements to our staff incentive schemes to focus on the delivery of quality of outcomes for customers. Top risks We set out the developments in our top risks in 2015 on pages 38 and 39. The key developments that continue to affect the profile of our top risks include: The interest rate environment The current low Bank of England Bank Rate (Base Rate) environment persisted during 2015. This continued to set challenges for both our net margin performance, and also the risks associated with our pension fund. 1I2I3 account In September 2015, we announced changes to the 1I2I3 Current Account and the 1I2I3 Credit Card. This was the first set of changes since the launch of the products, and we have made them in response to continuing challenges in the market and the ‘low for longer’ Base Rate environment. We are still in the early stages of knowing the real impact of the fee and cashback changes on customer acquisition, loyalty and satisfaction. We are carefully monitoring the consequences of this decision, including the impacts on our customers. | |
36 Santander UK plc
Risk developments | Top and | |||||||||||||||
in 2015 | emerging risks | |||||||||||||||
Medium-term funding (‘MTF’) issuanceBanking Reform
During 2015, our regulators issued various consultation papers bringing further clarity to areas such as capital and liquidity requirements, intra-group exposures and governance. Against this backdrop, we continue to work on our plans for implementation. Banking Reform is one of £12.9bn (sterling equivalent)a number of both regulatory and business-led change initiatives such as our investments in 2014 included £7.7bndigital technology. We are closely monitoring the operational risks associated with the growing change agenda to ensure successful delivery.
Cyber crime
In common with other large UK financial institutions, we saw an increase in the scale and complexity of senior unsecured issuance. Overall the cost of wholesale fundingattempted cyber crime activity during 2015. We have continued to fall duringstrengthen our defence against these attacks, including participation in the year,Bank of England’s industry-wide cyber security testing exercise. We also continued our significant programme of investment to improve the prevention and detection of financial crime.
Emerging risks
We set out the developments in our emerging risks in 2015 on page 40.
We face a background of uncertainty regarding the UK economy, and interest rates in particular. This is coupled with economic and political pressures in Europe, as lower cost new issuance replaced more expensive maturing fundingwell as significant volatility in a more stable capital markets environment.
Capitalcertain markets. All of these could affect our risk profile and leverage(D)
The CET 1 capital ratio improvedstrategy. In addition, changes in the regulatory environment, and the demanding agenda, continue to 11.9% at 31 December 2014 (2013: 11.6%(3)), with the PRA end-point T1 leverage ratio at 3.8% (2013: 3.3%). During 2014, we issued £800m of AT1 capital, and redeemed £265m of preferred shares.
RWAs increased £4.6bn to £82.3bn at 31 December 2014, reflecting higher customer loans, a recalibration of risk models in Commercial Banking and a small increase in mortgage risk weights.
PRA stress test results
The latest PRA stress test results were released in December 2014. Santander UK exceeded the PRA’s 2014 stress test threshold requirement of 4.5%, with a stressed CET 1 ratio of 7.9% after PRA-allowed management actions.impact our business.
The PRA stress test centred onWe track emerging risks in the context of the four major forces shaping the UK banking market:
Economic environment
While the current economic outlook for the UK is supportive, we remain aware of the risks in the medium term which could have an unprecedented UK housing market stress and therefore was particularly focused on banks with significant UK residential mortgage exposure. Notwithstanding this focus,adverse impact. These include the outcome demonstrated Santanderpotential implications from the forthcoming referendum of the UK’s continuing resilience, robust balance sheet and credit strength.membership of the European Union.
OutlookRegulatory development
We expect the developments in the business, and investments made to date to help maintain our strong performance.
A further reduction in the overall cost of deposits is expected to compensate for any further asset margin declines. Our tight control of business-as-usual costsregulatory environment will continue, while we invest further in the transformation of our business.
The momentum of the UK economy should continue to be supportivefocused on financial strength, customer experience and competition. While we remain confident that we can continue to grow the business safely against this backdrop, there remain risks associated with the scale and pace of change across the business.
Market competition
We anticipate increasing competitive pressure, both from established incumbents refocusing on UK banking, and from new entrants leveraging technology and focusing on selected elements of the market.
Customer behaviour
The needs and demands of our business, although there is evidencecustomers are evolving more rapidly than ever, driven by changes in technology and the adoption of increasing liquiditydigital and mobile as part of multi-channel banking. These shifts in customer behaviour bring with them associated challenges in risk management, for example in developing strategies to tackle fraud.
Planned activities for 2016
The key areas of focus for the market resulting in competitive pressures in many business lines which may impact margins and slow the rate of growth.Risk Division for 2016 include:
We believe that our performance over time should continue to demonstrate the consistency and strength of Santander UK.
| – | Continuing to embed our Risk Culture Programme ‘I AM Risk’, aligned to Simple, Personal and Fair |
| – | Investing in our retail and corporate credit systems infrastructure, helping to improve the speed and quality of our credit decisions |
| – | Making further enhancements to, and increasing automation around, our stress testing capability and our response to the forthcoming accounting standard IFRS 9 as it relates to credit provisioning |
| – | Continuing our strategic change programmes for conduct risk, risk data automation and aggregation, operational risk and financial crime risk. |
(D) | Liquidity, funding, capital and leverage – CRD IV | |||||||||
| ||||||||||
| 31 December | 2014 £bn | 2013 £bn | ||||||||
| ||||||||||
LCR eligible liquidity pool | 39.5 | 32.8 | ||||||||
| LCR | 110% | 103%(3) | ||||||||
| CET 1 capital | 9.8 | 9.0(3) | ||||||||
| CET 1 capital ratio | 11.9% | 11.6%(3) | ||||||||
| Risk Weighted Assets (‘RWAs’) | 82.3 | 77.7(1) | ||||||||
PRA end-point Tier 1 leverage ratio(2)
| 3.8% | 3.3% | ||||||||
| ||||||||||
| ||||
– Identify risks and opportunities – Assess their probability and impact – Managethe – Report, challenge, review, learn and ‘speak up’. I AM Risk helps ensure that every business area is accountable for the
| ||||
The success of the I AM Risk programme has been reflected in our staff surveys, where 97% of the respondents acknowledged their personal responsibility for risk management. For more on this programme, see ‘Making change happen: I AM Risk’ in the section ‘How we approach risk – our culture and principles’. |  | |||
Annual Report 2015
Risk review
All our activities involve identifying, assessing, managing and reporting risks. A top risk is a current risk within our business that could have a material impact on our financial results, reputation and the sustainability of our business model.
Our top risks and their causes are outlined below, as well as how they link to our 2013-2015 strategic priorities. We also explain the key developments in the year.
| Risk features and impact | 2013-2015 strategic priorities | |||
Deterioration in the credit quality of our customers and counterparties could reduce the value of our assets, and increase our write-downs and allowances for impairment losses. The macroeconomic environment and other factors can cause our credit risk to increase. The factors include increased unemployment, falling house prices, increased corporate insolvency levels, reduced corporate profits, increased personal insolvency levels, increased interest rates and/or higher tenant defaults.
|
| |||
| Market (Banking market) | Banking market risk could lead to lower income or a loss of value from changes in market risk factors such as interest rates. The current low Base Rate environment remains a key concern for the industry as a whole. If rates were not to increase, margins would remain under pressure.
|  | ||
| Liquidity | Like all major banks, we can be impacted by changes in confidence in the banking sector, the wholesale funding markets or the Company itself. We can also be affected by changes in the structure or the regulation of the banking sector. If we are unable to obtain sustainable funding (whether due to exceptional circumstances, industry restructuring or regulatory change), our ability to pay our financial obligations could be affected. This could disrupt our day-to-day operations and business model.
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| Capital | Capital risk has the potential to disrupt our business model and stop our normal functions. It could also cause us to fail to meet regulatory capital requirements. If that happened, our regulators would have powers to restrict our payments, such as dividends and AT1 coupons, or to wind up the Company. Our capital risk is driven mainly by credit risk and the effects of regulatory change as well as our ability to raise capital over the economic cycle.
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| Pension | We face pension risk as a sponsor of defined benefit pension schemes. It arises where the assets of the schemes do not fully match the timing and amount of the schemes’ liabilities. This can be due to uncertainty over future investment returns and the projected value of schemes’ liabilities. For instance, deterioration in the funding valuation position could mean we have to make material contributions to reduce deficits.
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| Operational | Operational risk is inherent in all our business and support processes, as well as our suppliers. It happens where unexpected or unplanned events related to people, processes, systems or external events prevent us from achieving our business objectives. It includes cyber security, and
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| Conduct | This is a key risk to us in view of the evolving regulatory agenda and to enable us to meet our aim to be the best bank for our customers. We are mainly exposed to conduct risk through: products and services not meeting our customers’ needs; failing to deal with complaints effectively; and the risk that we sell our customers unsuitable products or we do not give them the right information to make informed decisions.
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Governance review
Lord Burns
Chair
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During 2014, the Board continued to devote a significant amount of time to driving our strategic transformation.
Corporate governance
38 Santander UK as a subsidiary of the Banco Santander group, has its own autonomous operating framework and is regulated in the UK by the PRA and the FCA.
At Santander UK, we remain committed to achieving the highest standard of corporate governance. We have complied with the UK Corporate Governance Code in a manner appropriate to our ownership and have adopted an integrated approach to corporate governance across the group to ensure effective management and control.
The Board and its committees
The roles of Chair and CEO are separated and clearly defined. The CEO has delegated authority from the Board for the day-to-day operation of the business and implementation of the Board’s strategy and business plan. In turn he delegates a number of duties to his
direct reports. The CEO and his direct reports are supported by a number of senior level committees to assist them in executing their duties.
The Board delegates certain responsibilities to its Committees which comprise independent Non-Executive Directors. These committees play a central role in supporting the Board to discharge its duties and implement its vision and strategy while providing focused oversight of key aspects of the business.
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How the Board spent its time in 2014
During 2014, the Board continued to devote a significant amount of time to driving Santander UK’s strategic transformation, focusing on the three strategic priorities.
The Board reviewed global trends in financial markets, with particular emphasis on the implications for the UK banking sector. This also informed the Board’s assessment of our forward plan and vision during its annual Strategy Day, held in May 2014.
Another significant area of effort for the Board in 2014 was the increasing regulatory agenda, in particular the banking reform proposals which will impact our business model and legal structure, proposed leverage requirements, and regulatory scrutiny of competition in financial services.
The Board also closely monitored the effectiveness of the risk management framework and internal controls through enhanced risk management information and reporting.
The Board maintained close attention on customer experience as well as the continuing development of the Santander UK culture, with the aim of ensuring good outcomes for our customers. Following the launch of the Santander Way, the Board also continued to review the process of implementation and embedding of a strong and effective customer-centric culture.
Lastly, the Board has continued to review its composition to ensure an appropriate mix of skills and experience, and to ensure effective succession planning.
Priorities for 2015
For 2015, the Board will continue to focus on helping people and businesses prosper and working to achieve our strategic priorities. Banking reform will be a particular area of attention, together with the ongoing embedding of an effective risk culture, digital innovation programme and the Santander Way. By remaining concentrated on continuous improvement, the Board will aim to further enhance its effectiveness.
 | Strategic priority key: | |||||||
| define risk’ on page 42 | ||||||||
 | Loyal and satisfied retail customers | |||||||
| ‘Bank of Choice’ for UK | |||||||
| Consistent profitability and a strong balance sheet | |||||||
Risk indicator | Developments in 2015 | |
 | In 2015, credit quality improved further, supported by our conservative risk profile and supportive economic environment. Our NPL ratio improved to 1.54% (2014: 1.80%), and total loan loss allowances decreased to £1,157m at 31 December 2015 (2014: £1,439m), with all loan portfolios performing well. Our residential mortgages NPL ratio decreased to 1.47% at 31 December 2015 (2014: 1.64%), with impairment releases and the decrease in NPL and coverage ratios reflecting the continued good performance of the portfolio supported by low interest rates and rising house prices. Our Commercial Banking NPL ratio decreased to 2.80% (2014: 3.56%), with strong credit quality. We continue to adhere to our prudent lending criteria as we grow lending. | |
 | Banking NIM(1) remained broadly flat at 1.83% in 2015 (2014: 1.82%). The movement in NIM sensitivity in 2015 was largely due to changes in the underlying models used for risk measurement purposes. The assumptions used in these have been updated to better reflect the current low Base Rate environment. | |
| Our LCR improved to 120% at 31 December 2015 (2014: 110%(2)). Our LCR eligible liquidity pool decreased £0.8bn to £38.7bn at 31 December 2015, reflecting lower liquidity requirements, largely due to the phasing of short-term funding and of medium-term maturities. Wholesale funding with a residual maturity of less than one year decreased £2.0bn to £21.1bn (2014: £23.1bn), reflecting changes in the maturity profile of our medium-term funding. Our LCR eligible liquidity pool significantly exceeded wholesale funding of less than one year, with a 183% coverage ratio (2014: 171%). | |
 | We are making good progress with our capital and funding plan towards meeting future regulatory structure and TLAC/MREL requirements. Our CET 1 capital ratio was 11.6% at 31 December 2015 (2014: 11.9%), adversely impacted by the PPI provision charge of £450m. Our PRA end point Tier 1 leverage ratio was 4.0% at 31 December 2015, up from 3.8% at 31 December 2014, driven by the £750m AT1 issuance in June 2015. Our total capital ratio increased to 18.2% at 31 December 2015 (2014: 17.9%), driven by the £750m AT1 and US$1.5bn Tier 2 issuances. This increase was partially offset by the decline in our CET 1 capital ratio, the adverse impact of CRD IV Minority Interest and grandfathering rules, as well as the partial buy-back of four capital instruments in June 2015. | |
 | In 2015, as in previous years, the pension scheme was managed within the pension risk appetite triggers and limits. The risk profile of the pension scheme also remained stable. In 2015, VaR (1 year, 95% confidence interval) decreased slightly to £1,260m (2014: £1,340m). This was mainly due to the slightly higher real interest rate reducing the size of the discounted liability. In 2015, the accounting position of the pension scheme and other funded arrangements improved. The overall position was a £483m surplus at 31 December 2015 (2014: £156m surplus). The improvement in the position was mainly driven by gains of £319m from adjustments in actuarial assumptions in the year. | |
| In 2015, we developed an Operational Risk Transformation Programme to help us deliver our new Operational Risk Framework. We are rolling out the programme, including new technology, in phases to the end of 2016. This will enable us to achieve market best practice in our operational risk management. In 2015 and 2014 most of our operational risk losses related to charges for conduct remediation, mainly relating to historic sales of PPI. | |
 | Our Conduct Risk Strategy Programme has delivered substantial improvements since it was set up in 2013. In 2015, we continued to enhance the way we report and monitor conduct risk. We also improved how we assess conduct risk in our business decisions. We have provided £450m in response to the recent FCA consultation paper on PPI, including the Plevin case. While we saw a reduction in PPI redress costs in the first half of the year, we have seen an increase in the third quarter in line with industry trends, with the fourth quarter remaining flat. The total provision for PPI redress and related costs was £465m at 31 December 2015. Other conduct provisions were £172m at 31 December 2015, which included £43m of additional provisions taken in the third quarter of 2015 relating to wealth and investment products. | |
| (1) | Non-IFRS measure. See page 332. |
| (2) | Non-IFRS measure. See page 117. |
Annual Report 2015
Risk review
Emerging and future risks(unaudited)
An emerging and future risk is a risk with largely uncertain outcomes which may develop or crystallise in the future. Crystallisation of an emerging risk could have a material effect on long-term strategy. The table below includes the emerging risks we tracked in 2015. The timeframes are indicative of when these risks could have an impact.
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Our financial performance is strongly linked to the health of If the UK economy continues to improve, interest rates are expected to rise, especially if inflation moves back towards the Bank of England’s target rate. If this happens, the behaviour of our customers and market participants could change. This could include increased customer movement and require more competitive product pricing. If the UK economy doesn’t continue to recover as expected, or even experiences a downturn, Bank of England interest rates may remain at record low levels, placing pressure on forecast net interest margins. We closely monitor indicators and reports relating to the UK’s economic performance and also of other major trading areas in the global economy. We quantify these impacts wherever possible in our risk reporting. This analysis includes, for example, any resulting customer credit deterioration, impacts on funding and capital issuance plans, and stress analysis on our net interest margin and pension fund deficit. | ||||||
The UK Government has pledged to renegotiate the terms of the UK’s membership of the EU, and We are closely monitoring political developments in the lead up to the referendum, assessing potential risks, and | ||||||
Customer behaviour The needs and Our marketing and product design teams monitor changing demographics, trends, and customer behaviours. They provide feedback in order to reshape distribution channels and redesign products to meet changing demands. Market competition We have seen established incumbents refocusing on UK banking, and new financial services providers enter the market with new business models and new technology-oriented approaches. We monitor and report on the activities of existing and emerging competitors including the new digital entrants. We analyse the risks to our business plans, customer base and revenue streams and take decisions to mitigate those risks where necessary. As part of this approach we have designed and implemented our own digital business strategy and we continue to respond to the rapid changes in the methods, targets and sophistication of cyber fraud. Regulatory development 2015 continued to see a large amount of new regulation affecting our business. In response, we are progressing some significant change projects, including those relating to the Financial Services (Banking Reform) Act 2013. While the requirements for Banking Reform have become clearer during this year, considerable challenges remain for us to implement a business model that both meets the regulatory demands and delivers our strategic aims. We regularly review the potential impact on our risk profile, including strategic risk and operational risk. We do this against a backdrop of many other complex regulatory programmes already in progress. We also assess the potential increase in our costs that these regulations will cause. However, there remain significant areas of emerging regulation where the impact and timing are still uncertain.
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Economic environment EU economies There are still concerns about the growth in eurozone economies, and significant differences remain between the economic performance of individual member states. Increased levels of migration from areas of conflict have seen a disparity of views between member states. We monitor the economic performance of the EU, the evolving political landscape and the eurozone (monetary union and redenomination risk). | ||
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Corporate
Governance review
continued
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Remuneration
Santander UK’s success depends upon the performance and commitment of our employees. Our remuneration approach is designed to attract, retain and motivate high-calibre individuals to deliver our business strategy in line with our values.
We operate and apply a consistent reward methodology for employees ensuring that we remain within the parameters of the PRA Remuneration Code.
Remuneration reporting40
Santander UK wishes to build on its previous commitment to enhance its pay transparency. To expand on extensive voluntary disclosures made in our 2013 report, we have continued to improve understanding of the link between performance and pay.
The full Directors’ Remuneration report, in which we outline remuneration and fees paid to the Executive and Non-Executive Directors for 2014, is shown on pages 170 to 181.
Directors’ remuneration(E)plc
The Board, through its Remuneration Oversight Committee, continued to review and enhance the quality and performance of the remuneration structures for the Executive Directors and throughout the business.
We remain aware that remuneration for executives generally, and in the financial services sector specifically, has been under close scrutiny from many stakeholders in recent years and remains a key topic for regulators and shareholders.
As we report, the Board continues to believe that our remuneration policies at all levels, including those for the Executive Directors, need to encourage staff to deliver strong, long-term sustainable growth, robust risk management processes and appropriate behaviours, as well as the right customer outcomes.
Additionally, the remuneration for our Non-Executive Directors, including the Chair, is reviewed annually, taking into account fees paid in similar companies, and time commitment for the role to ensure we can attract and retain individuals of the right calibre needed to successfully deliver the Board’s strategy.
(E)
| Directors’ remuneration
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Aggregate Directors’ remuneration | 2014 £
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Salaries and fees | 6,697,041 | 6,183,203 | ||||||||
| Performance-related payments(1) | 5,459,000 | 4,800,051 | ||||||||
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Total remuneration excluding pension contributions | 12,156,041 | 10,983,254 | ||||||||
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Corporate Social
Responsibility review
Training development
95%
Staff took advantage of the wide training resources available, with 95% undertaking some form of learning in 2014.
We recognise the importance of social responsibility and are committed to maintaining the highest ethical standards and conducting business in a responsible way.
Our culture
Santander UK is committed to maintaining high ethical standards, adhering to laws and regulations, conducting business in a responsible way and treating all stakeholders with honesty and integrity. These principles are reflected in our Ethical Code of Conduct which sets out clearly the standards expected of all our people and is implemented through the Santander Way.
We are also committed to protecting and respecting human rights, with our Human Rights Policy applying to employees, customers and suppliers as well as the communities in which we operate. As we continue to operate in accordance with the highest international standards, the policy remains aligned with international standards and regulations regarding labour, social and environmental affairs.
Our people
Our goal to be the best bank for our customers is only achievable if we reach our aspiration to become the best bank for our people. Key to this is having a workplace that provides excellent opportunities for career progression and that encourages accountability and teamwork.
In 2014, we recorded an average of five training days per employee (2013: four days), and more than 95% of staff undertook either face-to-face or eLearning modules. The employee turnover and average length of service were broadly stable at 13% and 8.3 years respectively.
We also focus on creating a safe and healthy working environment and provide training, coaching and practical advice to all colleagues on health, safety and wellbeing. We provide employees and immediate family members with an Employee Assistance Programme offering free, confidential telephone advice and support, including face-to-face counselling.
Schemes such as Flexi Working, Flexi Leave, Voluntary Home Working and Career Break are also in place to support work-life balance of our staff.
Communication and consultation
We continue to involve and inform employees on matters that affect them. Through our intranet, team meetings, regional roadshows and national conferences, we keep employees informed of company news and strategic developments and through initiatives such as Better Together we seek the ideas of our people to build on this work.
We are particularly pleased with a successful history of working in partnership with our recognised trade unions, Advance and the Communication Workers Union, whom we consult on significant proposals and change initiatives at both national and local levels.
Diversity and inclusion(F)
We believe in supporting diversity and creating an inclusive culture where all our people feel valued and able to fulfil their potential. During 2014, more than 250 senior leaders attended our Inclusive Leadership course and we launched a mentoring programme for all colleagues to help them fulfil their potential.
(F) | Diversity and inclusion | |||||||||||||||||||||
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| 31 December | Total | Female No. | Female % | Male No. | Male % | |||||||||||||||||
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Board Directors | 16 | 2 | 12 | 14 | 88 | |||||||||||||||||
| Senior managers(1) | 233 | 39 | 17 | 194 | 83 | |||||||||||||||||
Employees
| 20,676 | 11,829 | 57 | 8,847 | 43 | |||||||||||||||||
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(1) In accordance with sections 414C(9) and 414C(10) of the Companies Act 2006, a senior manager is defined as an employee of the Company with responsibility for planning, directing or controlling the activities of the Company, or a strategically significant part of the Company, including directors of significant subsidiaries. |
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Our Embrace, Enable, Women in Business and Cultural Awareness networks encourage colleagues to connect on issues related to sexuality, disability, gender and culture and to feel confident and supported in being who they are. In 2014 we invested in online functionality and user experience for our networks to make sure they are simple to navigate and more personal for members. The lesbian, gay, bisexual and transgender (‘LGBT‘) network expanded as a result of these enhancements and we now have actively involved champions in the business across the LGBT spectrum.
Gender equality is a focus area for us and in addition to our Women in Business network we continued our partnership with Everywoman, giving our staff access to tools and networks to help them develop their careers. In 2014 Santander UK was recognised as one of the Top 30 Employers for Working Families(1) and one of The Times Top 50 Employers for Women. In 2014, we also introduced a policy to ensure there is a female candidate on all short lists for senior roles within the business.
We remain mindful of Lord Davies’ report ‘Women on Boards’ published in 2011 and its aspirational target of 25% female representation on the FTSE 100 companies Boards by 2015. Following the adoption of the Board diversity policy in March 2014, our Board committed to have 25% female representation by 2017. With the appointment of Shriti Vadera, our female Board representation is now 18%.
Our communities
Support for society at Santander UK is focused on three priority areas: education, employment and enterprise. Support for students is co-ordinated via Santander Universities, Breakthrough assists SMEs and the Santander UK Foundation provides grants to local charities. Together through these three flagship programmes and further funding we contributed £21m to society in 2014.
The Santander UK Foundation provides grants to UK registered charities particularly in communities where Santander branches, business centres and offices are located. Through its three grant programmes focused on funding for education, training and financial capability projects more than 2,700 charities benefited over the year.
At the end of 2014, Santander Universities had partnerships with 77 UK universities providing funding to students and staff to support their studies, with £10m contributed to the sector in the UK.
Through our Breakthrough programme we provide fast-growth companies with the resources and knowledge they need to achieve their growth potential. During 2014, more than 370 businesses benefited from overseas trade missions, roundtable events, master classes and internships. This programme also supported 39 SMEs with £38m of Growth Capital and £88m of other growth-related finance providing these companies with the opportunity and support to create over 1,300 jobs in the UK economy.
Our community priorities:
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Corporate Social
Responsibility review
continued
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We also encourage our people to give back to local communities through our Community Day volunteering projects. Santander UK also co-sponsored the ‘Blood Swept Lands and Seas of Red’ installation at the Tower of London at which many Santander UK people volunteered their time to plant ceramic poppies to mark the 100th anniversary of the beginning of the First World War.
The environment(G)
We are committed to creating a strong business that is not achieved at the expense of the environment. Our Environmental Management System defines responsibilities and processes in relation to waste, energy, water, travel and supply chain management at our 14 major offices. Our head office is also ISO 14001 compliant.
Smart meter technology is installed across the business and we are able to track the individual performance of our properties. This allows us to monitor ongoing consumption profiles, and alter plant operational times in line with the requirements of each property,
reducing energy wastage. We are very pleased with 2014 results which show energy usage in 2014 continued to reduce with electricity across the estate reducing by 2% and gas reducing by 12%. We recycle 98% of the paper, plastic, aluminium and general waste produced at our offices and branches.
Climate change
The main greenhouse gas generated as a result of running our business is carbon dioxide, generated from our use of fuels in heating, cooling and lighting for our offices and branches, and through business travel.
We are committed to reducing carbon dioxide emissions and our electricity was sourced solely from green supplies in 2014 which has zero-rated carbon dioxide emissions. On the British mainland our electricity is sourced from bio-mass via Haven Power and in Northern Ireland from wind and other forms of natural green energy via Airtricity. In 2014, we launched a ‘No Travel Week’ campaign for our employees highlighting video and telephone conferencing technology as alternatives to business travel.
(G)
| The environment
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Emissions data | | 2014 Tonnes CO2e | (1) | | 2013 Tonnes CO2e(1) | | ||||
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CO2 from fuel | 7,017 | 8,000 | ||||||||
CO2 from business travel
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(1) Department for Environment, Food & Rural Affairs (‘DEFRA’) conversion factors for greenhouse gas reporting. DEFRA Standard Set 2013 |
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The Strategic Report, on pages 2 to 24, incorporates our heritage and Santander UK today, the Chair’s review, the Chief Executive Officer’s review, the Chief Financial Officer’s review, and the Corporate Governance and Corporate Social Responsibility review.
By order of the Board.
Nathan Bostock
Chief Executive Officer
24 February 2015
Risk review
This Risk review contains audited financial information except as otherwise marked as unaudited. The audited financial information in this Risk review forms an integral part of the Consolidated Financial Statements.
Following a strategic review, the segmental financial information reported to the Board (Santander UK’s chief operating decision maker) was revised in the fourth quarter of 2014, and prior periods restated, principally to designate three distinct main customer business segments, which reflect how we now manage and operate: Retail Banking, Commercial Banking and Corporate & Institutional Banking, as well as Corporate Centre. The financial information in this Risk review has been presented on this basis for all periods. See Note 2 to the Consolidated Financial Statements.
As a significant financial services provider, risk is at the core of Santander UK’s day-to-day activities. The understanding and control of risk on an enterprise-wide basis is critical for the effective management of the business. Santander UK aims to employ a prudent approach and advanced risk management techniques to facilitate the delivery of robust financial performance, and ultimately build sustainable value for all our stakeholders.
Santander UK aims to maintain a predictable medium-low risk profile, consistent with its business model, which is key to the successful achievement of our strategic objectives.
In December 2013, the Board approved an updated Risk Framework, which was implemented and embedded during 2014. This framework was not significantly changed from the framework set out in the 2013 Annual Report. The key components include:
Good progress has been made in implementing the Risk Framework and embedding enterprise-wide risk management. Progress has been reviewed by Board Risk Committee, linked to annual Risk Framework attestations which are evidence based and approved by Executive Committee members. Risk management is becoming more effective as a result through the improved identification, assessment, management and reporting of risk.
The key changes introduced as part of this new framework included improvements to the risk definitions, including a simplification of the key risk types, and enhancements of the governance structure, including a streamlining of the lines of defence model. There was no change to the overriding principles. The main changes were:
With respect to risk definition and structure:
With respect to governance, roles and responsibilities:
Further updates to the Risk Framework were approved by the Board in December 2014, and included:
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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.
Our Risk Framework sets out how we manage and control risk. It is based on the following key elements which we describe in more detail in the next pages:
| Section | Content | |
How we define risk | We describe each of our key risk types. | |
How we approach risk – our culture and principles | We describe our risk culture and explain how we make it a day-to-day reality across the business. | |
Our risk governance structure | We describe how we consider risk in all our business decisions as part of our organisational structure, and the responsibilities of our people and our committees. | |
Our internal control system | We describe our internal control system and how it helps us manage and control risk. | |
We continued to make good progress in 2015 in embedding the Risk Framework across the business. The Board Risk Committee reviewed our progress, linked to annual Risk Attestations (see ‘Internal control system’ in this section for more on these). These are evidence-based and approved by the Executive Committee members. As a result, we are managing risk more effectively by improving how we identify, assess, manage and report it.
In 2015, we also updated our Risk Framework to reflect how some risks have become more important to us. We now:
| – | Include financial crime risk as a key risk type on its own. This reflects its growing importance as technology in the banking industry develops |
| – | Include legal risk within our operational risk activities to improve its day-to-day management |
| – | Present banking market risk, liquidity risk, capital risk and pension risk separately in our list of key risks due to their importance. In the past, we combined them as balance sheet management risk. |
We also enhanced the responsibility for some risks in 2015. Our:
| – | Chief Conduct and Compliance Officer (CCCO) now has direct responsibility for conduct and regulatory risks |
| – | Capital Committee is now an Executive Committee in its own right, recognising the critical importance of capital. In the past it was a sub-committee of the Executive Risk Committee. |
Annual Report 2015
Risk definitionreview
How we define risk
Risk is defined as theany uncertainty around Santander UK’s abilityabout us being able to achieve itsour business objectives. It specifically equates tocan be split into a numberset of risk factors that have the potential to adversely impact Santander UK’skey risks, each of which could affect our results and our financial resources. Enterprise-wide risk (‘EWR’) is defined as the overall combined set of risks to the objectives of the enterprise. The mainOur key risks are:
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| Pension | The risk caused by our contractual or other liabilities with respect to a pension scheme (whether established for our employees or those of a related company or otherwise). It also refers to the risk that we will make payments or other contributions with respect to a pension scheme due to a moral obligation or for some other reason.
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| Other key risks | Financial crime risk – the risk that we are used to legitimise the proceeds from criminal activity which conceal their true origins. This includes money laundering, financing terrorism, sanctions, and bribery and corruption. Strategic risk – the risk of significant loss or damage arising from strategic decisions that impact the long-term interests of our key stakeholders or from an inability to adapt to external developments. Reputational risk – the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors or any other interested party.
Regulatory risk |
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Risk review
Risk governance
continued
Enterprise wide risk is the aggregate view of all the key risks described above.
Risk culture, overriding principles and minimum standards42 (unaudited)
Objectives
Risk culture plays a significant role in Santander UK’s aim to be the best bank for our people, customers, shareholders and communities. Having a strong unified culture is critical to success and was a key focus throughout 2014 ensuring risk culture is fully embedded on an enterprise-wide basis through the emphasis on the importance of the identification, assessment, management and reporting of all risks. Risk culture is embedded into all business units through the implementation of the Santander UK Risk Framework, Risk Attestations and initiatives aligned to the Risk Culture Statement.plc
The following overriding principles and minimum standards underpin the Risk Framework:
The CEO, Chief Risk Officer (‘CRO’) and other senior executives are responsible for promoting a corporate culture from the top, driving cultural change and increased accountability across the Santander UK group.
The Risk Culture Statement confirms that “Santander UK will only take risks that it understands and will always remain prudent in identifying, assessing, managing and reporting all risks. We actively encourage our people to take personal responsibility for doing the right thing and to challenge without fear. We ensure decisions are taken in the best interests of all our stakeholders and are in line with ‘The Santander Way’.” The Risk Culture Statement is agreed by the Board, communicated to, and by, line management and is reviewed annually by the Risk Division.
People, performance, remuneration and training
During 2014, a programme of initiatives was delivered to help strengthen and further embed a risk management culture aligned to the Risk Framework principles and Risk Culture Statement. This included embedding risk management competencies into the whole employee lifecycle including recruitment, performance management, training and development, and reward. We actively encourage our people to speak up and raise ideas, suggestions and issues resulting in proactive changes.
A training programme to help embed risk management across Santander UK was delivered during 2014 highlighting personal accountability for managing risk at all levels of Santander UK. The strong culture of risk management and control provides the foundation for improving performance and delivering future success.
Mandatory risk management training and other online and face to face training were completed throughout the year to promote the understanding of Santander UK’s values and risk culture.
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How we approach risk – our culture and principles
The complexity and importance of the financial services industry demands a strong risk culture. We have extensive systems, controls and safeguards in place to manage and control the risks we face, but it is also crucial that everyone takes personal responsibility for managing risk.
Our risk culture plays a key role in our aim to be the best bank for our people, customers, shareholders and communities. It is vital that everyone in our business understands that, to achieve this, our people have a strong, shared understanding of what risk is, and what their role is in helping to control it. We express this in our Risk Culture Statement:
| Risk Culture Statement |
Santander UK will only take risks that it understands and |
The Board reviews and approves our Risk Culture Statement every year. The CEO, Chief Risk Officer (CRO) and other senior executives are responsible for promoting our risk culture from the top. They drive cultural change and increased accountability across the business.
We reinforce our Risk Culture Statement and embed our risk culture in all our business units through our Risk Framework, Risk Attestations and other initiatives. This includes highlighting that:
| – | It is everyone’s personal responsibility to play their part in managing risk |
| – | We must identify, assess, manage and report risk quickly and accurately |
| – | We make risk part of how we assess our people’s performance, how we recruit, develop and reward them |
| – | Our internal control system is essential to make sure we manage and control risk in line with our principles, standards, Risk Appetite and policies. |
We use Risk Attestations to confirm how we manage and control risks in line with our Risk Framework and within our Risk Appetite. As an example, every year, each member of our Executive Committee confirms in writing that they have managed risk in line with the Risk Framework in the part of the business for which they are responsible. Their attestation lists any exceptions and the agreed actions taken to correct them. This is a very tangible sign of the personal accountability that is such a key part of our risk culture.
Making change happen: ‘I AM Risk’ – everyone’s personal responsibility for managing risk
We launched our approach to raise awareness of, and embed, the right risk management culture across Santander UK in November 2012 under the ‘I AM Risk’ banner. We have learned from the reviews of other banks after the financial crisis and the increased regulatory focus on strong risk management in banks. This programme aims to make sure our people:
| – | Identify risks and opportunities |
| – | Assess their probability and impact |
| – | Manage the risks and suggest alternatives |
| – | Report, challenge, review, learn and ‘speak up’. |
We use I AM Risk in our risk attestations, risk frameworks, and all our risk-related communications. We also include it in our mandatory training and induction courses for our staff. To support this, we launched the I AM Risk learning website which includes short films, factsheets and discussion boards.
Among other things, I AM Risk is how we make risk management part of everyone’s life as a Santander employee, from how we recruit them and manage their performance to how we develop and reward them. It is also how we encourage people to take personal responsibility for risk, speak up and come up with ideas that help us change. To do this, we embedded the behaviours we want to encourage in key processes and documents. These included:
| – | Individual annual performance reviews |
| – | New induction and training courses |
| – | Codes of conduct |
| – | Reward and incentives |
| – | Risk frameworks and governance. |
As part of the programme, we added mandatory risk objectives for all our people – from our Executive Committee to branch staff. We also added risk technical and behavioural requirements to our job profiles, and similar elements to other initiatives.
In 2015, we created The Santander Way Steering Committee to coordinate all our culture initiatives under the sponsorship of the CEO. The I AM Risk initiatives are reported quarterly to the CRO, and to the Executive Risk Committee and Board Risk Committee twice a year.
We also continued to embed our risk management culture. We:
| – | Reinforced I AM Risk messages through enhanced communication, education and training at all levels |
| – | Embedded risk management across the whole employee life-cycle, including our recruitment practices |
| – | Increased and promoted our range of escalation channels |
| – | Updated the mandatory risk objectives for all our people including our Executive Committee |
| – | Measured change through a range of measures including ‘speaking up’ escalation channels, surveys and mandatory training completion rates |
| – | Improved how we identify and manage risk in our change and strategic planning processes. |
I AM Risk continues to play a key part in our aim to be the best bank for our people, customers, shareholders and communities. In 2015, we built on the progress made in Retail Banking and Commercial Banking, and extended our focus to Global Corporate Banking and Corporate Centre.
Annual Report 2015
Risk review
Our risk governance structure
We are committed to the highest standards of corporate governance in every part of our business. This includes risk management. For details of our governance, including the Board and its Committees, see the ‘Governance’ section of this Annual Report.
The Board delegates authority to committees as needed and where appropriate. Our risk governance structure strengthens our ability to identify, assess, manage and report risks, as follows:
| – | Committees: A number of Board and Executive committees are responsible for specific parts of our Risk Framework |
| – | Roles with risk management responsibilities: There are senior roles with specific responsibilities for risk |
| – | Risk organisational structure: We have ‘three lines of defence’ built in to the way we run our business. |
Committees
The Board and the Board Risk Committee responsibilities for risk are:
| Board/ Board Committee | Main risk responsibilities | |||
The Board | — | Has overall responsibility for business execution and for managing risk | ||
| — | Reviews and approves the Risk Framework and Risk Appetite. | |||
Board Risk Committee | — | Assesses the Risk Framework and recommends it to the Board for approval | ||
| — | Advises the Board on our overall Risk Appetite, tolerance and strategy | |||
| — | Oversees our exposure to risk and our future strategy and advises the Board on both | |||
| — | Reviews the effectiveness of our risk management systems and internal controls. | |||
The Executive Level Committee responsibilities for risk are: | ||||
| Executive Committees | Main risk responsibilities | |||
Executive Committee | — | Reviews and approves business plans in line with our Risk Framework and Risk Appetite before they are sent to the Board to approve | ||
| — | Receives updates on key risk issues managed by CEO-level committees and monitors the actions taken. | |||
Executive Risk Committee | — | Reviews Risk Appetite proposals before they are sent to the Board Risk Committee and the Board to approve | ||
| — | Ensures that we comply with our Risk Framework, Risk Appetite and risk policies | |||
| — | Reviews and monitors our risk exposures and approves any steps we need to take. | |||
Asset and Liability Committee (ALCO) | — | Reviews liquidity risk appetite proposals before they are sent to the Board to approve | ||
| — | Ensures we measure and control structural balance sheet risks, capital, funding and liquidity, in line with the policies, strategies and plans set by the Board | |||
| — | Reviews and monitors the key asset and liability management activities of the business to ensure we keep our exposure in line with our Risk Appetite. | |||
Pensions Committee | — | Reviews pension risk appetite proposals before they are sent to the Board to approve | ||
| — | Approves actuarial valuations and the impact they may have on our contributions, capital and funding | |||
| — | Consults with the pension scheme trustees on the scheme’s investment strategy. | |||
Capital Committee | — | Puts in place effective risk control processes, reporting systems and processes to make sure capital risks are managed within our Risk Framework | ||
| — | Reviews capital adequacy and capital plans, including the Internal Capital Adequacy Assessment Process (ICAAP), before they are sent to the Board to approve. | |||
44 Santander UK plc
Governance, roles and responsibilities
Santander UK is committed to achieving the highest standards of corporate governance in every aspect of the business, including risk management. Details of Santander UK’s governance arrangements, including descriptions of the Board and its Committees are set out in the Governance section of this Annual Report.
The growing complexity and importance of the financial services industry demands a strong risk culture. Santander UK’s risk governance structure strengthens risk identification, assessment, management and reporting. To enable the Board to achieve its objectives, it delegates authority to various committees as required and appropriate. Furthermore, a number of Board and Executive committees specifically consider risk across the Santander UK group:
The key risk responsibilities of the Board and its Risk Committee include:
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In addition, risk management committees and forums ensure that effective risk control frameworks are in place and risk is managed within the Risk Appetite limits set by the Board.
Risk review
Risk governance
continued
Risk management
The Board delegates full responsibility to the CEO for the execution of business activities and theRoles with risk management of risk on a day-to-day basis. As the leader of the Risk Division, the CRO provides oversight and challenge. The CRO reports to the Board through the Board Risk Committee, and also reports to the CEO for operational purposes. The Chief Internal Auditor (‘CIA’) reports to the Board through the Board Audit Committee, and also reports to the CEO for operational purposes. The CIA also has a direct reporting line to the CIA of Banco Santander, S.Aresponsibilities
Chief Executive Officer
The Board delegates responsibility for our business activities and managing risk on a day-to-day basis to the CEO. The key risk responsibilities of the CEO are to:
| – | Propose |
| – | Ensure |
| – |
| – | Ensure all our staff know about the policies and corporate values approved by the |
Chief Risk Officer
As the leader of the Risk Division, the CRO oversees and challenges plans and activities. The CRO reports to the Board through the Board Risk Committee, and also reports to the CEO for operational purposes. The CRO also reports directly to the CRO of Banco Santander SA. The key risk responsibilities of the CRO are to:
| – | Propose a Risk Framework to the Board |
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| – | Ensure that our culture promotes ethical practices and social responsibility |
| – | Ensure that our policies and corporate values approved by the Board are communicated so that our culture, values and ethics are aligned to our strategic objectives. |
The CRO is responsible for the control and oversight of all risks except for legal, financial crime, conduct and regulatory risk. These are the responsibilities of the Chief Conduct and Compliance Officer (CCCO) and the General Counsel and Chief Administrative Officer (GC&CAO).
General Counsel and Chief Administrative Officer
The GC&CAO is responsible for the control and oversight of legal and financial crime risk. These are part of his responsibilities for legal, secretariat and financial crime. The GC&CAO has similar responsibilities to the CRO.
Chief Conduct and Compliance Officer
The CCCO is responsible for the control and oversight of conduct and regulatory risk. This is part of his responsibility for compliance. The CCCO has similar responsibilities to the CRO.
Chief Internal Auditor
The mainChief Internal Auditor (CIA) reports to the Board through the Board Audit Committee, and also reports to the CEO for operational purposes. The CIA also reports directly to the CIA of Banco Santander SA. The key responsibilities of the CIA are to:
| – | Ensure |
| – | Design and |
| – | Develop an audit plan |
| – |
| – |
| – | Develop and |
Annual Report 2015
Risk review
Risk organisational structure
We use the three lines of defence model to manage risk. This model is widely used in the banking industry and has a clear set of principles to implement a cohesive operating model across an organisation. It does this by separating risk management, risk control and risk assurance.
The diagram below shows the reporting lines to the Board with respect to risk:
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Risk organisational structure
The three lines of defence is an industry-wide model for the management of risk, understood as a clear set of principles by which to implement a cohesive operating model across an organisation. The reporting lines with respect to the management of risk are set out below:
Risk review
Risk governance
continued
Internal control system
TheOur Risk Framework providesis an overarching view of theour internal control system which supportsthat helps us manage risk across the management of risk on an enterprise-wide basis across Santander UK.business. It sets out at a high level the overriding guiding principles, the minimum standards, the roles and responsibilities, and the governance for internal control. The internal control system is split into the following categories:
Category
| Description | |
| Risk Frameworks | Set out how we should manage and control risk | |
– The Santander UK group (overall framework) | ||
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Risk Management Responsibilities | Set out the Line 1 risk management responsibilities for business units and business support units. | |
Risk Appetite Statement | Defines the type and the level of risk that Risk control units set
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Delegated Authorities/
| Define who can do what under the authority delegated to the CEO by the Board. | |
| Risk Attestations |
They are completed at least once a year. They also explain any
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Annual Report 2015
Risk review
How we control the risks we are prepared to take
When our Board sets our strategic objectives, it is important that we are clear about the risks we are prepared to take to achieve them. We express this through our Risk Appetite Statement, which defines the amount and kind of risk we are willing to take. Our Risk Appetite and strategy are closely linked – our strategy must be achievable within the limits set out in our Risk Appetite.
The principles of our Risk Appetite
Our Risk Appetite Statement lists ten principles that we use to set our Risk Appetite.
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| – | We should be able to predict how our income and losses might vary – that is, how volatile they are. That applies to all our risks and lines of business |
| – | Our earnings and dividend payments should be stable, and in line with the return we aim to achieve |
| – | We are an autonomous business, so we always aim to have strong capital and liquidity resources |
| – | The way we fund our business should give us diverse sources and duration of funding. This helps us to avoid relying too much on wholesale markets |
| – | We set controls on large concentrations of risk, such as to single customers or specific industries |
| – | There are some key risks we take, but for which we do not actively seek any reward, such as operational, conduct, financial crime and regulatory risk. We take a risk-averse approach to all such risks |
| – | We comply with all regulations – and aim to exceed the standards they set |
| – | Our pay and bonus schemes should support these principles and our risk culture |
| – | We always aim to earn the trust of our people, customers, shareholders and communities. |
How we describe the limits in our Risk Appetite
Our Risk Appetite sets out detailed limits for different types of risk, using metrics and qualitative statements.
Metrics
We use metrics to set limits on losses, capital and liquidity. We set:
| – | Limits for losses for our most important risks, including credit, market, operational and conduct risk |
| – | Capital limits, reflecting both the capital that regulators expect us to hold (regulatory capital) and our own internal measure (economic capital) |
| – | Liquidity limits according to the most plausible stress scenario for our business. |
These limits apply in normal business conditions, but also when we might be experiencing a far more difficult trading environment. A good example of this might be when the UK economy is performing much worse than we expected. We refer to conditions such as this as being under stress.
There is more on economic capital and stress scenarios later in this section.
Qualitative statements
For some risks we also use qualitative statements that describe in words the controls we want to set. For example, in conduct risk, we use them to describe our Risk Appetite for products, sales, after-sales service, and culture. We also use them to exclude or restrict risks from some sectors, types of customer and activities.
How we set our Risk Appetite, and stay within it
We control our Risk Appetite through our Risk Appetite Framework. Our Board approves and oversees the Risk Appetite Statement every year. This ensures it is consistent with our strategy and reflects the markets in which we operate. Our Executive Committee is responsible for ensuring that our risk profile (the level of risk we are prepared to accept) is consistent with our Risk Appetite Statement. To do this they monitor our performance, business plans and budgets each month. At least every six months, we use stress testing to review how our business plan performs against our Risk Appetite Statement. This shows us if we would stay within our Risk Appetite under stress conditions. It also helps us to identify any adverse trends or inconsistencies.
We embed our Risk Appetite by setting more detailed risk limits for each business unit and key portfolio. These are set in a way so that if we stay within each detailed limit, we will stay within our overall Risk Appetite. When we use qualitative statements to describe our appetite for a risk, we link them to lower-level key risk indicators, so that we can monitor and report our performance against them.
We provide a programme of communication and training for our staff which helps ensure that Risk Appetite is well understood.
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The Risk Appetite defines the type and the level of risk that Santander UK is willing and able to accept in pursuit of its strategic objectives. The Risk Appetite is set on an enterprise-wide basis and is closely linked with the strategy of Santander UK. The strategy must be achievable within the agreed boundaries determined by the Risk Appetite.
The Risk Appetite is expressed through the principles, metrics, and qualitative statements contained within our Risk Appetite Statement.
Principles
The principles that govern the Risk Appetite Statement, which are based on Santander UK’s strategic objectives and the Risk Framework, require that Santander UK should maintain:
Primary metrics
These metrics are the primary articulation of the Risk Appetite. Limits are set covering losses, capital adequacy and liquidity under stress conditions. The scope of the limits for losses covers all appropriate key risk types including credit risk, market risk, operational risk and conduct risk. Capital limits consider both regulatory and economic capital, whilst liquidity risk appetite is set with reference to the current most plausible stress scenario.
Complementary metrics
The main objective of these metrics is to control risk concentrations. Their scope includes limits around large and single-name exposures, products, sectors, sovereigns and certain geographical regions.
Qualitative statements
For aspects of risk that do not lend themselves to expression through metrics, qualitative statements are employed. For example, in the case of conduct risk, qualitative statements express our risk appetite around products, sales, after sales servicing and culture. Statements are also used to cover specific exclusions and restrictions in respect of certain sectors, types of customer and business activities.
The Board approves and oversees the annual formulation of the Risk Appetite Statement, ensuring that it continues to be consistent with our strategy, and reflective of the markets in which we operate.
It is the responsibility of executive management to ensure the risk profile of Santander UK, reflected in the annual budget and business plan, remains consistent with the Risk Appetite Statement. Monthly monitoring is undertaken to support this. In addition, at least semi-annually, the performance of the business plan against the Risk Appetite under stressed conditions is assessed to detect any adverse trends or inconsistencies.
After the Risk Appetite has been set, it is cascaded down to business unit or portfolio level as appropriate ensuring enterprise-wide coverage. To help ensure the Risk Appetite is properly communicated and embedded, lower level limits and thresholds are set at a business unit or portfolio level, which are linked to the Risk Appetite Statement. For risk types where the Risk Appetite is expressed through qualitative statements, appropriate lower level Key Risk Indicators are used, so that performance against the statements can also be monitored and reported.
| Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks |
Risk review
Risk governance
continued
Santander UK uses stressStress testing as a risk management tool in order to improve business planninghelps us understand how different events and enterprise-wide risk management. The main objective of stress testing is to enhance senior management’s understanding of the sensitivity of Santander UK’seconomic conditions could affect our business plan, earnings and risk profile to stressedprofile. This helps us plan and manage our business better.
Scenarios for stress testing
To see how we might cope with difficult conditions, we regularly develop challenging scenarios that we might face. We consult a broad range of internal stakeholders when we design and choose our most important scenarios, including Board members. The scenarios cover a wide range of outcomes, risk factors, time horizons and market conditions.
Governance
Santander UK’s Stress Testing Framework has been They are designed to ensure that stress testing has enterprise-wide coverage and is an integral part of:test:
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| – | Potential impacts on specific risks such as market risk, credit risk and pension risk. |
We describe each scenario using a narrative setting out how events might unfold, as well as a market and/or economic context. For example the key economic factors we reflect in our ICAAP scenarios include house prices, interest rates, unemployment levels and the size of the UK economy. One scenario looks at what might happen in a recession where the output of the economy shrinks by around 3%, unemployment reaches over 9%, and house prices fall by around 20%.
We use a comprehensive suite of stress scenarios to explore sensitivities to market risk, including those based on historic market events.
How we use stress testing
We use stress testing to estimate the effect of these scenarios on our business and financial performance, including:
| – | Our business plan, and its assessment against our Risk |
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| – | Impacts on other risks such as market and credit risk. |
Various governance committeesWe use a wide range of models, approaches and assumptions. These help us interpret the links between factors in markets and the economy, and our financial performance. For example, one model looks at how changes in unemployment rates might affect the number of customers who might fall into arrears on their mortgage.
Our stress testing models are involvedsubject to a formal review, independent validation and approval process. We highlight the key weaknesses and related model assumptions in the reviewapproval process for each stress test. In some cases, we overlay expert judgement onto the results of our models. Where this is material to the outcome of the stress test, the approving governance committee reviews it.
We take a multi-layered approach to stress testing to capture risks at various levels. This ranges from sensitivity analyses of a single factor to a portfolio, to wider exercises that cover all risks across our entire business. We use stress testing outputs to design action plans that aim to mitigate damaging effects.
We also conduct reverse stress tests. These are tests in which we identify and challengeassess scenarios that are most likely to cause our business model to fail.
Board oversight of stress testing
The Executive Risk Committee approves the design of the scenarios in our ICAAP. The Board Risk Committee approves the stress testing framework and the annual programme of stress testing. The Board considersreviews the outputs of stress testing outputs duringas part of the approval processes for the ICAAP, the ILAAILAAP, our Risk Appetite and Risk Appetite. It is supportedregulatory stress tests.
Regulatory stress tests
We take part in a number of external stress testing exercises. These can include stress tests of the UK banking system conducted by the Board Risk Committee which approves the Stress Testing Framework and the annual programme ofPRA. We also contribute to stress testing to be conducted. The Executive Risk Committee is responsible for ensuring the integritytests of the stress testing approaches, processes and results as well as the overall adherence to the Stress Testing Framework.wider Banco Santander group.
For more details on capital and liquidity stress testing, see the ‘Capital risk’ and ‘Liquidity risk’ sectionssections.
Annual Report 2015
Risk review
HOW RISK IS DISTRIBUTED ACROSS OUR BUSINESS(unaudited)
As well as assessing how much regulatory capital we are required to hold, we use an internal Economic Capital (EC) model to measure our risk.
We use EC to get a consistent measure across different risks, including credit, market and operational risk. EC also takes account of the Risk Review.how concentrated our portfolios are, and how much diversification there is between our various businesses.
Scenarios
Santander UK regularly develops forward-looking hypothetical stress scenarios. These considerAs a broadconsequence we can use EC for a range of potential outcomes, exploring both the key vulnerabilities of Santander UK’s business model, as well as external economic shocks. The scenario design and selection process engages a broad range of internal stakeholders, including Board members. In addition to a descriptive narrative, the scenarios are defined using projections for key economic variables such as GDP, house price indices, unemployment and interest rates. The range of scenarios features diverse severities and time horizons of typically between three and five years.risk management activities. For example, one scenario considers an economic recessionwe can use it to help us compare requirements in which GDP suffers an overall contractionour ICAAP or to get a risk-adjusted comparison of approximately 4% with unemployment reaching rates as high as 12%income from different activities.
The table below shows the proportion of our regulatory capital risk weighted assets we held in different parts of our business, and housing prices falling by upfor different types of risk. It shows how risk was distributed at 31 December 2015 and 2014.
2015 compared to 35% from their peak level.2014
Models, approaches and assumptions
A rangeOur distribution of quantitative models, approaches and assumptions are used to estimate forecasted stressed results. These include the linkages between underlying economic factors and stressed risk parameters, as well as those for the balance sheet and income statement. Where stress testing models are deemed material they are subject to a formal review, independent validation and approval process. The key weaknesses and associated assumptions of the models are highlighted during the approval process for the stress test in question. In some cases, the results generated by the stress testing models will be supplemented with expert management judgement. Where this is material to the outcome of the stress test, it is subject to review by the approving governance committee.
A multi-layered approach to stress testing has been designed in order to capture risks at various levels; this extends from sensitivity analyses of a single risk factor to an individual portfolio, through to comprehensive exercises that cover all risk types across the entire business. Stress testing outputs form the basis for designing appropriate action plans aimed at mitigating potentially damaging effects.
Santander UK also conducts reverse stress tests. These are tests in which Santander UK is required to identify and assess scenarios that are most likely to cause the failure of its current business model. The results of the reverse stress test are reviewed and approved by senior management and ultimately by the Board.
External stress testing exercises
Santander UK also takes part in a number of external stress testing exercises. During 2014, these included the concurrent stress test of the UK banking system conducted by the PRA, as describedchanged very little in the ‘Top Risks’ section, as well as contributing to the stress testyear. The largest category was credit risk in Retail Banking, which accounted for most of Banco Santander, S.A. orchestrated by the EBAour risk-weighted assets. This reflects our business strategy and balance sheet. Market risk arises primarily as part of their test of the resilience of banksour trading book activities within Global Corporate Banking. Our operational risk capital requirements remained small, and were concentrated in our Retail Banking activities.
For more on this, see ‘Risk weighted assets’ in the EU.
The Economic Capital (‘EC’) model is used as an internal measure of risk to which Santander UK is exposed. It is used as a risk management tool alongside approaches such as stress testing, and complements the assessment of regulatory capital requirements. The model has been developed internally in conjunction with Banco Santander, S.A., and is regularly monitored and updated as required. It has been subject to independent validation, and formal review and approval.
The model allows for consistent assessment across various risk types, including credit risk, trading market risk, banking market risk, pension risk, operational risk and strategic risk. Critically, the model also considers portfolio concentration and diversification between businesses. The time horizon and confidence interval of the model can be adjusted to allow it to be used for a variety of risk management purposes. For example, EC is used to supplement the analysis of regulatory capital within the ICAAP, and also to compare the risk-adjusted returns of business lines and individual transactions.
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DISTRIBUTION OF RISK(unaudited)
As homogenous measures of risk, both EC and regulatory capital can be used to illustrate the distribution of risk across those risk types for which capital is considered an effective mitigant. The table below sets out the distribution of regulatory RWAs across Santander UK at 31 December 2014 and 2013, by key risk type and by business unit.
During 2014, the relative distribution of risk across Santander UK, as measured by regulatory RWAs, was broadly unchanged. Credit risk in Retail Banking remained the largest consumer of RWAs, reflecting our balance sheet structure and business strategy.
For additional information, see ‘Risk weighted assets’ in the ‘Capital risk’ section on page 117.
Risk review
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| In this section, we explain how we manage credit risk and analyse our credit risk profile and performance. | ||||||||
| We begin by discussing credit risk at a Santander UK group level. Then we cover each of our business segments: Retail Banking, Commercial Banking, Global Corporate Banking and Corporate Centre, separately in more detail in the sections that follow. For details of the businesses in each of our segments, see Note 2 to the Consolidated Financial Statements. | ||||||||
| Key metrics | ||||||||
| NPL ratio of 1.54% continued to improve | ||||||||
| In 2015, credit quality improved further, supported by both our conservative risk profile and supportive economic environment. | ||||||||
| Loan loss allowances decreased to £1,157m | ||||||||
| Total loan loss allowances decreased in 2015, with retail and corporate loans performing well in a supportive credit environment. | ||||||||
| Average LTV of 65% on new mortgage lending | ||||||||
| We maintained our prudent lending criteria, with an average LTV of 65% on new lending. Our lending with an LTV of over 85% accounted for 16% of the new business flow. | ||||||||
| NPL coverage ratio decreased to 38% | ||||||||
The NPL coverage ratio reduced to 38% in 2015, from 42% in 2014. | ||||||||
Annual Report 2015
Risk review
Credit risk – Santander UK group level
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We also explain how we measure and control risk, including the key metrics we use.
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CREDIT RISK MANAGEMENT
Exposures
Exposures to credit risk arise in our business segments from:
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Retail Banking
Commercial Banking
Global Corporate Banking
Corporate Centre
— Residential mortgages, unsecured lending (overdrafts, personal loans, credit cards and business banking) and vehicle consumer finance.
— We provide these to individuals and small businesses.
— Loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance.
— We provide these to mid-corporates and SMEs, Commercial Real Estate and Social Housing customers.
— Loans and treasury products, and from treasury markets activities.
— We provide these to large corporates, financial institutions, sovereigns and other international organisations.
— Asset and liability management of our balance sheet, as well as our non-core and Legacy Portfolios being run down.
— Exposures include sovereign and other international organisation assets held for liquidity.
Our types of customer and how we manage them
We manage credit risk across all our business segments in line with the credit lifecycle shown in the next section. We tailor the way we manage risk across the lifecycle to the type of customer. We classify customers as standardised or non-standardised:
Standardised | Non-standardised | |
— Mainly individuals and small businesses. Transactions are for relatively small amounts of money, and share similar credit characteristics. | — Mainly medium and large corporate customers and financial institutions. Transactions are for larger amounts of money, and have more diverse credit characteristics. | |
— In Retail Banking, Commercial Banking and Corporate Centre (for non-core portfolios). | — In Commercial Banking, Global Corporate Banking and Corporate Centre. | |
— We manage risk using automated decision-making tools. These are backed by teams of analysts who specialise in this type of risk. | — We manage risk through expert analysis. This is supported by decision-making tools based on internal risk assessment models. | |
52 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||||
Our approach to credit risk
We manage our portfolios across the credit risk lifecycle, from drawing up our risk strategy, plans, budgets and limits to making sure our actual risk profile stays in line with our plans and within our Risk Appetite.
Risk strategy and planning
All relevant areas of the business – Risk, Marketing, Products and Finance – work together to create our business plans. Our aim is to balance out strategy, business goals, financial and technical resources and our attitude towards risk (our Risk Appetite). The result is an agreed set of targets and limits that help us direct our business.
To do this, we focus particularly on:
| – | Economic and market conditions and forecasts |
| – | Regulations |
| – | Conduct considerations |
| – | Profitability, returns and market share. |
Assessment and origination
We undertake a thorough risk assessment to make sure customers can meet their obligations before we approve a credit application. We consider:
| – | The credit quality of the customer |
| – | The underlying risk – and anything that mitigates it, such as netting or collateral |
| – | Our risk policy, limits and appetite |
| – | Whether we can balance the amount of risk we face with the returns we could get. |
We make these decisions with authority from the Board.
Monitoring
We measure and monitor changes in our credit risk profile on a regular and systematic basis against budgets, limits and benchmarks. We monitor credit performance by portfolio, segment, customer or transaction. If our portfolios do not perform as we expect, we investigate to understand the reasons. Then we take action to mitigate it as far as possible and bring performance back on track.
We monitor and review our risk profile through a formal structure of governance and committees across our business segments. These agree and track any steps we need to take to manage our portfolios, to make sure the impact is prompt and effective. This structure is a vital feedback tool to co-ordinate issues, trends and developments across each part of the credit lifecycle.
A core part of our monitoring is credit concentrations, such as the proportion of our lending that goes to specific borrowers, groups or industries. We set concentration limits in line with our Risk Appetite and review them on a regular basis.
Arrears management
Sometimes our customers face financial difficulty and they may fall into payment arrears or breach conditions of their credit facility. If this happens, we work with them to get their account back on track. We aim to support our customers and keep our relationship with them. We do this by:
| – | Finding affordable and sustainable ways of repaying to fit their circumstances |
| – | Monitoring their finances and using models to predict how we think they will cope financially. This helps us design and put in place the right strategy to manage their debt |
| – | Working with them to get their account back to normal as soon as possible in a way that works for them and us |
| – | Monitoring agreements we make to manage their debt so we know they are working. |
Top risks
Annual Report 2015
A topRisk review
Forbearance
When a customer gets into financial difficulties, we can change the terms of their loan, either temporarily or permanently. We do this to help customers through temporary periods of financial difficulty so they can get back on to sustainable terms and fully pay off the loan over its lifetime, with support if needed. This is known as forbearance. We always try to do this before the customer defaults. Whatever we offer, we assess it to make sure the customer can afford the repayments. Forbearance improves our customer relationships and our credit risk profile. It also means that we only use foreclosure or repossession as a last resort. We review our approach regularly to make sure it is still effective.
In a currentfew cases, we can help a customer in this way more than once. This can happen if the plan to repay their debt doesn’t work and we have to draw up another one. When this happens more than once in a year, or more than three times in five years, we call it multiple forbearance.
Debt recovery
Sometimes, even when we have taken all reasonable and responsible steps we can to manage arrears, they prove ineffective. If this happens, we have to end our relationship with the customer and try to recover the whole debt, or as much of it as we can.
Risk measurement and control
We measure and control credit risk within our business that could potentiallyat all stages across the credit lifecycle. We have a material impact on our financial results, reputationrange of tools, processes and the sustainability of our business model.approaches, but we rely mainly on:
| – | Credit control: as a core part of risk management we generate, extract and store accurate, comprehensive and timely data to monitor credit limits. We do this using internal data and data from third parties like credit bureaux |
| – | Models: we use models widely to measure credit risk and capital needs. They range from statistical and expert models to benchmarks |
| – | Review: we use formal and informal forums across the business to approve, validate, review and challenge our risk management. We do this to help us predict if our credit risk will worsen. |
Strategic priority key:We use two key metrics to measure and control credit risk: Expected Loss (EL) and Non-Performing Loans (NPLs).
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(2) Non-IFRS measure. See page 106.
Risk review
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Credit risk is the risk of financial loss arising from the default or credit quality deterioration of a customer or counterparty to which Santander UK has directly provided credit, or for which Santander UK has assumed a financial obligation.
Exposures to credit risk arise in the following businesses:
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The credit risk arising in each of these businesses is covered in further detail in subsequent sections. The management of credit risk is tailored according to the type of customers, who are typically classified as either standardised or non-standardised as follows:
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Risk review
Credit risk
continued
Approach to credit risk
Risk limit planning and setting
Risk limit planning and setting is a dynamic process involving the discussion of business proposals and the attitude to risk. This process culminates in an agreed risk limit plan, which is a comprehensive document used for the integrated management of the balance sheet and its inherent risks. All risk limit plans are monitored with management actions taken to deliver the plan, as necessary.
Risk analysis and credit rating process
Risk analysis is performed to establish the customer’s ability to meet its obligations. The analysis includes a review of customer credit quality, associated operational risk, and risk-adjusted returns. To aid this analysis, Santander UK uses a number of proprietary internal measurement tools including statistical models and rating systems. These are used for internal credit risk assessment and informing lending decisions, and are tailored to each risk classification.
For standardised customers, statistical models are typically employed that automatically assign a score to the proposed transaction or customer. Such scorecards typically work in conjunction with other policy rules, supported by credit references. Most decisions are automated although, in some cases, manual intervention is necessary. Risk assessment is not constrained to decisions at origination, as often scorecards exist across the customer lifecycle.
For non-standardised customers, specific proprietary rating systems are used. For many non-standardised counterparties with a global footprint, Santander UK employs rating tools, co-ordinated on a global basis by the Banco Santander group. Portfolios of this nature include sovereigns, large corporates and certain financial institutions. Risk assessment involves the analysis of the customer’s financial performance compared with macro-economic data, supplemented with an analyst’s expert judgement. Customer ratings are reviewed at least annually and more frequently in cases where monitoring indicates this is appropriate. The rating tools are regularly reviewed.
Transaction decision-making
Having analysed a credit transaction and rated the customer, a decision is then made about whether or not to approve the transaction. This decision-making process takes account of the credit quality of the customer, the underlying risk of the transaction (and the extent of any risk mitigation such as collateral); the associated risk policy, limits and appetite; and achievement of the desired balance between risk and associated return. All decisions to approve credit transactions are made under authority delegated by the Board. The approach to the decision-making process differs according to risk classification. For standardised customers, automated decision models are used to manage large volumes of credit transactions. In certain cases this is supplemented by the use of manual underwriting to ensure adherence to risk policy. For non-standardised customers, credit approval decisions are made under a system of delegated authorities to individuals. Larger transactions above pre-defined limits are referred to governance committees.
Risk monitoring
Monitoring is conducted at a portfolio, segment, customer and transaction level. Mitigating actions are proposed if deterioration is detected. Credit concentrations are also monitored. Concentration limits as defined by the Risk Appetite are reviewed and approved as necessary.
For standardised customers (principally retail and SME customers), scorecards and policies are monitored frequently, using both quantitative and qualitative key risk indicators in order to detect any variance in portfolio performance compared to forecasts. Adjustments to models and policy are made as required to bring portfolio performance back in line with expectations.
For non-standardised customers, monitoring is undertaken using a Watchlist process. There are a range of indicators that may trigger a case being added to the Watchlist, including downturn in trade, covenant breaches, major contract loss, early arrears or persistent excesses and resignation of key management. Such cases are assessed to determine the potential financial implications of these trigger events. The Watchlist uses the classifications of ‘enhanced monitoring’ and, for cases warranting more significant actions, ‘proactive management’. Proactive management strategies can range from an agreed reduction in credit exposure to the negotiation of additional security or the cancellation of exposure. Inclusion on the Watchlist indicates that a potential impairment event has been observed but it does not automatically mean there has been a default. Cases on the Watchlist are assessed for impairment collectively, unless the debt management activity has been transferred to the Restructuring & Recoveries team, at which point impairment is assessed individually. Cases that become non-performing are no longer included on the Watchlist and are also assessed for impairment individually.
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Risk measurement and control
Changes in Santander UK’s credit risk position are measured and controlled against budgets, limits and benchmarks. The potential future impact of any changes arising from either strategic decisions or the external operating environment is assessed to establish any mitigating action. Several metrics are used to measure and control credit risk in this regard. The key metrics for risk management purposes:
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– Probability of default – Exposure at default
– PD, EAD and LGD are
| The way we calculate impairment under IFRS will change from 1 January 2018 when IFRS 9 takes effect. It uses an expected credit loss (ECL) model rather than an incurred loss model used by IAS 39. There are also differences between the ECL approach used by IFRS 9 and the EL approach used by CRD IV. For more, see ‘Future accounting developments’ in Note 1 to the Consolidated Financial Statements. | |||||
NPLs |
Retail Banking – – Their loan term has ended, but they still owe us money more than three – – –
– We have repossessed the property. We have included these as
Commercial Banking, Global Corporate – – – – –
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Santander UK uses a number of measurement tools for assessing credit risk, making lending decisions and calculating regulatory capital in accordance with CRD IV requirements, but these are not used in the calculation of impairment loss allowances for accounting purposes under IFRS. For the remainder of the Risk Review, impairments, impairment losses and impairment loss allowances refer to calculations in accordance with IFRS unless specified as relating to CRD IV. For details of the accounting policies for impairment calculated in accordance with IFRS, see Note 1 to the Consolidated Financial Statements.
Risks areWe also assessedassess risks from various complementaryother perspectives, including internal rating deterioration, geographical location, business area, product and process, in order to identify specific areas requiring remediation. Stresswe need to focus on. We also use stress testing techniques are also employed to establish vulnerabilities to economic deterioration.
Debt management
Debt management is fundamentalOur business segments tailor their approach to our business, and is deployed through specialist units. It is a strategic, integrated business activity that aimscredit risk to deal fairly but efficiently with customers that are experiencing financial difficulties. Effective debt management is dependent on:
Debt management activity consists of the following phases, which are tailored to each business segment and are discussed in the sections that follow: Arrears management; Forbearance; Other changes in contractual terms; Other forms of debt management and Exit strategies.
Risk review
Credit risk
continuedlater on.
CREDIT RISK MANAGEMENT – RETAIL BANKING
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Credit risk management and mitigation
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Debt management – mortgages
Debt management strategies can start prior to actual payment default or as early as the day after a repayment is past due and can continue through to legal action. Different collection strategies are applied to different segments of the portfolio subject to the perceived levels of risk and the individual circumstances of each case. Wherever possible, rehabilitation tools are used to encourage customers to find their own way out of financial difficulties with a solution agreeable to Santander UK. Customer retention, where appropriate, is important and helping customers through difficult times can improve loyalty.
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Arrears management
Arrears management makes use of collection and rehabilitation tools such as debt counselling and field visits, as well as exercising legal right of set-off against other designated bank accounts. Our focus is on understanding the nature of customers’ circumstances so that the most appropriate assistance is offered in our efforts to bring the customer account up to date as soon as possible.
Forbearance
Forbearance on mortgage accounts occurs where Santander UK agrees a temporary or permanent change of contractually agreed terms and conditions with a borrower who has been identified as being in financial difficulty. Forbearance strategies are employed to assist customers through temporary periods of financial difficulty and ensure that foreclosure or repossession is a last resort. The effectiveness of our forbearance approach is regularly reviewed.
The factors considered when concluding whether a borrower is experiencing financial difficulties can include significant changes in economic circumstances such as the loss of income or employment, and significant changes in personal circumstances such as divorce or bereavement. The aim of such concessions is to bring the account back on to sustainable terms where the mortgage can be fully serviced over its lifetime. Santander UK’s policies and practices are based on criteria which, in the judgment of management, indicate that repayment is likely to continue and that after the initial period of financial difficulties the customer can revert to the previous terms, with appropriate support where necessary.
Santander UK may offer the following forbearance solutions provided that the affordability assessments indicate that the borrower will be able to meet the revised payment arrangements:
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk |
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Accounts subject to such concessions which are granted due to financial difficulties are subsequently reported as forborne. Many of these accounts remain in the performing portfolio but are identified and reported separately from the other performing accounts, and are subject to higher provisioning rates. Where a case which is subject to forbearance is already classified in NPL at the point the forbearance is agreed, the case is retained in the NPL category, until all arrears prior to the forbearance have been repaid. Under Santander UK’s forbearance methodology, a case remains classified as forborne until full repayment is achieved.
In limited circumstances, a customer may have their loan forborne more than once, when an agreed plan to mitigate the customer’s financial difficulty has not achieved the intended or desired result and an alternative plan is required. Customers that have more than one forbearance event in a given year or more than three events in any rolling five year period are classified as multiple forbearance.
Loan loss allowances are assessed taking into account the value of collateral held as estimated by mark to market valuation models using postcode data as well as the cash flow available to service debt over the period of the forbearance, amongst other factors. These loan loss allowances are assessed regularly and are independently reviewed.
Other changes in contractual terms
In addition to the forbearance arrangements described above, there are other changes in contractual terms that have been carried out historically, due to commercial reasons, for borrowers who are not exhibiting signs of being in financial difficulty (such as a change of term or change to method of repayment). These changes are not classified as forbearance as no financial difficulty was evident at the time of the change in contractual terms and the majority of those modified subsequently continue to perform satisfactorily. The aim of the change in contractual terms is to retain the customer relationship.
Exit strategies
When a customer is unwilling or unable to adhere to an acceptable agreement regarding arrears, the account is escalated to the litigation and recovery phase. Santander UK will consider delaying litigation, or action once in litigation under certain circumstances, such as where the customer presents evidence that the mortgage will be redeemed or the arrears cleared, or where the customer is making a regular payment of at least the instalment amount. These policies exist to ensure that repossession is only used as a last resort. To ensure that estimated losses inherent in the stock of repossessed properties are realistic in relation to the current economic conditions, two independent valuations are requested on all repossessed properties together with estimated disposal costs. These form the basis for the calculation of the impairment loss allowance.
Other key risks
Risk review
Credit risk
continued
Higher risk loans and other segments of particular interest
Santander UK is principally a retail prime lender and does not originate sub-prime or second charge mortgages, or lend on original LTV of over 90% (except where we do so in support of UK Government mortgage schemes to a maximum LTV of 95%). Nonetheless, there are some mortgage types that may present higher risks than others, or which may be of particular interest. These consist of:
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Debt management – banking and consumer credit
Arrears management
Arrears management makes use of collection and rehabilitation tools such as debt counselling and field visits, as well as exercising legal right of set-off against other designated bank accounts. Solutions offered to customers will vary according to both the type of credit facility (e.g. overdraft, credit card, monthly repayment loan) and the individual customer’s circumstances. In all cases our focus is on providing the most appropriate assistance in our efforts to bring the customer account up to date as soon as possible.
Forbearance
Unsecured lending
Forbearance arrangements for unsecured lending follow a similar set of principles to those applied to mortgages. Arrangements are managed on an individual basis taking into consideration each customer’s circumstances to ensure that arrangements are appropriate and sustainable. A range of potential solutions are in place that includes:
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In addition to these forbearance strategies, Santander UK also complies with insolvency solutions for credit card customers which are governed by relevant regulations and codes of practice. Insolvency solutions are not considered forbearance as they are not at the discretion of Santander UK but rather are complied with when applicable.
Finance leases
There is no significant forbearance activity in the finance lease business.
Exit strategies
When a customer is unwilling or unable to adhere to an acceptable agreement regarding arrears, the account is escalated to the litigation and recovery phase. This will only happen after all reasonable attempts to restore the account back to order have been exhausted. Recovery activity includes the use of external debt collections agencies, debt sale to external purchasers, litigation and enforcement action as appropriate.
Risk review
Credit risk
continued
CREDIT RISK MANAGEMENT – COMMERCIAL BANKINGREVIEW
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Credit risk management and mitigation
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Debt management
Problem debt is identified through close monitoring and is supported by the Watchlist process. Debt management activity is performed initially by the relationship manager supported by the relevant credit risk expert, and subsequently by the Restructuring & Recoveries team if the circumstances of the case become more acute or specialist expertise is required and where the case becomes non-performing.
Debt management strategies typically start prior to actual payment default and can continue through to legal action. Different strategies are applied to different segments of the portfolio subject to the perceived levels of risk and the individual circumstances of each case.
Wherever possible, rehabilitation tools are used to encourage customers to find their own way out of financial difficulties with a solution agreeable to Santander UK. Customer retention, where appropriate, is important and helping customers through difficult times can improve loyalty.
Arrears management
Santander UK seeks to detect weakening financial performance early through close monitoring of regular financial and trading information, periodic testing to ensure compliance with both financial and non-financial covenants and regular dialogue with corporate clients. The Watchlist process is used proactively on cases which need enhanced management activity ranging from increased frequency and intensity of monitoring through to more specific activities to reduce exposure, enhance security or in some cases seek to exit the position altogether.
Once categorised as Watchlist, a strategy is agreed with Credit Risk and monitored through monthly Watchlist meetings attended by Restructuring & Recoveries for each portfolio. Where the issues identified are perceived to have become more acute or longer term, a recommendation may be made for the case to be transferred to Restructuring & Recoveries. Once a case enters NPL status, it is removed from the Watchlist and transferred to Restructuring & Recoveries.
Forbearance
Forbearance occurs where Santander UK agrees a temporary or permanent change of contractually agreed terms and conditions with a borrower who has been identified as being in financial difficulty. The factors considered when concluding whether a borrower is experiencing financial difficulties can include the results of covenant testing, reviews of trading and management information provided under the loan terms or directly from the customer as part of Santander UK’s ongoing relationship dialogue. The aim of such concessions is to bring the account back on to sustainable terms where the loan can be fully serviced over its lifetime. Santander UK’s policies and practices are based on criteria which, in the judgment of management, indicate that repayment is likely to continue and that after the initial period of financial difficulties the customer can revert to the previous terms, with appropriate support where necessary.
Forbearance strategies are employed in order to improve the management of customer relationships, maximise collection opportunities and, if possible where the loan is secured, avoid foreclosure or repossession. The effectiveness of our forbearance approach is kept under review.
Santander UK may offer the following forbearance solutions provided that the affordability assessments indicate that the borrower will be able to meet the revised payment arrangements:
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Risk review
Credit risk
continued
Accounts subject to such concessions which are granted due to financial difficulties are subsequently reported as forborne. Many of these accounts remain in the performing portfolio but are identified and reported separately from the other performing accounts, and are subject to higher provisioning rates. Where a case which is subject to forbearance is already in NPLs at the point the forbearance is agreed, the case is initially retained in the NPL category, until evidence of consistent compliance with the new terms is demonstrated before being reclassified out of NPLs (typically timely repayments for a minimum of three months).
Other forborne loans (i.e. those performing at the time of forbearance), are typically classified as sub-standard for an initial period and once the case has demonstrated continued compliance with the new terms and the risk profile is deemed to have improved, it may be reclassified as fully performing. Under Santander UK’s forbearance methodology, a case remains classified as forborne until full repayment is achieved.
In limited circumstances, a customer may have their loan forborne more than once, when an agreed plan to mitigate the customer’s financial difficulty has not achieved the intended or desired result and an alternative plan is required. Customers that have more than one forbearance event in a given year or more than three events in any rolling five year period are classified as multiple forbearance.
Loan loss allowances are assessed taking into account, amongst other factors, the value of collateral held as confirmed by third party professional valuations and the cash flow available to service debt over the period of forbearance. Loan loss allowances are assessed regularly and are independently reviewed.
Other forms of debt management
In addition to forbearance, Santander UK uses other forms of debt management which can include:
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Only a very limited number of debt-for-equity swaps have been undertaken. Under these arrangements, the converted debt is written off (net of existing loan loss allowances) upon completion of the debt conversion. The value of the equity acquired is initially held at nil value and reassessed periodically in light of subsequent performance of the borrower.
Exit strategies
Consensual arrangements
Where it is not possible to agree a forbearance arrangement, Santander UK may seek to exit the position by agreeing with the borrower an orderly sale of assets outside insolvency to pay down the debt, or arranging for the refinance of the debt with another lender.
Enforcement and recovery
Where it is not possible to agree a forbearance arrangement or to exit the position consensually, Santander UK will pursue recovery through an insolvency process, through the sale of any collateral held, or through a sale of the debt on the secondary market. A loan loss allowance is raised where a shortfall is identified between sale proceeds and the outstanding loan balance. Any shortfall is written off upon sale.
Higher risk loans and other segments of particular interest
The Commercial Real Estate market has experienced a particularly challenging environment over recent years following the financial crisis. Further analysis is provided on this sector in the section ‘Credit Risk – Commercial Banking’.
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CREDIT RISK MANAGEMENT – CORPORATE & INSTITUTIONAL BANKING
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Debt management
Arrears management and forbearance
The approach to arrears management and forbearance in Corporate & Institutional Banking is the same as for Commercial Banking.
Risk review
Credit risk
continued
CREDIT RISK MANAGEMENT – CORPORATE CENTRE
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Debt management
Arrears management and forbearance
The approach to arrears management and forbearance in Corporate Centre is the same as for Commercial Banking
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Maximum exposureOur maximum and net exposure to credit risk
The tables below set outshow the main differences between the Santander UK group’sour maximum exposure and net exposure to credit risk. They show the effects of collateral, netting, and risk transfer to mitigate the Santander UK group’sour exposure. The tables present only thoseshow the financial assets subject tothat credit risk.risk affects.
For balance sheet assets, the maximum exposure to credit risk representsis the carrying value after allowance for impairment.loan loss allowances. Off-balance sheet exposures compriseare guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum amount that Santander UKwe would have to pay if the guarantees were to be called upon.on. For formal standby facilities, credit lines and other commitments that are irrevocable over the life of the respective facilities,facility, the maximum exposure is the fulltotal amount of the committed facilities.commitment.
| Maximum exposure | Collateral | Maximum exposure | Collateral | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance sheet | Off-balance | Cash(1) | Non-cash(1) | Netting(2) | Risk | Net | Balance sheet asset | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| asset | sheet | transfer(3) | exposure |
| Gross amounts £bn |
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| Loan loss allowance £bn |
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| Net amounts £bn |
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| Off-balance sheet £bn |
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£bn | (1)
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| Non-cash
£bn | (1)
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| Netting
£bn | (2)
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| Risk transfer £bn | (3)
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| Net exposure £bn |
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| £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks
| 22.6 | - | - | - | - | - | 22.6 | 16.8 | – | 16.8 | – | – | – | – | – | 16.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 5.9 | - | - | - | (0.8) | - | 5.1 | 5.4 | – | 5.4 | – | – | – | (0.4) | – | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 3.0 | - | - | (2.2) | - | - | 0.8 | 6.0 | – | 6.0 | – | – | (5.0) | – | – | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Debt securities
| 8.0 | - | - | - | - | - | 8.0 | 5.5 | – | 5.5 | – | – | – | – | – | 5.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total trading assets
| 16.9 | - | - | (2.2) | (0.8) | - | 13.9 | 16.9 | – | 16.9 | – | – | (5.0) | (0.4) | – | 11.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets designated at fair value: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 2.3 | 0.2 | - | (2.4) | - | - | 0.1 | 1.9 | – | 1.9 | 0.3 | – | (2.2) | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
– Debt securities
| 0.6 | - | - | - | - | - | 0.6 | 0.5 | – | 0.5 | – | – | – | – | – | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets designated at fair value
| 2.9 | 0.2 | - | (2.4) | - | - | 0.7 | 2.4 | – | 2.4 | 0.3 | – | (2.2) | – | – | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities
| 8.9 | - | - | - | - | - | 8.9 | 8.9 | – | 8.9 | – | – | – | – | – | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments
| 23.0 | - | (1.3) | - | (19.2) | - | 2.5 | 20.9 | – | 20.9 | – | (1.1) | – | (17.3) | – | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to banks
| 2.1 | 1.7 | - | (0.3) | - | (0.1) | 3.4 | 3.5 | – | 3.5 | 1.3 | – | (0.8) | (0.3) | – | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers(4):
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers:(4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | 149.9 | 6.7 | - | (156.5) | - | - | 0.1 | 153.3 | (0.4) | 152.9 | 6.7 | – | (159.2) | (5) | – | – | 0.4 | |||||||||||||||||||||||||||||||||||||||||||||||
– Corporate loans | 29.4 | 14.9 | (0.1) | (20.1) | - | - | 24.1 | 31.9 | (0.4) | 31.5 | 16.4 | (0.1) | (23.0) | – | – | 24.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Finance leases | 2.6 | - | (0.1) | (2.2) | - | - | 0.3 | 6.3 | (0.1) | 6.2 | 0.6 | (0.1) | (5.3) | – | – | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other unsecured advances | 6.0 | 11.2 | - | - | - | - | 17.2 | 6.3 | (0.3) | 6.0 | 12.0 | – | – | – | – | 18.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates and joint ventures
|
| 0.8
|
|
| -
|
|
| -
|
|
| -
|
|
| -
|
|
| -
|
|
| 0.8
|
| 1.4 | – | 1.4 | – | – | – | – | – | 1.4 | ||||||||||||||||||||||||||||||||||
Total loans and advances to customers
| 188.7 | 32.8 | (0.2) | (178.8) | - | - | 42.5 | 199.2 | (1.2) | 198.0 | 35.7 | (0.2) | (187.5) | – | – | 46.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans and receivables securities(4)
| 0.1 | - | - | - | - | - | 0.1 | 0.1 | – | 0.1 | – | – | – | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total
| 265.2 | 34.7 | (1.5) | (183.7) | (20.0) | (0.1) | 94.6 | 268.7 | (1.2) | 267.5 | 37.3 | (1.3) | (195.5) | (18.0) | – | 90.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | The forms of collateral |
| (2) |
| (3) | Certain financial instruments can be used to transfer credit risk from |
| (4) |
| (5) | The collateral value we have shown is limited to the balance of each associated individual loan. It does not include the impact of overcollateralisation (where the collateral has a higher value than the loan balance). |
Annual Report 2015
Risk review
Credit risk
continued
| Maximum exposure | Collateral | Maximum exposure | Collateral | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance sheet | Off-balance | Cash(1) | Non-cash(1) | Netting(2) | Risk | Net | Balance sheet asset | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| asset | sheet | transfer(3) | exposure | Gross amounts £bn |
| Loan loss allowance £bn |
|
| Net amounts £bn |
|
| Off-balance sheet £bn |
|
| Cash
£bn | (1)
|
| Non-cash
£bn | (1)
|
| Netting
£bn | (2)
|
| Risk transfer £bn | (3)
|
| Net exposure £bn |
| ||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks
| 26.4 | – | – | – | – | – | 26.4 | 22.6 | – | 22.6 | – | – | – | – | – | 22.6 | ||||||||||||||||||||||||||||||||||||||||||||||
Trading assets: | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 9.3 | – | – | (0.8) | (3.4) | – | 5.1 | 5.9 | – | 5.9 | – | – | – | (0.8 | ) | – | 5.1 | |||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 4.4 | – | – | (4.2) | – | – | 0.2 | 3.0 | – | 3.0 | – | – | (2.2 | ) | – | – | 0.8 | |||||||||||||||||||||||||||||||||||||||||||||
– Debt securities
| 7.9 | – | – | – | – | – | 7.9 | 8.0 | – | 8.0 | – | – | – | – | – | 8.0 | ||||||||||||||||||||||||||||||||||||||||||||||
Total trading assets
| 21.6 | – | – | (5.0) | (3.4) | – | 13.2 | 16.9 | – | 16.9 | – | – | (2.2 | ) | (0.8 | ) | – | 13.9 | ||||||||||||||||||||||||||||||||||||||||||||
Financial assets designated at fair value: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 2.2 | 0.2 | – | (2.3) | – | – | 0.1 | 2.3 | – | 2.3 | 0.2 | – | (2.4 | ) | – | – | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||
– Debt securities
| 0.5 | – | – | – | – | – | 0.5 | 0.6 | – | 0.6 | – | – | – | – | – | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets designated at fair value
| 2.7 | 0.2 | – | (2.3) | – | – | 0.6 | 2.9 | – | 2.9 | 0.2 | – | (2.4 | ) | – | – | 0.7 | |||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities
| 5.0 | – | – | – | – | – | 5.0 | 8.9 | – | 8.9 | – | – | – | – | – | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments
| 20.0 | – | (1.7) | – | (15.4) | – | 2.9 | 23.0 | – | 23.0 | – | (1.3 | ) | – | (19.2 | ) | – | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to banks
| 2.3 | – | – | (0.3) | – | (0.1) | 1.9 | 2.1 | – | 2.1 | 1.7 | – | (0.3 | ) | – | (0.1 | ) | 3.4 | ||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers(4): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers:(4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | 147.8 | 6.8 | – | (154.3) | – | – | 0.3 | 150.5 | (0.6 | ) | 149.9 | 6.7 | – | (156.5 | )(5) | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||
– Corporate loans | 27.6 | 13.4 | (0.1) | (20.9) | – | – | 20.0 | 29.9 | (0.6 | ) | 29.3 | 14.9 | (0.1 | ) | (20.1 | ) | – | – | 24.0 | |||||||||||||||||||||||||||||||||||||||||||
– Finance leases | 3.1 | – | (0.1) | (2.1) | – | – | 0.9 | 2.7 | – | 2.7 | – | (0.1 | ) | (2.2 | ) | – | – | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other unsecured advances | 5.3 | 9.6 | – | – | – | – | 14.9 | 6.2 | (0.2 | ) | 6.0 | 11.2 | – | – | – | – | 17.2 | |||||||||||||||||||||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates and joint ventures
|
| 0.8
|
|
| –
|
|
| –
|
|
| –
|
|
| –
|
|
| –
|
|
| 0.8
|
| 0.8 | – | 0.8 | – | – | – | – | – | 0.8 | ||||||||||||||||||||||||||||||||
Total loans and advances to customers
| 184.6 | 29.8 | (0.2) | (177.3) | – | – | 36.9 | 190.1 | (1.4 | ) | 188.7 | 32.8 | (0.2 | ) | (178.8 | ) | – | – | 42.5 | |||||||||||||||||||||||||||||||||||||||||||
Loans and receivables securities(4)
| 1.1 | – | – | – | – | – | 1.1 | 0.1 | – | 0.1 | – | – | – | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||
Total
| 263.7 | 30.0 | (1.9) | (184.9) | (18.8) | (0.1) | 88.0 | 266.6 | (1.4 | ) | 265.2 | 34.7 | (1.5 | ) | (183.7 | ) | (20.0 | ) | (0.1 | ) | 94.6 | |||||||||||||||||||||||||||||||||||||||||
| (1) | The forms of collateral |
| (2) |
| (3) | Certain financial instruments can be used to transfer credit risk from |
| (4) |
| (5) | The collateral value we have shown is limited to the balance of each associated individual loan. It does not include the impact of overcollateralisation (where the collateral has a higher value than the loan balance). |
Credit quality
In the table below, we have used a single rating scale to ensure we are consistent across all our credit risk portfolios in how we report the risk of default. It has eight grades for non-defaulted exposures, from 9 (lowest risk) to 2 (highest risk). We define each grade by an upper and lower probability of default (PD) value and we scale the grades so that the default risk increases by a factor of 10 every time the grade number drops by 2 steps. For example, risk grade 9 has an average PD of 0.01%, and risk grade 7 has an average PD of 0.1%. We give defaulted exposures a grade 1 and a PD value of 100%. In the final column of the table we show the approximate equivalent credit rating grade used by Standard and Poor’s Ratings Services (S&P).
| Santander UK risk grade | PD range | |||||||||||||||
Mid % | Lower % | Upper % | S&P equivalent | |||||||||||||
9 | 0.010 | 0.000 | 0.021 | AAA to AA- | ||||||||||||
8 | 0.032 | 0.021 | 0.066 | A+ to A | ||||||||||||
7 | 0.100 | 0.066 | 0.208 | A- to BBB+ | ||||||||||||
6 | 0.316 | 0.208 | 0.658 | BBB to BBB- | ||||||||||||
5 | 1.000 | 0.658 | 2.081 | BB+ to BB- | ||||||||||||
4 | 3.162 | 2.081 | 6.581 | B+ to B | ||||||||||||
3 | 10.000 | 6.581 | 20.811 | B- to CCC | ||||||||||||
2 | 31.623 | 20.811 | 99.999 | CC to C | ||||||||||||
1 Default | 100.000 | 100.000 | 100.000 | D | ||||||||||||
56 Santander UK plc
|
|
|
|
|
|
| ||||||||||||
|
|
|
| |||||||||||||||
| Risk | ||||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk |
| Other key risks | ||||||||||
The tables below show the credit rating of our financial assets subject to credit risk. For more on the credit rating profiles of key portfolios, see the Retail Banking (i.e. residential mortgages), Commercial Banking, Global Corporate Banking and Corporate Centre sections.
| Santander UK rating guide | ||||||||||||||||||||||||||||||||||||
|
| 9 (AAA to AA-) £bn |
|
| 8 (A+to A)
£bn |
|
| 7 (A- to BBB+) £bn |
|
| 6 (BBB to BBB-) £bn |
|
| 5 (BB+ to BB-) £bn |
|
| 4 (B+ to B)
£bn |
|
| 1 to 3 (B- to D)
£bn |
|
| Other
£bn | (1)
|
| Total
£bn |
| ||||||||||
2015 | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 15.5 | – | – | – | – | – | – | 1.3 | 16.8 | |||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 0.2 | 1.4 | 3.5 | 0.3 | – | – | – | – | 5.4 | |||||||||||||||||||||||||||
– Loans and advances to customers | 0.6 | 3.9 | 1.3 | 0.1 | – | – | – | 0.1 | 6.0 | |||||||||||||||||||||||||||
– Debt securities | 1.0 | 3.1 | 0.8 | 0.6 | – | – | – | – | 5.5 | |||||||||||||||||||||||||||
Total Trading assets | 1.8 | 8.4 | 5.6 | 1.0 | – | – | – | 0.1 | 16.9 | |||||||||||||||||||||||||||
Financial assets designated at fair value: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 0.8 | 0.4 | 0.6 | – | – | – | – | 0.1 | 1.9 | |||||||||||||||||||||||||||
– Debt securities | 0.3 | 0.2 | – | – | – | – | – | – | 0.5 | |||||||||||||||||||||||||||
Total Financial assets designated at fair value | 1.1 | 0.6 | 0.6 | – | – | – | – | 0.1 | 2.4 | |||||||||||||||||||||||||||
Available-for-sale debt securities | 6.8 | 1.4 | 0.7 | – | – | – | – | – | 8.9 | |||||||||||||||||||||||||||
Derivative financial instruments | 0.4 | 9.9 | 8.5 | 1.5 | 0.6 | – | – | – | 20.9 | |||||||||||||||||||||||||||
Loans and advances to banks | 1.4 | 1.9 | 0.1 | 0.1 | – | – | – | – | 3.5 | |||||||||||||||||||||||||||
Loans and advances to customers:(2) | ||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | 2.7 | 21.4 | 68.8 | 41.0 | 7.2 | 6.4 | 5.8 | – | 153.3 | |||||||||||||||||||||||||||
– Corporate loans | 3.3 | 2.7 | 2.5 | 9.6 | 7.7 | 3.9 | 0.8 | 1.4 | 31.9 | |||||||||||||||||||||||||||
– Finance leases | – | – | 0.4 | 1.2 | 2.0 | 1.7 | 0.9 | 0.1 | 6.3 | |||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other unsecured advances | – | – | 0.2 | 1.2 | 2.7 | 0.9 | 0.4 | 0.9 | 6.3 | |||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates & joint ventures | 1.4 | – | – | – | – | – | – | – | 1.4 | |||||||||||||||||||||||||||
Total Loans and advances to customers | 7.4 | 24.1 | 71.9 | 53.0 | 19.6 | 12.9 | 7.9 | 2.4 | 199.2 | |||||||||||||||||||||||||||
Loans and receivables securities(2) | – | – | – | – | – | 0.1 | – | – | 0.1 | |||||||||||||||||||||||||||
| 34.4 | 46.3 | 87.4 | 55.6 | 20.2 | 13.0 | 7.9 | 3.9 | 268.7 | ||||||||||||||||||||||||||||
Loan loss allowance | (1.2 | ) | ||||||||||||||||||||||||||||||||||
Total | 267.5 | |||||||||||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Neither past due nor impaired: | ||||||||||||||||||||||||||||||||||||
– Cash and balances at central banks | 15.5 | – | – | – | – | – | – | 1.3 | 16.8 | |||||||||||||||||||||||||||
– Trading assets | 1.8 | 8.4 | 5.6 | 1.0 | – | – | – | 0.1 | 16.9 | |||||||||||||||||||||||||||
– Financial assets designated at fair value | 1.1 | 0.6 | 0.6 | – | – | – | – | 0.1 | 2.4 | |||||||||||||||||||||||||||
– Available-for-sale debt securities | 6.8 | 1.4 | 0.7 | – | – | – | – | – | 8.9 | |||||||||||||||||||||||||||
– Derivative financial instruments | 0.4 | 9.9 | 8.5 | 1.5 | 0.6 | – | – | – | 20.9 | |||||||||||||||||||||||||||
– Loans and advances to banks | 1.4 | 1.9 | 0.1 | 0.1 | – | – | – | – | 3.5 | |||||||||||||||||||||||||||
– Loans and advances to customers | 7.4 | 24.1 | 71.9 | 53.0 | 19.5 | 12.8 | 3.4 | 2.4 | 194.5 | |||||||||||||||||||||||||||
– Loans and receivables securities | – | – | – | – | – | 0.1 | – | – | 0.1 | |||||||||||||||||||||||||||
Total neither past due nor impaired | 34.4 | 46.3 | 87.4 | 55.6 | 20.1 | 12.9 | 3.4 | 3.9 | 264.0 | |||||||||||||||||||||||||||
Past due but not impaired(3) | – | – | – | – | 0.1 | – | 3.1 | – | 3.2 | |||||||||||||||||||||||||||
Impaired(4) | – | – | – | – | – | 0.1 | 1.4 | – | 1.5 | |||||||||||||||||||||||||||
| 34.4 | 46.3 | 87.4 | 55.6 | 20.2 | 13.0 | 7.9 | 3.9 | 268.7 | ||||||||||||||||||||||||||||
Loan loss allowance | (1.2 | ) | ||||||||||||||||||||||||||||||||||
Total | 267.5 | |||||||||||||||||||||||||||||||||||
| (1) | Other items include cash in hand and smaller cases mainly in the consumer finance and commercial mortgages portfolios. We use scorecards for these items, rather than rating models. |
| (2) | Balances include interest we have charged to the customer’s account and accrued interest we have not charged to the account yet. |
| (3) | Balances include mortgage loans in arrears which have been assessed for incurred but not observed (IBNO) losses as described in Note 1 to the Consolidated Financial Statements. |
| (4) | Impaired loans are loans we have assessed for observed impairment loss allowances. |
Annual Report 2015
Risk review
| Santander UK rating guide | ||||||||||||||||||||||||||||||||||||
|
| 9 (AAA to AA-) £bn |
|
| 8 (A+to A)
£bn |
|
| 7 (A- to BBB+) £bn |
|
| 6 (BBB to BBB-) £bn |
|
| 5 (BB+ to BB-) £bn |
|
| 4 (B+ to B)
£bn |
|
| 1 to 3 (B- to D)
£bn |
|
| Other
£bn | (1)
|
| Total
£bn |
| ||||||||||
2014 | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 21.1 | – | – | – | – | – | – | 1.5 | 22.6 | |||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 0.1 | 1.2 | 4.6 | – | – | – | – | – | 5.9 | |||||||||||||||||||||||||||
– Loans and advances to customers | – | 2.1 | 0.7 | 0.2 | – | – | – | – | 3.0 | |||||||||||||||||||||||||||
– Debt securities | 2.3 | 4.0 | 1.1 | 0.6 | – | – | – | – | 8.0 | |||||||||||||||||||||||||||
Total Trading assets | 2.4 | 7.3 | 6.4 | 0.8 | – | – | – | – | 16.9 | |||||||||||||||||||||||||||
Financial assets designated at fair value: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 0.4 | 0.8 | 1.0 | 0.1 | – | – | – | – | 2.3 | |||||||||||||||||||||||||||
– Debt securities | – | 0.2 | 0.1 | 0.1 | – | 0.2 | – | – | 0.6 | |||||||||||||||||||||||||||
Total Financial assets designated at fair value | 0.4 | 1.0 | 1.1 | 0.2 | – | 0.2 | – | – | 2.9 | |||||||||||||||||||||||||||
Available-for-sale debt securities | 8.9 | – | – | – | – | – | – | – | 8.9 | |||||||||||||||||||||||||||
Derivative financial instruments | 0.4 | 10.8 | 9.7 | 1.4 | 0.4 | – | – | 0.3 | 23.0 | |||||||||||||||||||||||||||
Loans and advances to banks | 0.3 | 1.4 | 0.3 | 0.1 | – | – | – | – | 2.1 | |||||||||||||||||||||||||||
Loans and advances to customers:(2) | ||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | 2.3 | 16.1 | 65.2 | 44.2 | 8.1 | 7.7 | 6.9 | – | 150.5 | |||||||||||||||||||||||||||
– Corporate loans | 2.3 | 4.0 | 2.6 | 8.0 | 7.1 | 3.6 | 0.8 | 1.5 | 29.9 | |||||||||||||||||||||||||||
– Finance leases | – | – | 0.2 | 0.5 | 0.8 | 0.7 | 0.4 | 0.1 | 2.7 | |||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other unsecured advances | – | – | 0.2 | 1.0 | 2.5 | 1.0 | 0.5 | 1.0 | 6.2 | |||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates & joint ventures | 0.7 | – | – | – | 0.1 | – | – | – | 0.8 | |||||||||||||||||||||||||||
Total Loans and advances to customers | 5.3 | 20.1 | 68.2 | 53.7 | 18.6 | 13.0 | 8.6 | 2.6 | 190.1 | |||||||||||||||||||||||||||
Loans and receivables securities(2) | – | – | 0.1 | – | – | – | – | – | 0.1 | |||||||||||||||||||||||||||
| 38.8 | 40.6 | 85.8 | 56.2 | 19.0 | 13.2 | 8.6 | 4.4 | 266.6 | ||||||||||||||||||||||||||||
Loan loss allowance | (1.4 | ) | ||||||||||||||||||||||||||||||||||
Total | 265.2 | |||||||||||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Neither past due nor impaired: | ||||||||||||||||||||||||||||||||||||
– Cash and balances at central banks | 21.1 | – | – | – | – | – | – | 1.5 | 22.6 | |||||||||||||||||||||||||||
– Trading assets | 2.4 | 7.3 | 6.4 | 0.8 | – | – | – | – | 16.9 | |||||||||||||||||||||||||||
– Financial assets designated at fair value | 0.4 | 1.0 | 1.1 | 0.2 | – | 0.2 | – | – | 2.9 | |||||||||||||||||||||||||||
– Available-for-sale debt securities | 8.9 | – | – | – | – | – | – | – | 8.9 | |||||||||||||||||||||||||||
– Derivative financial instruments | 0.4 | 10.8 | 9.7 | 1.4 | 0.4 | – | – | 0.3 | 23.0 | |||||||||||||||||||||||||||
– Loans and advances to banks | 0.3 | 1.4 | 0.3 | 0.1 | – | – | – | – | 2.1 | |||||||||||||||||||||||||||
– Loans and advances to customers | 5.3 | 20.1 | 68.2 | 53.6 | 18.4 | 12.8 | 3.5 | 2.5 | 184.4 | |||||||||||||||||||||||||||
– Loans and receivables securities | – | – | 0.1 | – | – | – | – | – | 0.1 | |||||||||||||||||||||||||||
Total neither past due nor impaired | 38.8 | 40.6 | 85.8 | 56.1 | 18.8 | 13.0 | 3.5 | 4.3 | 260.9 | |||||||||||||||||||||||||||
Past due but not impaired(3) | – | – | – | – | 0.1 | – | 3.8 | – | 3.9 | |||||||||||||||||||||||||||
Impaired(4) | – | – | – | 0.1 | 0.1 | 0.2 | 1.3 | 0.1 | 1.8 | |||||||||||||||||||||||||||
| 38.8 | 40.6 | 85.8 | 56.2 | 19.0 | 13.2 | 8.6 | 4.4 | 266.6 | ||||||||||||||||||||||||||||
Loan loss allowance | (1.4 | ) | ||||||||||||||||||||||||||||||||||
Total | 265.2 | |||||||||||||||||||||||||||||||||||
| (1) | Other items include cash in hand and smaller cases mainly in the consumer finance and commercial mortgages portfolios. We use scorecards for these items, rather than rating models. |
| (2) | Balances include interest we’ve charged to the customer’s account and accrued interest we haven’t charged to the account yet. |
| (3) | Balances include mortgage loans in arrears which have been assessed for incurred but not observed (IBNO) losses as described in Note 1 to the Consolidated Financial Statements. |
| (4) | Impaired loans are loans we have assessed for observed impairment loss allowances. |
58 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
Credit performance
| Customer loans(1) | NPLs(2) | NPL ratio(3) | NPL coverage(4) | Gross write-offs | Loan loss | |||||||||||||||||||
| allowance | ||||||||||||||||||||||||
| £bn | £m | % | % | £m | £m | |||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||
Retail Banking | 158.5 | 2,573 | 1.62 | 34 | 273 | 881 | ||||||||||||||||||
– Residential mortgages | 150.1 | 2,459 | 1.64 | 24 | 68 | 579 | ||||||||||||||||||
– Banking and consumer credit | 8.4 | 114 | 1.35 | 265 | 205 | 302 | ||||||||||||||||||
Commercial Banking | 18.7 | 664 | 3.56 | 46 | 75 | 305 | ||||||||||||||||||
Corporate & Institutional Banking | 5.2 | 53 | 1.01 | 138 | 11 | 73 | ||||||||||||||||||
Corporate Centre
| 8.3 | 134 | 1.62 | 134 | 64 | 180 | ||||||||||||||||||
|
190.7
|
| 3,424 | 1.80 | 42 | 423 | 1,439 | |||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||
Retail Banking | 155.6 | 2,936 | 1.89 | 31 | 387 | 921 | ||||||||||||||||||
– Residential mortgages | 148.1 | 2,788 | 1.88 | 21 | 103 | 593 | ||||||||||||||||||
– Banking and consumer credit | 7.5 | 148 | 1.96 | 222 | 284 | 328 | ||||||||||||||||||
Commercial Banking | 17.0 | 649 | 3.83 | 43 | 151 | 279 | ||||||||||||||||||
Corporate & Institutional Banking | 5.1 | 17 | 0.33 | 453 | 10 | 77 | ||||||||||||||||||
Corporate Centre
| 9.4 | 221 | 2.36 | 125 | 227 | 278 | ||||||||||||||||||
|
187.1
|
| 3,823 | 2.04 | 41 | 775 | 1,555 | |||||||||||||||||
Age of loans and advances that are past due but not impaired
At 31 December 2015, loans and advances of £3.2bn (2014: £3.9bn) were past due but not impaired. Of these balances, £0.1bn (2014: £0.1bn) were less than one month overdue, £1.0bn (2014: £1.2bn) were 1-2 months overdue, £0.6bn (2014: £0.8bn) were 2-3 months overdue, £0.8bn (2014: £1.0bn) were 3-6 months overdue, and £0.7bn (2014: £0.8bn) were more than six months overdue.
Concentrations of credit risk exposures
Managing concentrations of risk is a key part of risk management. We track how concentrated our credit risk portfolios are using various criteria, including geographical areas and countries, economic sectors, products and groups of customers. Although our operations are based mainly in the UK, we have built up exposures to entities around the world. As a result, we are exposed to concentrations of risk related to geographical area and industries. We analyse these below:
Geographical concentrations
As part of our approach to credit risk management and Risk Appetite, we set exposure limits to countries and geographical areas. We set our limits with reference to the country limits set by Banco Santander SA. These are determined according to how the country is classified (whether it is a developed OECD country or not), its credit rating, its gross domestic product, and the types of products and services the Banco Santander group wants to offer in that country. The tables below set out our loans and advances to banks and customers by geographical area.
UK
£bn | Peripheral eurozone(1) £bn | Rest of eurozone £bn | Rest of Europe £bn | US
£bn | Rest of world £bn | Total
£bn | ||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||
Loans and advances to banks | 2.0 | – | – | – | 0.5 | 1.0 | 3.5 | |||||||||||||||||||||
Loans and advances to customers:(2) | ||||||||||||||||||||||||||||
– Advances secured on residential property | 153.3 | – | – | – | – | – | 153.3 | |||||||||||||||||||||
– Corporate loans | 30.5 | 0.2 | 0.1 | 0.3 | 0.4 | 0.4 | 31.9 | |||||||||||||||||||||
– Finance leases | 6.2 | – | – | – | – | 0.1 | 6.3 | |||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | |||||||||||||||||||||
– Other unsecured advances | 6.3 | – | – | – | – | – | 6.3 | |||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates and joint ventures | – | – | – | – | – | 1.4 | 1.4 | |||||||||||||||||||||
Loans and advances to customers (gross) | 196.3 | 0.2 | 0.1 | 0.3 | 0.4 | 1.9 | 199.2 | |||||||||||||||||||||
Less: impairment loss allowance | (1.2 | ) | ||||||||||||||||||||||||||
Loans and advances to customers, net of impairment loss allowance |
| 198.0 | ||||||||||||||||||||||||||
| 201.5 | ||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||
Loans and advances to banks | 1.3 | – | – | – | 0.7 | 0.1 | 2.1 | |||||||||||||||||||||
Loans and advances to customers:(2) | ||||||||||||||||||||||||||||
– Advances secured on residential property | 150.5 | – | – | – | – | – | 150.5 | |||||||||||||||||||||
– Corporate loans | 28.5 | 0.1 | 0.2 | 0.5 | – | 0.6 | 29.9 | |||||||||||||||||||||
– Finance leases | 2.6 | – | – | – | – | 0.1 | 2.7 | |||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | |||||||||||||||||||||
– Other unsecured advances | 6.2 | – | – | – | – | – | 6.2 | |||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates and joint ventures | – | – | – | – | – | 0.8 | 0.8 | |||||||||||||||||||||
Loans and advances to customers (gross) | 187.8 | 0.1 | 0.2 | 0.5 | – | 1.5 | 190.1 | |||||||||||||||||||||
Less: impairment loss allowance | (1.4 | ) | ||||||||||||||||||||||||||
Loans and advances to customers, net of impairment loss allowance |
| 188.7 | ||||||||||||||||||||||||||
| 190.8 | ||||||||||||||||||||||||||||
| (1) |
| (2) | Balances include interest we have charged to the customer’s account |
For more geographical information, see ‘Country risk exposure’.
Annual Report 2015
Risk review
Industry concentrations
As part of our approach to credit risk management and Risk Appetite, we set concentration limits by industry sector. These limits are set based on the industry outlook, our strategic aims and desired level of concentration, but also take into account any relevant limit set by Banco Santander SA.
Social Housing
£bn | Banks
£bn | Corporate and SME (including real estate) | Residential
£bn | Cards and personal unsecured lending £bn | Other
£bn | Total
£bn | ||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||
Loans and advances to banks | – | 3.5 | – | – | – | – | 3.5 | |||||||||||||||||||||
Loans and advances to customers:(1) | ||||||||||||||||||||||||||||
– Advances secured on residential property | – | – | – | 153.3 | – | – | 153.3 | |||||||||||||||||||||
– Corporate loans | 6.1 | – | 25.5 | – | – | 0.3 | 31.9 | |||||||||||||||||||||
– Finance leases | – | – | – | – | – | 6.3 | 6.3 | |||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | |||||||||||||||||||||
– Other unsecured advances | – | – | – | – | 6.3 | – | 6.3 | |||||||||||||||||||||
– Amounts due from fellow subs, associates and JVs | – | – | – | – | – | 1.4 | 1.4 | |||||||||||||||||||||
Loans and advances to customers (gross) | 6.1 | – | 25.5 | 153.3 | 6.3 | 8.0 | 199.2 | |||||||||||||||||||||
Less: impairment loss allowance | (1.2 | ) | ||||||||||||||||||||||||||
Loans and advances to customers, net of impairment loss allowance |
| 198.0 | ||||||||||||||||||||||||||
| 201.5 | ||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||
Loans and advances to banks | – | 2.1 | – | – | – | – | 2.1 | |||||||||||||||||||||
Loans and advances to customers:(1) | ||||||||||||||||||||||||||||
– Advances secured on residential property | – | – | – | 150.5 | – | – | 150.5 | |||||||||||||||||||||
– Corporate loans | 5.8 | – | 23.2 | – | – | 0.9 | 29.9 | |||||||||||||||||||||
– Finance leases | – | – | – | – | – | 2.7 | 2.7 | |||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | |||||||||||||||||||||
– Other unsecured advances | – | – | – | – | 6.2 | – | 6.2 | |||||||||||||||||||||
– Amounts due from fellow subs, associates and JVs | – | – | – | – | – | 0.8 | 0.8 | |||||||||||||||||||||
Loans and advances to customers (gross) | 5.8 | – | 23.2 | 150.5 | 6.2 | 4.4 | 190.1 | |||||||||||||||||||||
Less: impairment loss allowance | (1.4 | ) | ||||||||||||||||||||||||||
Loans and advances to customers, net of impairment loss allowance |
| 188.7 | ||||||||||||||||||||||||||
| 190.8 | ||||||||||||||||||||||||||||
| Balances include interest we have charged to the customer’s account and accrued interest we have not charged to the account yet. They also exclude loans classified as ‘Financial assets designated at fair value’. |
For more industry information, see ‘Country risk exposure’. We also provide further portfolio analyses on committed exposures, which are typically higher than the balance sheet value, in the following ‘Credit risk review’ sections.
Forbearance summary
The following table shows loans and advances to customers in the previous tables that are subject to forbearance. For more on forbearance on mortgages in Retail Banking, as well as forbearance in Commercial Banking, Global Corporate Banking, and Corporate Centre, see the sections that follow.
| 2015 | 2014 | |||||||||||||||||||||||||
Forbearance of NPL £m | Forbearance of non-NPL £m | Total
£m | Forbearance of NPL £m | Forbearance of non-NPL £m | Total
£m | |||||||||||||||||||||
Retail Banking: | ||||||||||||||||||||||||||
– Mortgages(1) | 546 | 3,122 | 3,668 | 594 | 3,273 | 3,867 | ||||||||||||||||||||
– Unsecured loans | – | 1 | 1 | 1 | 3 | 4 | ||||||||||||||||||||
– Credit cards | 27 | – | 27 | 27 | – | 27 | ||||||||||||||||||||
– Bank accounts | 12 | – | 12 | 13 | – | 13 | ||||||||||||||||||||
Commercial Banking | 405 | 300 | 705 | 389 | 408 | 797 | ||||||||||||||||||||
Global Corporate Banking | 10 | – | 10 | 53 | – | 53 | ||||||||||||||||||||
Corporate Centre | 36 | 84 | 120 | 86 | 245 | 331 | ||||||||||||||||||||
| 1,036 | 3,507 | 4,543 | 1,163 | 3,929 | 5,092 | |||||||||||||||||||||
| (1) | The table above shows forbearance based on the customer’s payment status at the year-end, split between NPL and non-NPL. This basis differs to that presented in the ‘Credit risk – Retail Banking’ section, which shows the customer’s payment status at the year-end, split between in arrears and performing. |
Forbearance exit criteria
Under our forbearance policy, accounts remain in forbearance until settlement or write off. At 31 December 2015, £2,529m i.e. 56% (2014: £2,671m i.e. 52%) of the reported forbearance balance had been performing for 24 consecutive months since the last forbearance event and was less than 30 days past due after this performing period.
60 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
Credit performance
The customer loans in the tables below and in the remainder of the ‘Credit risk’ section are presented differently from the ‘Loans and advances to customers’ balance in the Consolidated Balance Sheet. The main differences are that the customer loans below are presented on an amortised cost basis and include loans classified as ‘Trading assets’, ‘Financial assets designated at fair value’ and ‘Loans and advances to customers’ in the Consolidated Balance Sheet. In addition, the balances below exclude interest we have accrued but not charged to customers’ accounts yet.
|
| Customer loans £bn |
|
| NPLs
£m | (1)
|
| NPL ratio
% | (2)
|
| NPL coverage
% | (3)
|
| Gross write-offs £m |
|
| Loan loss allowance £m |
| |||||||
2015 | ||||||||||||||||||||||||
Retail Banking: | 164.8 | 2,373 | 1.44 | 32 | 212 | 762 | ||||||||||||||||||
– Residential mortgages | 152.8 | 2,252 | 1.47 | 19 | 40 | 424 | ||||||||||||||||||
– Banking and consumer credit | 12.0 | 121 | 1.01 | 279 | 172 | 338 | ||||||||||||||||||
Commercial Banking(4) | 20.9 | 586 | 2.80 | 44 | 83 | 260 | ||||||||||||||||||
Global Corporate Banking(4) | 5.5 | 10 | 0.18 | 330 | 28 | 33 | ||||||||||||||||||
Corporate Centre | 7.4 | 87 | 1.18 | 117 | 45 | 102 | ||||||||||||||||||
| 198.6 | 3,056 | 1.54 | 38 | 368 | 1,157 | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
Retail Banking: | 158.5 | 2,573 | 1.62 | 34 | 273 | 881 | ||||||||||||||||||
– Residential mortgages | 150.1 | 2,459 | 1.64 | 24 | 68 | 579 | ||||||||||||||||||
– Banking and consumer credit | 8.4 | 114 | 1.35 | 265 | 205 | 302 | ||||||||||||||||||
Commercial Banking(4) | 18.7 | 664 | 3.56 | 46 | 75 | 305 | ||||||||||||||||||
Global Corporate Banking(4) | 5.2 | 53 | 1.01 | 138 | 11 | 73 | ||||||||||||||||||
Corporate Centre | 8.3 | 134 | 1.62 | 134 | 64 | 180 | ||||||||||||||||||
| 190.7 | 3,424 | 1.80 | 42 | 423 | 1,439 | |||||||||||||||||||
(1) Loans and advances are classified as NPL in line with the definitions in the ‘Credit risk management’ section. (2) NPLs as a percentage of customer loans. (3) Total impairment loan loss allowances as a percentage of NPLs. Total loan loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs. So the ratio can be bigger than 100%. (4) Total lending to corporates is the total lending of Commercial Banking and Global Corporate Banking.
Non-performing loans and advances(1)(2)
An analysis of our NPLs is shown below.
|
| |||||||||||||||||||||||
| 2015 £m | 2014 £m | 2013 £m | 2012 £m | 2011 £m | ||||||||||||||||||||
Loans and advances to customers of which:(2) | 198,634 | 190,651 | 187,048 | 194,733 | 206,311 | |||||||||||||||||||
NPLs | 3,056 | 3,424 | 3,823 | 4,210 | 3,979 | |||||||||||||||||||
Total impairment loan loss allowances | 1,157 | 1,439 | 1,555 | 1,803 | 1,563 | |||||||||||||||||||
| % | % | % | % | % | ||||||||||||||||||||
NPL ratio(3) | 1.54 | 1.80 | 2.04 | 2.16 | 1.93 | |||||||||||||||||||
Coverage ratio(4) | 38 | 42 | 41 | 43 | 39 | |||||||||||||||||||
| (1) | Loans and advances are classified as |
| (2) | Include social housing loans and finance leases, and exclude trading assets. |
| (3) | NPLs as a percentage of loans and advances to customers. |
| (4) |
2015 compared to 2014(unaudited)
In 2015, the total NPL ratio continued to improve to 1.54% (2014: 1.80%), with all loan books performing well in a supportive economic environment.
In Retail Banking, the NPL ratio decreased to 1.44% (2014: 1.62%), as a result of lower mortgage non-performing loans and overall growth in retail assets. The residential mortgages NPL ratio decreased to 1.47% (2014: 1.64%), with impairment releases and the decrease in NPL and coverage ratios reflecting the continued good performance of the portfolio supported by low interest rates, rising house prices and the supportive economic environment. The banking and consumer credit NPL ratio decreased to 1.01% (2014: 1.35%) due to asset growth, mainly through the PSA cooperation.
The Commercial Banking NPL ratio decreased to 2.80% (2014: 3.56%), with credit quality remaining strong. We continue to adhere to our prudent lending criteria as we grow lending. The Global Corporate Banking NPL ratio decreased to 0.18% (2014: 1.01%), due to the exit of a single loan of £49m and asset growth. The Corporate Centre NPL ratio decreased to 1.18% (2014: 1.62%), due to further loan disposals.
The coverage ratio reduced slightly to 38% at 31 December 2015 (2014: 42%). This was mainly due to a release in mortgage provisions, as a result of the growth in house prices and the continued strong credit quality of the portfolio.
For further information and commentarymore on the credit performance of theour key portfolios by business segment, see the ‘Credit risk – Retail Banking’, ‘Credit risk – Commercial Banking’, ‘Credit risk – Global Corporate & Institutional Banking’, and ‘Credit risk – Corporate Centre’ sections.
Credit quality
Santander UK uses a single rating scale to provide a consistent approach for reporting default risk across all the credit risk portfolios. The scale is comprised of eight grades for non-defaulted exposures numbered from 9 (lowest risk) to 2 (highest risk). Each grade is defined by an upper and lower probability of default (‘PD’) value and is scaled so that the default risk increases by a factor of 10 for every 2 step reduction in the grade number. For example, risk grade 9 equates to an average PD of 0.01%, and risk grade 7 equates to an average PD of 0.1%. Defaulted exposures are assigned to grade 1 and a PD value of 100%. An approximation to the equivalent credit rating grade used by Standard and Poor’s Ratings Services (‘S&P’) is shown in the final column of the table.
| Santander UK risk grade | PD range | |||||||||||||
| Mid | Lower | Upper | S&P | |||||||||||
| % | % | % | equivalent | |||||||||||
9 | 0.010 | 0.000 | 0.021 | AAA to AA- | ||||||||||
8 | 0.032 | 0.021 | 0.066 | A+ to A | ||||||||||
7 | 0.100 | 0.066 | 0.208 | A- to BBB+ | ||||||||||
6 | 0.316 | 0.208 | 0.658 | BBB to BBB- | ||||||||||
5 | 1.000 | 0.658 | 2.081 | BB+ to BB- | ||||||||||
4 | 3.162 | 2.081 | 6.581 | B+ to B | ||||||||||
3 | 10.000 | 6.581 | 20.811 | B- to CCC | ||||||||||
2 | 31.623 | 20.811 | 99.999 | CC TO C | ||||||||||
1 Default
| 100.000 | 100.000 | 100.000 | D | ||||||||||
Annual Report 2015
Risk review
Risk review
Credit risk
continued
The tables below set out the distribution across the credit rating master scale for those financial assets subject to credit risk. For further detail and commentary on the credit rating profiles of key portfolios, see the Retail Banking (i.e. residential mortgages), Commercial Banking, Corporate & Institutional Banking and Corporate Centre sections.
| Santander UK rating guide | ||||||||||||||||||||||||||||||||||||
| 9 | 8 | 7 | 6 | 5 | 4 | | 1 to 3 | | Othe | r(1) | Total | |||||||||||||||||||||||||
| (AAA to | (A+to A) | (A- to | (BBB to | (BB+ to | (B+ to B) | (B-to D) | ||||||||||||||||||||||||||||||
| AA-) | BBB+) | BBB-) | BB-) | |||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks
| 21,104 | – | – | – | – | – | – | 1,458 | 22,562 | |||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 97 | 1,187 | 4,579 | 34 | 30 | – | 9 | – | 5,936 | |||||||||||||||||||||||||||
– Loans and advances to customers | 53 | 2,073 | 674 | 207 | – | – | – | – | 3,007 | |||||||||||||||||||||||||||
– Debt securities
| 2,287 | 3,988 | 1,147 | 559 | – | – | – | – | 7,981 | |||||||||||||||||||||||||||
Total Trading assets
| 2,437 | 7,248 | 6,400 | 800 | 30 | – | 9 | – | 16,924 | |||||||||||||||||||||||||||
Financial assets designated at fair value | ||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 376 | 765 | 909 | 140 | 7 | – | 62 | – | 2,259 | |||||||||||||||||||||||||||
– Debt securities
| 3 | 243 | 73 | 83 | – | 220 | – | – | 622 | |||||||||||||||||||||||||||
Total Financial assets designated at fair value
| 379 | 1,008 | 982 | 223 | 7 | 220 | 62 | – | 2,881 | |||||||||||||||||||||||||||
Available-for-sale debt securities
| 8,919 | – | – | – | – | – | – | – | 8,919 | |||||||||||||||||||||||||||
Derivative financial instruments
| 397 | 10,785 | 9,733 | 1,379 | 353 | 33 | 37 | 304 | 23,021 | |||||||||||||||||||||||||||
Loans and advances to banks
| 329 | 1,357 | 289 | 78 | 4 | – | – | – | 2,057 | |||||||||||||||||||||||||||
Loans and advances to customers(2): | ||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | 2,332 | 16,069 | 65,208 | 44,174 | 8,079 | 7,637 | 6,926 | 15 | 150,440 | |||||||||||||||||||||||||||
– Corporate loans | 2,339 | 3,969 | 2,576 | 8,086 | 7,116 | 3,629 | 816 | 1,472 | 30,003 | |||||||||||||||||||||||||||
– Finance leases | 2 | 13 | 206 | 483 | 707 | 696 | 391 | 141 | 2,639 | |||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | 15 | 15 | |||||||||||||||||||||||||||
– Other unsecured advances | 37 | 29 | 187 | 1,035 | 2,478 | 958 | 491 | 1,021 | 6,236 | |||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates & joint ventures
| 723 | – | – | – | 66 | – | – | 8 | 797 | |||||||||||||||||||||||||||
Total Loans and advances to customers
| 5,433 | 20,080 | 68,177 | 53,778 | 18,446 | 12,920 | 8,624 | 2,672 | 190,130 | |||||||||||||||||||||||||||
Loans and receivables securities(2)
| 26 | 7 | 38 | – | 5 | 10 | 32 | – | 118 | |||||||||||||||||||||||||||
|
39,024
|
| 40,485 | 85,619 | 56,258 | 18,845 | 13,183 | 8,764 | 4,434 | 266,612 | ||||||||||||||||||||||||||
Loan loss allowance
| (1,439) | |||||||||||||||||||||||||||||||||||
Total
| 265,173 | |||||||||||||||||||||||||||||||||||
Of which:
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Neither past due nor impaired: | ||||||||||||||||||||||||||||||||||||
– Cash and balances at central banks | 21,104 | – | – | – | – | – | – | 1,458 | 22,562 | |||||||||||||||||||||||||||
– Trading assets | 2,437 | 7,248 | 6,400 | 800 | 30 | – | 9 | – | 16,924 | |||||||||||||||||||||||||||
– Financial assets designated at fair value | 379 | 1,008 | 982 | 223 | 7 | 220 | 62 | – | 2,881 | |||||||||||||||||||||||||||
– Available-for-sale debt securities | 8,919 | – | – | – | – | – | – | – | 8,919 | |||||||||||||||||||||||||||
– Derivative financial instruments | 397 | 10,785 | 9,733 | 1,379 | 353 | 33 | 37 | 304 | 23,021 | |||||||||||||||||||||||||||
– Loans and advances to banks | 329 | 1,357 | 289 | 78 | 4 | – | – | – | 2,057 | |||||||||||||||||||||||||||
– Loans and advances to customers | 5,429 | 20,076 | 68,173 | 53,714 | 18,291 | 12,656 | 3,513 | 2,536 | 184,388 | |||||||||||||||||||||||||||
– Loans and receivables securities
| 26 | 7 | 38 | – | 5 | 10 | 32 | – | 118 | |||||||||||||||||||||||||||
Total neither past due nor impaired
| 39,020 | 40,481 | 85,615 | 56,194 | 18,690 | 12,919 | 3,653 | 4,298 | 260,870 | |||||||||||||||||||||||||||
Past due but not impaired
| 2 | 2 | 2 | 15 | 42 | 33 | 3,785 | 28 | 3,909 | |||||||||||||||||||||||||||
Impaired(3)
| 2 | 2 | 2 | 49 | 113 | 231 | 1,326 | 108 | 1,833 | |||||||||||||||||||||||||||
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39,024
|
| 40,485 | 85,619 | 56,258 | 18,845 | 13,183 | 8,764 | 4,434 | 266,612 | ||||||||||||||||||||||||||
Loan loss allowance
| (1,439) | |||||||||||||||||||||||||||||||||||
Total
| 265,173 | |||||||||||||||||||||||||||||||||||
| Overview | ||||||
We offer a full range of retail products and services through our branches, the internet, digital devices and over the phone, as well as through intermediaries. Credit risk management In this section, we explain how we manage credit risk, including how we mitigate it. Credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance and higher risk loans. Our main portfolios are: | Residential mortgages– This is our largest portfolio. We lend to customers of good credit quality (also known as prime lending). Most of our mortgages are for owner-occupied homes. We also have some buy-to-let mortgages where we focus on non-professional landlords with small portfolios. Vehicle consumer finance– This includes cars, vans, motorbikes and caravans – so long as they are privately bought. Other unsecured lending– This includes overdrafts, personal loans, credit cards and business banking. | |||||
RETAIL BANKING – CREDIT RISK MANAGEMENT
Our customers are mainly individuals and small businesses. We have a high volume of transactions, each of which is for a relatively small amount of money. In addition, many of our transactions and customers share similar credit characteristics, like their credit score or LTV. As a result, we manage our overall credit risk by looking at portfolios or groups of customers who share similar credit characteristics. Where we take this approach, we call them ‘standardised’ customers.
Exactly how we group customers into segments depends on the portfolio and the stage of the credit lifecycle. For example, we may segment customers at origination by their credit score. For accounts in arrears, we may segment them by how fast they improve or worsen. We regularly review each segment compared with our expectations for its performance, budget or limit.
Risk strategy and planning
For more on how we set our risk strategy and plans for Retail Banking, see the ‘Santander UK group-level – credit risk management’ section.
Assessment and origination
Managing credit risk begins with lending responsibly. That means only lending to customers who:
| – | Can afford to pay us back, even if interest rates rise or their financial position worsens |
| – | Are committed to paying us back. |
We do this mainly by looking at affordability and the customer’s credit profile:
Affordability
We strive to confirm that the customer will be able to make all the repayments on the loan over its full term. As part of this, we assess the risk that they will not pay us back. We do this by a series of initial affordability and credit risk assessments. If the loan is secured, we assess affordability by reviewing the customer’s income and spending, their other credit commitments, and what would happen if interest rates went up. As most unsecured products have fixed interest rates, affordability reviews for these products do not consider the impact of increases in interest rates.
We regularly review the way we calculate affordability, and refine it when we need to. This can be due to changes in regulations, the economy or our risk profile.
Credit profile
| We | look at each customer’s credit profile and signs of how reliable they are at repaying credit. We use the data they gave us when they applied, and: |
| – | Credit policy: these are our rules and guidelines. We review them regularly to make sure our decisions are consistent and fair, and align to the risk profile we want. For secured lending, we look at the property and the LTV as well as the borrower |
| – | Credit scores: these are based on statistics about the factors that make people fail to pay off debt. We use these to build models of what is likely to happen in the future. These models give a credit score to the customer or the loan they want, to show how likely it is to be repaid. We regularly review these models |
| – | Credit reference agencies: data from credit reference agencies about how the borrower has handled credit in the past |
| – | Other Santander accounts: we look at how the customer is using their other accounts with us. |
62 Santander UK plc
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| Risk | ||||||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||||
| Santander UK rating guide | ||||||||||||||||||||||||||||||||||||
| 9 | 8 | 7 | 6 | 5 | 4 | | 1 to 3 | | Other | (1) | Total | |||||||||||||||||||||||||
| (AAA to | (A+to A) | (A- to | (BBB to | (BB+ to | (B+ to B) | (B- to D) | ||||||||||||||||||||||||||||||
| AA-) | BBB+) | BBB-) | BB-) | |||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 25,160 | – | – | – | – | – | – | 1,214 | 26,374 | |||||||||||||||||||||||||||
Trading assets: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 2,490 | 3,952 | 2,771 | 96 | 17 | – | – | – | 9,326 | |||||||||||||||||||||||||||
– Loans and advances to customers | 265 | 3,732 | 407 | – | – | – | – | – | 4,404 | |||||||||||||||||||||||||||
– Debt securities | 3,089 | 3,833 | 895 | 42 | – | – | – | – | 7,859 | |||||||||||||||||||||||||||
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Total Trading assets | 5,844 | 11,517 | 4,073 | 138 | 17 | – | – | – | 21,589 | |||||||||||||||||||||||||||
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Financial assets designated at fair value | ||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 499 | 1,000 | 667 | 12 | – | – | – | 41 | 2,219 | |||||||||||||||||||||||||||
– Debt securities | 278 | 35 | 3 | – | – | 212 | – | – | 528 | |||||||||||||||||||||||||||
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Total Financial assets designated at fair value | 777 | 1,035 | 670 | 12 | – | 212 | – | 41 | 2,747 | |||||||||||||||||||||||||||
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Available-for-sale debt securities | 3,720 | 379 | 863 | – | – | – | – | 19 | 4,981 | |||||||||||||||||||||||||||
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Derivative financial instruments | 276 | 7,943 | 9,881 | 1,072 | 204 | 12 | 19 | 642 | 20,049 | |||||||||||||||||||||||||||
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Loans and advances to banks | 600 | 571 | 1,024 | 152 | – | – | – | – | 2,347 | |||||||||||||||||||||||||||
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Loans and advances to customers(2): | ||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | 3,374 | 15,216 | 60,965 | 43,173 | 8,715 | 8,811 | 8,144 | 20 | 148,418 | |||||||||||||||||||||||||||
– Corporate loans | 2,265 | 3,928 | 3,933 | 8,139 | 4,863 | 2,637 | 734 | 1,685 | 28,184 | |||||||||||||||||||||||||||
– Finance leases | 2 | 13 | 416 | 760 | 730 | 818 | 378 | 41 | 3,158 | |||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other unsecured advances | – | 43 | 121 | 730 | 2,043 | 1,009 | 520 | 1,103 | 5,569 | |||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates & joint ventures | 648 | – | – | – | 153 | – | – | 12 | 813 | |||||||||||||||||||||||||||
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Total Loans and advances to customers | 6,289 | 19,200 | 65,435 | 52,802 | 16,504 | 13,275 | 9,776 | 2,861 | 186,142 | |||||||||||||||||||||||||||
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Loans and receivables securities(2) | 786 | 99 | 34 | 88 | 94 | – | – | – | 1,101 | |||||||||||||||||||||||||||
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43,452 |
| 40,744 | 81,980 | 54,264 | 16,819 | 13,499 | 9,795 | 4,777 | 265,330 | ||||||||||||||||||||||||||
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Loan loss allowance | (1,561) | |||||||||||||||||||||||||||||||||||
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Total | 263,769 | |||||||||||||||||||||||||||||||||||
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Of which: | ||||||||||||||||||||||||||||||||||||
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Neither past due nor impaired: | ||||||||||||||||||||||||||||||||||||
– Cash and balances at central banks | 25,160 | – | – | – | – | – | – | 1,214 | 26,374 | |||||||||||||||||||||||||||
– Trading assets | 5,844 | 11,517 | 4,073 | 138 | 17 | – | – | – | 21,589 | |||||||||||||||||||||||||||
– Financial assets designated at fair value | 777 | 1,035 | 670 | 12 | – | 212 | – | 41 | 2,747 | |||||||||||||||||||||||||||
– Available-for-sale debt securities | 3,720 | 379 | 863 | – | – | – | – | 19 | 4,981 | |||||||||||||||||||||||||||
– Derivative financial instruments | 276 | 7,943 | 9,881 | 1,072 | 204 | 12 | 19 | 642 | 20,049 | |||||||||||||||||||||||||||
– Loans and advances to banks | 600 | 571 | 1,024 | 152 | – | – | – | – | 2,347 | |||||||||||||||||||||||||||
– Loans and advances to customers | 6,289 | 19,192 | 65,430 | 52,688 | 16,377 | 12,865 | 3,770 | 2,589 | 179,200 | |||||||||||||||||||||||||||
– Loans and receivables securities | 776 | 84 | 34 | 88 | 94 | – | – | – | 1,076 | |||||||||||||||||||||||||||
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Total neither past due nor impaired | 43,442 | 40,721 | 81,975 | 54,150 | 16,692 | 13,089 | 3,789 | 4,505 | 258,363 | |||||||||||||||||||||||||||
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Past due but not impaired | – | 5 | 2 | 17 | 53 | 40 | 4,765 | 41 | 4,923 | |||||||||||||||||||||||||||
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Impaired(3) | 10 | 18 | 3 | 97 | 74 | 370 | 1,241 | 231 | 2,044 | |||||||||||||||||||||||||||
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43,452 |
| 40,744 | 81,980 | 54,264 | 16,819 | 13,499 | 9,795 | 4,777 | 265,330 | ||||||||||||||||||||||||||
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Loan loss allowance | (1,561 | ) | ||||||||||||||||||||||||||||||||||
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Total | 263,769 | |||||||||||||||||||||||||||||||||||
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Many of our decisions are automated as our risk systems contain data about affordability and credit history. We tailor the process and emphasis on the factors above for individual products, based on their relevance. More complex transactions often need greater manual assessment. This means we have to rely more on our credit underwriters’ skill and experience in making the decision. This is particularly true for secured lending, where we might need to do more checks on the customer’s income, or get a property valuation from an approved surveyor, for example.
Credit risk mitigation
The types of credit risk mitigation, including collateral, across each of our portfolios is:
| Description | ||
| Residential mortgages | Collateral is in the form of a first legal charge over the property. Before we grant a mortgage, we get an approved surveyor to value the property. We have our own guidelines for valuations, which build on guidance from the Royal Institution of Chartered Surveyors (RICS). For re-mortgages and some loans where the LTV is 75% or less, we might use an automated valuation instead. | |
| Unsecured lending | Most of our other portfolios are unsecured. This means there is no collateral or security tied to the loan that can be used to mitigate any potential loss if the customer does not pay us back. | |
| Vehicle consumer finance | Collateral is in the form of legal ownership of the vehicle for most vehicle consumer finance loans, with the customer being the registered keeper. Only a very small proportion of the vehicle consumer finance business is underwritten as a personal loan. In these cases there is no collateral or security tied to the loan. We use a leading vehicle valuation company, to assess the LTV at the proposal stage. | |
Our risk assessment does not end once we have made the decision to lend. We monitor credit risk across the credit lifecycle, mostly using IT systems. There are three main parts:
| – | Behaviour scoring: we use statistical models that help to predict whether the customer will have problems repaying, based on data about how they use their accounts. Our models also use data from credit reference agencies |
| – | Credit reference agencies: we often use data from agencies on how the borrower is handling credit from other lenders in our behaviour scoring models. We also buy services like proprietary scorecards or account alerts, which tell us as soon as the customer does something that concerns us (such as missing a payment to another bank) |
| – | Other Santander accounts: every month, we also look at how the customer is using their other accounts with us, so we can identify problems early. |
The way we use this monitoring to manage risk varies by product. For revolving credit facilities like credit cards and overdrafts, it might lead us to raise or lower credit limits. Our monitoring can also mean we change our minds about whether a product is still right for a customer and influence whether we approve an application for re-financing. In these ways we can balance our customers’ needs and their ability to manage credit.
For secured lending, our monitoring also needs to take account of changes in property prices. We use an independent agency to estimate the property’s current value every three months. They use statistical models based on recent sales prices and valuations in that local area. A lack of data can mean our confidence in the model’s valuation drops below a certain minimum, and in that case we use the House Price Index (HPI) instead.
If we find evidence that a customer is in financial difficulties, we might also talk to them about arrears management or forbearance, which we explain in more detail below.
Arrears management
We have several strategies for managing arrears, and we start using them as soon as possible. This can be before the customer has defaulted, and often as early as the day after a missed payment. We try to understand the problems a customer is having, so we can offer them the right help to bring their account up to date as soon as possible.
The strategy we use depends on the risk and the customer’s circumstances. We provide a range of tools to assist customers in reaching an affordable and acceptable solution. That could mean visiting the customer, debt counselling, or paying off the debt using money from their other accounts with us (where we have the right to do so).
Forbearance
If a customer is having financial difficulty, we always try to come to an arrangement with them before they actually default. Their problems might be the result of something like losing their job, falling ill, a relationship breaking down, or the death of someone close to them.
Forbearance is mainly for mortgages and unsecured loans. We very rarely offer it for vehicle consumer finance.
Annual Report 2015
Risk review
Credit risk
continued
Re-categorisationWe may offer the following types of loans and loan loss allowances
During 2014, loans and loan loss allowances were re-categorised to align definitions with industry practices and which also conform to changes in regulatory definitions. There was no change inforbearance. We only do this if our assessments indicate the total amount of impairment loss allowances, and did not reflect any change in credit quality ofcustomer can meet the assets. Impaired loans at 31 December 2013 in the previous table have been adjusted for comparability, resulting in a decrease of £1,809m, from £3,853m as previously published, to £2,044m. Details of the re-categorisation by portfolio are as follows:
Advances secured on residential property and other unsecured advances which are in arrears are regarded as impaired where they are three months or more past due i.e. when there is sufficient reliable evidence of a loss event. Such loans are classified as individually impaired and the associated loan loss allowances are presented as part of the observed provision. Previously, advances were also classified as individually impaired where they were in early arrears (i.e. more than one month but less than three months past due) with the associated loan loss allowances presented as part of the observed provision (collective). Impairment loss allowances on advances in early arrears are now presented as part of the IBNO provision.
Corporate loans and other secured advances in arrears are also regarded as impaired where they are three months or more past due, or if they are individually assessed sub-standard loans. Such loans are classified as individually impaired and are assessed as part of the observed provision. Previously, corporate loans and other secured advances which were exhibiting earlier signs of stress (i.e. included on the Watchlist or collectively assessed sub-standard loans) were also classified as individually impaired and the associated loan loss allowances presented as part of the observed provision (collective). Impairment loss allowances on advances in early arrears are now presented as part of the IBNO provision.
Higher risk loans
During 2014 we have elected to employ a more conservative definition of higher risk assets aligned to our master rating scale. Assets allocated to the 1-3 banding represent either defaulted balances or those at a higher risk of default (i.e. with a lower bound probability of default of 6.581%). The previously published ‘Higher risk’ loans of £1,112m at 31 December 2013 that were neither past due nor impaired included retail loans with a lower bound probability of default or expected loss of 12.5%. As a result the loans of £3,789m at 31 December 2013 that were neither past due nor impaired and included in the 1-3 banding in the table above were £2,677m higher.
Maturity analysis of loans and advances that are past due but not impaired
At 31 December 2014, loans and advances of £3,897m (2013: £4,923m) were past due but not impaired. Of these balances, £78m (2013: £104m) were due within one month, £1,206m (2013: £1,461m) were due after one month but within two months, £772m (2013: £1,010m) were due after two months but within three months, £1,019m (2013: £1,343m) were due after three months but within six months, and £822m (2013: £1,005m) were due after six months.
Non-performing loans and advances(1)(2)
An analysis of Santander UK’s NPLs is presented below.
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Loans and advances to customers of which:(2) | 190,651 | 187,048 | 194,733 | 206,311 | 202,090 | |||||||||||||||
Customers in arrears(3) | 2,930 | 3,455 | 4,149 | 3,913 | 3,648 | |||||||||||||||
NPLs | 3,424 | 3,823 | 4,210 | 3,979 | 3,717 | |||||||||||||||
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Total impairment loan loss allowances | 1,439 | 1,555 | 1,803 | 1,563 | 1,655 | |||||||||||||||
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| % | % | % | % | % | ||||||||||||||||
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Arrears ratio(4) | 1.54 | 1.86 | 2.13 | 1.90 | 1.81 | |||||||||||||||
NPLs ratio(5) | 1.80 | 2.04 | 2.16 | 1.93 | 1.84 | |||||||||||||||
Coverage ratio(6) | 42 | 41 | 43 | 39 | 45 | |||||||||||||||
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2014 compared to 2013(unaudited)
During 2014, the NPL ratio improved to 1.80% (2013: 2.04%), with retail and corporate loans performing well in a benign credit environment. The reduction in the NPL ratio resulted largely from improvements in the economic environment and prolonged low interest rates. In Retail Banking, the better performance of the portfolio was supported by the benign economic environment for UK households, low interest rates, rising house prices and falling unemployment. In Commercial Banking, credit quality remained strong, again supported by the improving economic environment.
At 31 December 2014, loans and advances to customers in arrears and the arrears ratio decreased to £2,930m (2013: £3,455m) and 1.54% (2013: 1.86%), respectively, as a result of the improving economy and as Santander UK continued to execute the strategy of exiting problem exposures through sale of the debt or through the realisation of the collateral.
The coverage ratio remained broadly unchanged at 42% at 31 December 2014 (2013: 41%).
revised payments:
| Description | ||
| Capitalisation | We offer two main types, which are often combined with term extensions and interest-only concessions: – If the customer cannot afford to increase their monthly payment enough to pay off their arrears in a reasonable time, but has been making their monthly payments (usually for at least six months), then we can add the arrears to the mortgage balance. – We can also add to the mortgage balance at the time of forbearance unpaid property charges which are due to a landlord and which we pay on behalf of the customer to avoid the lease being forfeited. | |
| Term extension | We can extend the term of the loan, making each monthly payment smaller. At a minimum, we expect the customer to pay the interest in the short-term and have a realistic chance of repaying the full balance in the long-term. We may offer this option if the customer is up-to-date with their payments, but showing signs of financial difficulties. For mortgages, the customer must also meet our policies for maximum loan term and age when they finish repaying (usually no more than 75). | |
| Interest-only | In the past, if it was not possible or affordable for a customer to have a term extension, we may have agreed to let them pay only the interest on the loan for a short time – usually less than a year. We only agreed to this where we believed their financial problems were temporary and they were likely to recover. Since March 2015 we no longer provide this option as a concession. Instead, interest-only has only been offered as a short-term standard collections arrangement. We now record any related shortfall in monthly payments as arrears and report them to the credit reference agencies. As a result, we no longer classify new interest-only arrangements agreed since March 2015 as forbearance. We continue to manage and report all interest-only arrangements offered before this date as forbearance. | |
Reduced payment arrangements | We can suspend overdraft fees and charges while the customer keeps to a plan to reduce their overdraft each month. | |
When we agree to any of these solutions with a customer, we report the account as forborne. We also review our loan loss allowances for them. Some of these accounts stay in our performing portfolio but we report them separately from other performing accounts as forborne. We classify a loan as forborne until it is fully repaid.
If an account is performing when we agree forbearance, we automatically classify it as forborne. We only classify it as NPL once it meets our standard criteria for NPL. If an account is in NPL when we agree forbearance, we keep it in the NPL category until the customer repays all the arrears, including those that existed before forbearance started.
We assess and review our loan loss allowances regularly and have them independently reviewed. We look at a number of factors, including the:
| – | Cash flow available to service debt |
| – | Value of collateral (mostly mortgages). We use an agency to do this. They use models to estimate property values with data from recent property sales and valuations in that local area. |
Other changes in contract terms
Apart from forbearance, we have sometimes changed the terms of a contract to improve our relationship with a customer. These customers showed no signs of financial difficulties, so we do not classify the contract changes as forbearance, and most of the loans were paid back without any problems.
We do not classify insolvency solutions for credit card customers as forbearance. This is because they are set by regulations and codes of practice, rather than as a result of our policy.
Debt recovery
When a customer cannot or will not keep to an agreement for paying off their arrears, we turn to the law and begin litigation and recovery. We only do this after we have made every reasonable effort to get the account back in order. To recover what we are owed, we may use a debt collection agency, sell the debt to another company, or take the customer to court.
For secured retail loans (mostly mortgages), we sometimes delay bringing in the lawyers or put legal action on hold. That can happen if the customer shows evidence that they will be able to pay off the mortgage or pay back the arrears, or if they are regularly making at least their normal monthly payment. We only repossess as a last resort.
We make sure our estimated losses from repossessed properties are realistic by getting two independent valuations on each property, as well as the estimated cost of selling it. These form the basis of our impairment loss allowance calculations.
Risk measurement and control
Retail Banking involves managing large numbers of accounts, so it produces a huge amount of data. This allows us to take a more analytical and data intense approach to measuring risk. This is reflected in the wide range of statistical models we use across the credit lifecycle. We use:
| – | Risk strategy and planning: econometric models |
| – | Assessment and origination: application scorecards, and attrition, pricing, impairment and capital models |
| – | Monitoring: behavioural scorecards and profitability models |
| – | Arrears management: models to estimate the proportion of cases that will result in possession (known as roll rates) |
| – | Debt recovery: recovery models. |
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Concentrations of credit risk exposures
RETAIL BANKING – CREDIT RISK REVIEW
RESIDENTIAL MORTGAGES
We offer mortgages to people who want to buy a house, and offer additional borrowing (known as further advances) to existing mortgage customers. The management of risk concentration is a key part of risk management. Santander UK tracks the degree of concentration of its credit risk portfolios using various criteria, including geographical areas and countries, economic sectors, products and groups of customers. Although Santander UK’s operations are based mainlyproperty must be in the UK it has built up exposures to various entities around(except for a small amount of lending in the world and is therefore exposed to concentrationsIsle of risk related to geographical area. These are further analysed below:Man).
Geographical concentrationsLending
As part of its approach to credit risk management and risk appetite, Santander UK sets exposure limits to countries and certain geographical areas. These limits are set by Santander UK with reference toWe analyse mortgage movements in 2015 in the country limits set by Banco Santander, S.A. These are determined according to the classification of the country (whether it is a developed OECD country or not), the rating of the country, its gross domestic product and the type of business activities and products the Banco Santander group wishes to engage in within that country.
The tables below set out the distribution, by geographical area, of loans and advances to banks and customers.
| UK | Peripheral | Rest of | Rest of | US | Rest of | Total | ||||||||||||||||||||||
| eurozone | (1) | eurozone | Europe | world | ||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||
Loans and advances to banks | 1,311 | 8 | 28 | 11 | 644 | 55 | 2,057 | |||||||||||||||||||||
Loans and advances to customers(2): | ||||||||||||||||||||||||||||
– Advances secured on residential property | 149,861 | – | – | – | – | – | 149,861 | |||||||||||||||||||||
– Corporate loans | 28,034 | 144 | 167 | 497 | 30 | 573 | 29,445 | |||||||||||||||||||||
– Finance leases | 2,482 | – | – | – | – | 103 | 2,585 | |||||||||||||||||||||
– Other secured advances | – | – | – | – | – | 15 | 15 | |||||||||||||||||||||
– Other unsecured advances | 5,988 | – | – | – | – | – | 5,988 | |||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates and joint ventures
| 797 | – | – | – | – | – | 797 | |||||||||||||||||||||
Loans and advances to customers
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| 187,162
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| 144 | 167 | 497 | 30 | 691 | 188,691 | |||||||||||||||||||
| 188,473 | 152 | 195 | 508 | 674 | 746 | 190,748 | ||||||||||||||||||||||
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31 December 2013 | ||||||||||||||||||||||||||||
Loans and advances to banks | 1,528 | 68 | 62 | 222 | 415 | 52 | 2,347 | |||||||||||||||||||||
Loans and advances to customers(2): | ||||||||||||||||||||||||||||
– Advances secured on residential property | 147,825 | – | – | – | – | – | 147,825 | |||||||||||||||||||||
– Corporate loans | 25,420 | 263 | 157 | 734 | 159 | 817 | 27,550 | |||||||||||||||||||||
– Finance leases | 3,106 | 4 | – | 4 | – | – | 3,114 | |||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | |||||||||||||||||||||
– Other unsecured advances | 5,285 | – | – | – | – | – | 5,285 | |||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates and joint ventures | 813 | – | – | – | – | – | 813 | |||||||||||||||||||||
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Loans and advances to customers | 182,449 | 267 | 157 | 738 | 159 | 817 | 184,587 | |||||||||||||||||||||
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| 183,977 | 335 | 219 | 960 | 574 | 869 | 186,934 | ||||||||||||||||||||||
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table below. In this table:
| – | The data does not include accrued interest and we have presented |
For additional geographical information and commentary, see ‘Country Risk Exposure.’
Risk review
Credit risk
continued
Credit risk exposures by industry
As part of its approach to credit risk management and risk appetite, Santander UK sets exposure limits to certain key industry sectors. The tables below set out the distribution, by industry sector, of loans and advances to banks and customers.
| Social | Banks | SME | Real | Transport | Residential | Cards and | Other | Total | ||||||||||||||||||||||||||||
| Housing | estate | personal | ||||||||||||||||||||||||||||||||||
| unsecured | ||||||||||||||||||||||||||||||||||||
| lending | ||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||||||
Loans and advances to banks | – | 2,057 | – | – | – | – | – | – | 2,057 | |||||||||||||||||||||||||||
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Loans and advances to customers(1): | ||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | – | – | – | – | – | 150,440 | – | – | 150,440 | |||||||||||||||||||||||||||
– Corporate loans | 5,857 | – | 13,544 | 2,800 | 375 | – | – | 7,427 | 30,003 | |||||||||||||||||||||||||||
– Finance leases | – | – | – | – | 314 | – | – | 2,325 | 2,639 | |||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | 15 | 15 | |||||||||||||||||||||||||||
– Other unsecured advances | – | – | – | – | – | – | 6,236 | – | 6,236 | |||||||||||||||||||||||||||
– Securities acquired under resale agreement | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates & joint ventures | – | – | – | – | – | – | – | 797 | 797 | |||||||||||||||||||||||||||
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Loans and advances to customers (gross) | 5,857 | – | 13,544 | 2,800 | 689 | 150,440 | 6,236 | 10,564 | 190,130 | |||||||||||||||||||||||||||
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Less: impairment loss allowance | (1,439 | ) | ||||||||||||||||||||||||||||||||||
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Loans and advances to customers, net of impairment loss allowance |
| 188,691 | ||||||||||||||||||||||||||||||||||
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| 190,748 | ||||||||||||||||||||||||||||||||||||
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31 December 2013 | ||||||||||||||||||||||||||||||||||||
Loans and advances to banks | – | 2,347 | – | – | – | – | – | – | 2,347 | |||||||||||||||||||||||||||
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Loans and advances to customers(1): | ||||||||||||||||||||||||||||||||||||
– Advances secured on residential property | – | – | – | – | – | 148,418 | – | – | 148,418 | |||||||||||||||||||||||||||
– Corporate loans | 5,748 | – | 12,776 | 3,363 | 635 | – | – | 5,662 | 28,184 | |||||||||||||||||||||||||||
– Finance leases | – | – | – | – | 942 | – | – | 2,216 | 3,158 | |||||||||||||||||||||||||||
– Other secured advances | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other unsecured advances | – | – | – | – | – | – | 5,569 | – | 5,569 | |||||||||||||||||||||||||||
– Securities acquired under resale agreement | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Amounts due from fellow subsidiaries, associates & joint ventures | – | – | – | – | – | – | – | 813 | 813 | |||||||||||||||||||||||||||
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Loans and advances to customers (gross) | 5,748 | – | 12,776 | 3,363 | 1,577 | 148,418 | 5,569 | 8,691 | 186,142 | |||||||||||||||||||||||||||
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Less: impairment loss allowance | (1,555 | ) | ||||||||||||||||||||||||||||||||||
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Loans and advances to customers, net of impairment loss allowance |
| 184,587 | ||||||||||||||||||||||||||||||||||
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| 186,934 | ||||||||||||||||||||||||||||||||||||
For additional industry information, see ‘Country Risk Exposure.’
Forbearance summary
The following table provides a summary of the population of loans and advances to customers which have been subject to forbearance programmes and are included in the previous tables. Discussion and analysis of forbearance activities for mortgages in Retail Banking and forbearance activities in Commercial Banking, Corporate & Institutional Banking, and Corporate Centre are set out in their respective sections.
| 2014 | 2013 | |||||||||||||||||||||||||
| Forbearance | Forbearance | Total | Forbearance | Forbearance | Total | |||||||||||||||||||||
| of NPL | of non-NPL | of NPL | of non-NPL | |||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||||
Retail Banking: | ||||||||||||||||||||||||||
– Mortgages | 723 | 3,144 | 3,867 | 691 | 3,396 | 4,087 | ||||||||||||||||||||
– Unsecured loans | 1 | 3 | 4 | 2 | 7 | 9 | ||||||||||||||||||||
– Credit cards | 27 | – | 27 | 33 | – | 33 | ||||||||||||||||||||
– Bank accounts | 1 | 12 | 13 | 2 | 15 | 17 | ||||||||||||||||||||
Commercial Banking | 58 | 739 | 797 | 182 | 728 | 910 | ||||||||||||||||||||
Corporate & Institutional Banking | 50 | – | 50 | 14 | – | 14 | ||||||||||||||||||||
Corporate Centre | 18 | 313 | 331 | 58 | 322 | 380 | ||||||||||||||||||||
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| 878 | �� | 4,211 | 5,089 | 982 | 4,468 | 5,450 | ||||||||||||||||||||
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| £m | ||||||||||||
At 1 January 2015(1) | 150,057 | |||||||||||
New business | 25,228 | |||||||||||
Further advances/Flexi drawdowns | 1,255 | |||||||||||
Redemptions/paydowns | (23,721) | |||||||||||
At 31 December 2015(1) | 152,819 | |||||||||||
| (1) | All mortgage balances are in the UK and continue accruing interest. Balances include interest we have charged to the customer’s account, but do not include interest they have accrued that we have not charged to their account yet. |
RESIDENTIAL MORTGAGES
Retail Banking grants mortgage loans for house purchases as well as granting further advances toIn 2015, there were also £18.0bn (2014: £14.4bn) of internal transfers where we kept existing mortgage customers. The propertycustomers with maturing products on which the mortgage is secured must always be located within the UK, with the exception of an immaterial amount of lending in the Isle of Man.
In the following chart, gross lending includes both new business and, shown separately, further advances and any flexible mortgage drawdown against available limits. The redemptions and paydowns refer to customer payments, over-payments, clearing mortgage balances or re-financing away from Santander UK. The data excludes accrued interest and is presented gross of impairment loss allowances.
Mortgage provision models
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Mortgages are our largest product, so we pay particular attention to how we calculate the provision we need for them. Our provision models are statistically-derived collective models, except for fraud and properties in possession, which we provide for individually. We have two main models – a credit model and a maturity risk model (for interest-only mortgages). In 2015, we enhanced our credit model to: – Increase its granularity for mortgages with an LTV over 100% – Refine its treatment of poorly performing cases – Update the segmentation used to estimate loss propensities – Change the use of loss per case and loss factor to a loss ratio, which takes account of the exposure of each account. This estimates the percentage of balances that will be lost on possession using our observed loss experience. As a result of our enhancements to our credit model, we reduced the number and scale of model overlays applied to our previous model. In view of the increase in house prices in 2015 and improvement in other economic drivers of impairment, we also reviewed our approach to continue to ensure the segments in the model | have similar credit characteristics.
We also updated our maturity risk model to reflect long-run average house price trends. The model now recognises the possibility of loss for all estimated LTVs at maturity, not just those above 75% as in the past.
| We ran the new models in parallel in the second half of the year and compared the results with the provisions estimated from the prior models and our model overlays. This showed there was no significant change to our mortgage provision under the new models compared to the adjusted old models. The new models were subject to our model governance framework and approved by the Board Audit Committee in November 2015. | ||||||
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(1) All mortgage balances are UK and continue accruing interest. The balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account.
In addition, during 2014 there were internal transfers of £14.4bn (2013: £18.4bn) where we were successful in the targeted retention of mortgage customers.
Annual Report 2015
Risk review
Credit risk
continued
Borrower and product profile
In the followingthese charts, the category ‘home movers’ includesinclude both existing customers moving house and taking out a new mortgage with us, and customers who moveswitch their mortgage to us at the pointwhen they move home. The category ‘re-mortgagers’ compriseshouse. ‘Re-mortgagers’ are external customers who are re-mortgaging to Santander UK only. Internalwith us. We have not included internal re-mortgages, further advances and any flexible mortgage drawdowns are not included in the new business figures below.
2014 compared to 2013(unaudited)
During 2014, the proportion of new business arising from first-time buyers increased from 20% to 22% driven by the Help to Buy scheme, under which Santander UK lent £1.2bn in the year. The Help to Buy scheme supports borrowers who have smaller deposits by guaranteeing a proportion of their loan, enabling lenders taking part to offer home buyers higher LTV mortgages (from 80% to 95% LTV) without materially increasing the credit risk profile of the lending. Santander UK participates in Help to Buy from 90% to 95% LTV. Buy-to-let new business increased from 3% to 5%, in line with the strategy to expand this line of business in a controlled manner. There was a corresponding decrease in remortgager (from 28% to 25%) and Home mover (from 49% to 48%) new business percentages. There were smaller movements in the mix of buyer type in the stock figures, which were also influenced by redemptions and repayments. Overall, the mix was relatively stable, with only a slight decrease in the remortgagers.
Product and interest rate profile
| 2014 | 2013 | |||||||||||||||||
| £m | % | £m | % | |||||||||||||||
Term product – Fixed rate | 69,329 | 46 | 56,672 | 39 | ||||||||||||||
Term product – Tracker | 4,308 | 3 | 5,956 | 4 | ||||||||||||||
Standard Variable Rate (‘SVR’)(1) | 43,072 | 29 | 51,490 | 35 | ||||||||||||||
Base rate linked | 14,791 | 10 | 15,260 | 10 | ||||||||||||||
Flexi(2) | 15,203 | 10 | 16,245 | 11 | ||||||||||||||
Buy-to-let | 3,138 | 2 | 2,201 | 1 | ||||||||||||||
Other
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| 255
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150,057
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100
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148,079
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100
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(1) Excludes Buy-to-let on SVR of £790m (2013: £841m) included in the Buy-to-let line.
(2) In addition, there were £6,177m (2013: £7,469m) of legacy Alliance & Leicester flexible loan products included in other categories as the product functionality is more limited than the current Santander UK Flexi loan product.
2014 compared to 2013(unaudited)
During 2014, the migration away from tracker mortgages to fixed rate products witnessed in 2013 continued, in line with the market. This reflected potential borrowers’ concerns over future interest rate movements, and the increased availability of competitively priced fixed rate products. This was also reflected in the proportion of existing customers paying the SVR decreasing by 6% to 29% in 2014 (2013: 35%).
figures.
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2015 compared to 2014(unaudited)
The mortgage borrower mix was broadly unchanged in 2015, with the majority of total stock home movers and remortgagers, at 45% and 33%, respectively, at 31 December 2015 (2014: 43% and 35%, respectively). First-time buyers represented 19% (2014: 20%) of total stock and 3% (2014: 2%) was buy-to-let. This was driven by an underlying stability in target market segments, product pricing and distribution strategy.
Buy-to-let new business increased from 5% to 9% at 31 December 2015, in line with our business objectives to support additional lending for this sector. We have a particular focus on non-professional landlords as this segment is more closely aligned with residential mortgages, and also accounts for the majority of the buy-to-let market. In 2015, we completed 12,700 buy-to-let mortgages at an average LTV of 70%.
Interest rate profile
The interest rate profile of our mortgage asset stock was:
| 2015 | 2014 | |||||||||||||||||
| £m | % | £m | % | |||||||||||||||
Fixed rate | 82,570 | 54 | 70,720 | 47 | ||||||||||||||
Variable rate | 34,402 | 23 | 35,476 | 24 | ||||||||||||||
Standard Variable Rate (SVR) | 35,847 | 23 | 43,861 | 29 | ||||||||||||||
| 152,819 | 100 | 150,057 | 100 | |||||||||||||||
2015 compared to 2014(unaudited)
In 2015, the proportion of SVR loan balances and variable rate mortgages both decreased to 23% (2014: 29% and 24% respectively) and fixed rate mortgages increased to 54% (2014: 47%). This was driven by new business flows and consumer sentiment about expected future interest rate movements as well as the availability of competitively-priced fixed rate products.
66 Santander UK plc
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| Risk | ||||||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||||
Geographical distribution
The new business data in the followingthese tables corresponds tois new business originated duringstarting in each of the reported years. For 2014, theyears we show. The Council of Mortgage Lenders (‘CML’)(CML) new business data in the table belowfor 2015 covers the nine months ended 30 September 2014, due2015 because that was the only data available for 2015 when we went to timing of data availability.print. The percentage shown ispercentages are calculated on a value weighted basis. During
| UK region | 2015 | 2014 | ||||||||||||||||||||||||
| Santander UK | CML (unaudited) | Santander UK | CML (unaudited) | |||||||||||||||||||||||
| Stock | New business | New business | Stock | New business | New business | |||||||||||||||||||||
| % | % | % | % | % | % | |||||||||||||||||||||
East Anglia | 3 | 3 | 4 | 3 | 3 | 3 | ||||||||||||||||||||
London | 23 | 28 | 21 | 22 | 26 | 22 | ||||||||||||||||||||
Midlands | 10 | 10 | 12 | 11 | 10 | 12 | ||||||||||||||||||||
North and North West | 10 | 8 | 10 | 11 | 8 | 10 | ||||||||||||||||||||
Northern Ireland | 3 | 1 | 1 | 3 | 1 | 1 | ||||||||||||||||||||
Scotland | 5 | 4 | 7 | 5 | 4 | 7 | ||||||||||||||||||||
South East excluding London | 30 | 32 | 27 | 29 | 32 | 29 | ||||||||||||||||||||
South West and Wales | 11 | 10 | 12 | 11 | 11 | 11 | ||||||||||||||||||||
Yorkshire and Humberside | 5 | 4 | 6 | 5 | 5 | 5 | ||||||||||||||||||||
| 100 | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||||||
2015 compared to 2014 Santander UK updated its geographical region definitions to align to revised CML definitions, providing a narrower definition of London and an equivalently wider definition(unaudited)
At 31 December 2015, the lending profile of the South East excluding London. The data presented for 2013 has been prepared onportfolio represented a consistent basis, to aid comparability.
| UK Region | 2014 | 2013 | ||||||||||||||||||||||||
| Santander UK | CML (unaudited) | Santander UK | CML (unaudited) | |||||||||||||||||||||||
| Stock | New business | New business | Stock | New business | New business | |||||||||||||||||||||
| % | % | % | % | % | % | |||||||||||||||||||||
East Anglia | 3 | 3 | 3 | 3 | 3 | 3 | ||||||||||||||||||||
East Midlands | 5 | 5 | 6 | 5 | 5 | 6 | ||||||||||||||||||||
London | 22 | 26 | 22 | 22 | 26 | 22 | ||||||||||||||||||||
North | 3 | 2 | 3 | 3 | 3 | 3 | ||||||||||||||||||||
North West | 8 | 6 | 7 | 8 | 6 | 7 | ||||||||||||||||||||
Northern Ireland | 3 | 1 | 1 | 3 | 1 | 1 | ||||||||||||||||||||
Scotland | 5 | 4 | 7 | 5 | 4 | 7 | ||||||||||||||||||||
South East excluding London | 29 | 32 | 29 | 29 | 31 | 28 | ||||||||||||||||||||
South West | 8 | 9 | 8 | 8 | 9 | 9 | ||||||||||||||||||||
Wales | 3 | 2 | 3 | 3 | 2 | 3 | ||||||||||||||||||||
West Midlands | 6 | 5 | 6 | 6 | 5 | 6 | ||||||||||||||||||||
Yorkshire and Humberside
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100
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2014 compared to 2013(unaudited)
Geographically, whilst Santander UK has a diverse geographical footprint across the UK, our mortgage exposure continueswhile continuing to reflect a concentration around London and the South East.
Larger loans
The mortgage asset stock of larger loans was:
| Stock | South East including London | UK | ||||||||||||||||
Individual mortgage loan size | 2015 £m | 2014 £m | 2015 £m | 2014 £m | ||||||||||||||
Less than £0.25m | 50,325 | 51,712 | 114,555 | 117,269 | ||||||||||||||
£0.25m–£0.5m | 21,848 | 18,929 | 29,060 | 25,617 | ||||||||||||||
£0.5m–£1m | 6,828 | 5,271 | 7,922 | 6,213 | ||||||||||||||
£1m–£2m | 1,060 | 768 | 1,123 | 827 | ||||||||||||||
> £2m | 155 | 124 | 159 | 131 | ||||||||||||||
Average loan size for new business
The average loan size for new business in 2015 and 2014 was:
UK region
| 2015 £000 | 2014 £000 | ||||||
South East including London | 248 | 229 | ||||||
Rest of the UK | 136 | 125 | ||||||
UK as a whole | 186 | 169 | ||||||
2015 compared to 2014(unaudited)
In 2015, the average loan size for new business increased in line with the overall rise in house prices, to £186,000 for the UK overall, £248,000 for the South East including London representing approximately halfand £136,000 for the valuerest of the total portfolio.UK. The concentration is a resultaverage loan-to-income multiple of both the natural effect of a greater housing density and higher than average house prices in this area, coupled with aour new business market share higher than the industry average as a whole.
During 2014, mortgage asset stock and new business geographic distribution remained broadly the same aslending in 2013. There2015 was a marginal increase in business written in the South East excluding London.
Exposures to larger loans
Exposures to larger loans across the UK increased in the year but remained at a low level with the total mortgage asset stock of larger mortgage loans at 31 December 2014 and 2013, as follows:
| Stock | South East including London | UK | ||||||||||||||||
| Individual mortgage loan size | 2014 £m | 2013 £m | 2014 £m | 2013 £m | ||||||||||||||
£0.5m–£1m | 5,281 | 3,837 | 6,226 | 4,683 | ||||||||||||||
£1m–£2m | 769 | 459 | 828 | 510 | ||||||||||||||
> £2m
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Average loan size for new business The average loan size for new business during the years ended 31 December 2014 and 2013 was as follows:
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New business UK Region | 2014 £000 | 2013 £000 | ||||||||||||||||
South East including London
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229
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205
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Rest of the UK
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125
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118
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UK as a whole
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169
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155
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Annual Report 2015
Risk review
Credit risk
continued
Rating distribution(unaudited)
The following chart analyses the credit quality of the mortgage stock by Santander UK’s internal rating scale (see the ‘Credit quality’ section). The 2013 ratings shown below are based on a 2014 rating calibration and are therefore presented on a consistent basis with the 2014 ratings. Within this scale, the higher the rating, the better the quality of the loan.
This table shows the LTV distribution for mortgage asset stock, NPL stock and new business. We have included fees added to the loan in the calculation. And if the product is on flexible terms, the calculation only includes the drawn loan amount, not undrawn limits.
| LTV | 2015 | 2014 | ||||||||||||||||||||||||
| of which: | of which: | |||||||||||||||||||||||||
Stock % | NPL stock % | New business % | Stock % | NPL stock % | New business % | |||||||||||||||||||||
up to 50% | 40 | 33 | 16 | 36 | 25 | 17 | ||||||||||||||||||||
>50–75% | 42 | 36 | 41 | 44 | 36 | 43 | ||||||||||||||||||||
>75–80% | 6 | 6 | 16 | 6 | 7 | 14 | ||||||||||||||||||||
>80–85% | 4 | 5 | 11 | 5 | 6 | 9 | ||||||||||||||||||||
>85–90% | 3 | 4 | 12 | 3 | 6 | 12 | ||||||||||||||||||||
>90–95% | 2 | 3 | 4 | 2 | 4 | 5 | ||||||||||||||||||||
>95–100% | 1 | 3 | – | 1 | 4 | – | ||||||||||||||||||||
>100% i.e. negative equity | 2 | 10 | – | 3 | 12 | – | ||||||||||||||||||||
| 100 | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||||||
Collateral value of residential properties(1)(2) | £152,432m | £2,190m | £25,228m | £149,561m | £2,342m | £25,078m | ||||||||||||||||||||
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Simple average(3)LTV (indexed) | 45 | 50 | 65 | 47 | 55 | 65 | ||||||||||||||||||||
Value weighted average(4)LTV (indexed) | 41 | 44 | 60 | 43 | 50 | 60 | ||||||||||||||||||||
| (1) | Includes collateral against loans in negative equity of £2,285m at 31 December 2015 (2014: £3,073m). |
| (2) | The collateral value we have shown is limited to the balance of each associated individual loan. It does not include the impact of overcollateralisation (where the collateral has a higher value than the loan balance). |
| (3) | Unweighted average of LTV of all accounts. |
| (4) | Total of all loan values divided by the total of all valuations. |
20142015 compared to 20132014(unaudited)
In 2014, there2015, we maintained our prudent lending criteria, with an average LTV of 65% on new lending (2014: 65%). Our lending with an LTV of over 85% was a shift to better quality stock as the proportion16% of the portfolio with a rating of 7-9 increased to 55.6% (2013: 53.6%). This was as a result of comparatively better quality new business flow (2014: 17%).
At 31 December 2015, our stock LTV was broadly unchanged at 45% (2014: 47%). It continued to perform well, supported by house price increases and the improving economic conditionsenvironment which helped capital repayments by borrowers.
In September 2015, we withdrew from the UK Government’s Help to Buy scheme but we continue to offer mortgages with an LTV of over 90% under the same terms, due to the good performance of Help to Buy mortgages and reflecting the healthy market for customers with smaller deposits.
At 31 December 2015, the loans in 2014. The proportionnegative equity that were effectively uncollateralised (before taking account of the portfolio of lower quality, with a rating of 1-3, decreased slightlyloan loss allowances) reduced to 4.5% (2013: 5.4%)£387m (2014: £496m). See ‘Credit Performance’ for additional information on the proportion of assets in NPLs and arrears.
Maturity profile(unaudited)
The following charts set out mortgage loans and advances by contractual maturity period for new business (term at inception), and the residual maturity of stock (contractual term remaining). Customer behaviour shows that many loans are pre-paid prior to their legal (i.e. contractual) maturity, either through overpayments or redemptions.Credit performance
| 2015 £m | 2014 £m | |||||||
Mortgage loans and advances to customers(1) | 152,819 | 150,057 | ||||||
Performing(2)(4) | 148,963 | 145,598 | ||||||
Early arrears:(4) | 1,604 | 1,941 | ||||||
– 31 to 60 days | 979 | 1,185 | ||||||
– 61 to 90 days | 625 | 756 | ||||||
NPLs:(3)(4) | 2,252 | 2,459 | ||||||
– By arrears | 1,826 | 2,133 | ||||||
– By bankruptcy | 34 | 44 | ||||||
– By maturity default | 263 | 210 | ||||||
– By forbearance | 83 | 72 | ||||||
– By PIPs(3) | 46 | – | ||||||
PIPs(3)not classified as NPL | – | 59 | ||||||
2014 compared to 2013(unaudited)
In 2014, there was a small migration in the residual maturity profile towards shorter terms. The stock maturity profiles shifted to lower remaining terms. For new business, the proportion with terms greater than 25 years increased marginally. This was consistent with an increase in the proportion of first time buyer business, which is generally written with comparatively longer terms.
| (1) | Include Social Housing loans and finance leases. |
| (2) | Excludes mortgages where the customer did not pay for between 31 and 90 days, bankruptcy, maturity default and forbearance NPL. Includes £3,486m of mortgages (2014: £4,208m) where the customer did not pay for 30 days or less. |
| (3) | Mortgages are classified as NPL in line with the definitions in the ‘Credit risk management’ section. |
| (4) | All mortgages are in the UK and continue accruing interest. The balances include interest we have charged to the customer’s account, but don’t include any interest they have accrued but we have not charged to their account yet. |
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Loan-to-value analysis
The following table sets out the LTV distribution for mortgage asset stock, NPL stock and new business. The LTV calculation includes fees added to the loan and, where the product is on flexible terms, only includes the drawn loan amount, not undrawn limits.
| LTV | 2014 | 2013 | ||||||||||||||||||||||||
| of which: | of which: | |||||||||||||||||||||||||
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| | NPL stock % | | | New business % | |
| Stock % |
| | NPL stock % | | | New business % | | |||||||||
<=50% | 36 | 25 | 17 | 29 | 18 | 19 | ||||||||||||||||||||
>50–55% | 8 | 6 | 5 | 7 | 4 | 6 | ||||||||||||||||||||
>55–60% | 9 | 7 | 6 | 7 | 5 | 6 | ||||||||||||||||||||
>60–65% | 10 | 7 | 8 | 9 | 6 | 8 | ||||||||||||||||||||
>65–70% | 9 | 8 | 11 | 10 | 6 | 12 | ||||||||||||||||||||
>70–75% | 8 | 8 | 13 | 9 | 8 | 14 | ||||||||||||||||||||
>75–80% | 6 | 7 | 14 | 8 | 8 | 13 | ||||||||||||||||||||
>80–85% | 5 | 6 | 9 | 7 | 8 | 10 | ||||||||||||||||||||
>85–90% | 3 | 6 | 12 | 5 | 8 | 12 | ||||||||||||||||||||
>90–95% | 2 | 4 | 5 | 3 | 6 | – | ||||||||||||||||||||
>95–100% | 1 | 4 | – | 2 | 6 | – | ||||||||||||||||||||
> 100% i.e. negative equity | 3 | 12 | – | 4 | 17 | – | ||||||||||||||||||||
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100
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100
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100
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100
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100
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Collateral value of residential properties(1)(2)
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£149,561m
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£2,342m
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£25,078m
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£147,241m
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£2,678m
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£17,234m
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Simple average(3)LTV (indexed)
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47
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55
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65
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51
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61
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Value weighted average(4)LTV (indexed)
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43
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50
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60
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47
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57
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58
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(1) Includes collateral against loans in negative equity of £3,073m at 31 December 2014 (2013: £5,394m).
(2) The collateral value shown above is limited to the outstanding value of each associated individual loan and excludes the impact of over-collateralisation i.e. where the collateral held is of a higher value than the loan balance outstanding.
(3) Unweighted average of LTV of all accounts.
(4) Sum of all loan values divided by sum of all valuations.
2014 compared to 2013(unaudited)
During 2014, the LTV profile of new business marginally shifted towards higher LTVs primarily as a consequence of the positive market conditions and propositions such as the UK Government’s Help to Buy scheme. The Help to Buy scheme delivered the planned 5% new business and was a key factor in the increase of value weighted average LTV new business from 58% to 60%.
During 2014, the LTV profile of mortgage assets improved primarily as a result of house price increases. Average LTV improved to 43% (2013: 47%) although there were regional variations, as well as the effect of regular capital repayments. We are, however, conscious that these positive trends in house prices may not continue and have therefore excluded the effect of this 2014 increase in assessing the level of our provisions.
At 31 December 2014, of the loans in negative equity, the total which was effectively uncollateralised before taking account of any loan loss allowances was £496m (2013: £838m).
Risk review
Credit risk
continued
Credit performance
2014 £m | 2013 £m | |||||||
Mortgage loans and advances to customers | 150,057 | 148,079 | ||||||
Performing(1)(3) | 145,598 | 142,806 | ||||||
Early arrears:(3) | 1,941 | 2,394 | ||||||
– 31 to 60 days | 1,185 | 1,424 | ||||||
– 61 to 90 days
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Non-performing loans:(2)(3) | 2,459 | 2,788 | ||||||
– By Arrears | 2,133 | 2,558 | ||||||
– By Bankruptcy | 44 | 55 | ||||||
– By Maturity default | 210 | 146 | ||||||
– By Forbearance
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Properties In Possession (‘PIP’)
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59
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91
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Non-performing loans and advances(1)(2)
An analysis of mortgage NPLs is presented below.
| 2014 £m | 2013 £m | 2015 £m | 2014 £m | |||||||||||||
Mortgage loans and advances to customers of which: | 150,057 | 148,079 | 152,819 | 150,057 | ||||||||||||
Customers in arrears(3) | 1,941 | 2,394 | ||||||||||||||
Mortgage NPLs
| 2,459 | 2,788 | ||||||||||||||
Early arrears | 1,604 | 1,941 | ||||||||||||||
NPLs | 2,252 | 2,459 | ||||||||||||||
Impairment loan loss allowances
| 579 | 593 | 424 | 579 | ||||||||||||
| % | % | % | % | |||||||||||||
Arrears ratio(4) | 1.29 | 1.62 | ||||||||||||||
Early arrears ratio(4) | 1.05 | 1.29 | ||||||||||||||
NPLs ratio(5) | 1.64 | 1.88 | 1.47 | 1.64 | ||||||||||||
Coverage ratio(6)
| 24 | 21 | 19 | 24 | ||||||||||||
| (1) |
| (2) |
| (3) | All |
| (4) |
| (5) | Mortgage NPLs as a percentage of |
| (6) | Impairment loss allowances as a percentage of NPLs. |
We analyse NPL movements in 2015 in the chart below. ‘Entries’ are loans which we have classified as NPL in the year and ‘Policy entries’ are due to definition changes. ‘PIP sales’ are loans that have been legally discharged when we have sold the property, and include any written-off portion. ‘Exits’ are loans that have been repaid (in full or in part) and loans that have returned to performing status. Forbearance activity does not change the NPL status.
2015 compared to 2014(unaudited)
In 2015, mortgage NPLs decreased to £2,252m at 31 December 2015 (2014: £2,459m) and the NPL ratio decreased to 1.47% (2014: 1.64%), including Properties in Possession (PIPs). Exits exceeded entries by £176m due to improving delinquency trends, reflecting portfolio vintage composition and associated credit quality. Impairment releases, and the decreases in the NPL and coverage ratios, reflected the continued good performance of the portfolio supported by low interest rates, rising house prices and the supportive economic environment. Policy entries of £57m mainly reflected us including PIPs in NPLs. Prior years have not been restated.
Annual Report 2015
Risk review
Forbearance
Forbearance started in the year(1)(2)
The balances that entered forbearance in 2015 and 2014 were:
| 2015 | 2014 | |||||||||||||||||
| £m | % | £m | % | |||||||||||||||
Capitalisation | 287 | 61 | 254 | 47 | ||||||||||||||
Term extensions | 167 | 35 | 175 | 33 | ||||||||||||||
Interest-only | 19 | 4 | 105 | 20 | ||||||||||||||
| 473 | 100 | 534 | 100 | |||||||||||||||
| (1) | ||
| (2) | The figures reflect the forbearance activity in the year, regardless of whether there was any forbearance on the accounts before. |
Forbearance total position
a) Performance when they entered forbearance
The balances at 31 December 2015 and 2014, analysed by their payment status when they entered forbearance and the forbearance we applied, were:
| Capitalisation £m | Term extension £m | Interest-only £m | Total £m | |||||||||||||
2015(1) | ||||||||||||||||
Forbearance of NPL | 393 | 99 | 264 | 756 | ||||||||||||
Forbearance of Non-NPL | 1,297 | 735 | 880 | 2,912 | ||||||||||||
| 1,690 | 834 | 1,144 | 3,668 | |||||||||||||
2014(1) | ||||||||||||||||
Forbearance of NPL | 331 | 95 | 297 | 723 | ||||||||||||
Forbearance of Non-NPL | 1,334 | 806 | 1,004 | 3,144 | ||||||||||||
| 1,665 | 901 | 1,301 | 3,867 | |||||||||||||
| (1) | We base forbearance type on the first forbearance on the accounts. Tables only show accounts that were open at the year-end. |
b) Performance at the year-end
The balances at 31 December 2015 and 2014 analysed by their payment status at the year-end and the forbearance we applied were:
Capitalisation
£m | Term extension
£m | Interest-only
£m | Total
£m | Impairment allowance £m | ||||||||||||||||
2015(1) | ||||||||||||||||||||
In arrears | 412 | 123 | 305 | 840 | 34 | |||||||||||||||
Performing | 1,278 | 711 | 839 | 2,828 | 27 | |||||||||||||||
| 1,690 | 834 | 1,144 | 3,668 | 61 | ||||||||||||||||
Proportion of portfolio | 1.1% | 0.5% | 0.7% | 2.4% | – | |||||||||||||||
2014(1) | ||||||||||||||||||||
In arrears | 425 | 144 | 390 | 959 | 59 | |||||||||||||||
Performing | 1,240 | 757 | 911 | 2,908 | 55 | |||||||||||||||
| 1,665 | 901 | 1,301 | 3,867 | 114 | ||||||||||||||||
Proportion of portfolio | 1.1% | 0.6% | 0.9% | 2.6% | – | |||||||||||||||
| (1) | We base forbearance type on the first forbearance on the accounts. Tables only show accounts that were open at the year-end. |
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An analysis of the NPL movements during 2014 is presented below. ‘Entries’ represent loans which have become classified as NPLs during the year and ‘Policy entries’ are due to definition changes. ‘PIP exits’ represent loans that have moved from non-performing and into possession, including any written-off portion. ‘Exits’ represent loans that have been repaid (in full or in part) plus those returned to performing status. Forbearance activity does not result in a change in the NPL status.
2014 compared to 2013(unaudited)
At 31 December 2014, the mortgage asset NPL stock decreased to £2,459m (2013: £2,788m), and the NPL ratio decreased to 1.64% (2013: 1.88%). This reflected the good credit quality of the portfolio, supported by the improving economic environment for UK households, with low interest rates, rising house prices and falling unemployment. We remain aware that these trends may not continue and we take account of this in setting our provisions.
There was an increase in mortgage NPLs on maturity defaults (i.e. interest-only mortgages that remain outstanding more than 90 days after contractual maturity), in line with our expectations. Policy entries of £25m in 2014 related to a change in policy for legacy portfolios to treat as NPL certain short-term (up to 6 months) term extensions if the customer does not redeem within 90 days of the original maturity date.
The improving economy also contributed to a reduction in the level of early arrears (31-90 days). The economic recovery remains at an early stage, and allowances have been made for losses which could stem from factors including regional variation in the risk profile, changes to regulation and contractual maturity defaults.
In 2014, interest income recognised on impaired loans amounted to £80m (2013: £88m, 2012: £90m).
Risk review
Credit risk
continued
Conduct risk
Other key risks
Forbearance
Forbearance commenced during the year(1)(2)
The balances that entered forbearance during the years ended 31 December 2014 and 2013 were:
| 2014 | 2013 | |||||||||||||||||||||
| £m | % | £m | % | |||||||||||||||||||
Capitalisation | 254 | 47 | 130 | 31 | ||||||||||||||||||
Term extensions | 175 | 33 | 168 | 39 | ||||||||||||||||||
Interest-only | 105 | 20 | 128 | 30 | ||||||||||||||||||
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| 534 | 100 | 426 | 100 | |||||||||||||||||||
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(1) Mortgages are included within the year that they were forborne. (2) The figures by year reflect the amount of forbearance activity undertaken during the year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.
Forbearance cumulative position a) Payment status when entering forbearance The forborne balances at 31 December 2014 and 2013 when they originally entered forbearance, analysed by type of forbearance applied, was:
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| £m | £m | £m | £m | |||||||||||||||||||
2014(1) | ||||||||||||||||||||||
Forbearance of NPL | 331 | 95 | 297 | 723 | ||||||||||||||||||
Forbearance of Non-NPL
| 1,334 | 806 | 1,004 | 3,144 | ||||||||||||||||||
| 1,665 | 901 | 1,301 | 3,867 | |||||||||||||||||||
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2013(1) | ||||||||||||||||||||||
Forbearance of NPL | 290 | 77 | 324 | 691 | ||||||||||||||||||
Forbearance of Non-NPL | 1,426 | 892 | 1,078 | 3,396 | ||||||||||||||||||
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| 1,716 | 969 | 1,402 | 4,087 | |||||||||||||||||||
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(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
b) Payment status at the year-end The forborne balances analysed by type of forbearance applied at 31 December 2014 and 2013 was:
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| Capitalisation | Term extension | Interest-only | Total | Impairment | ||||||||||||||||||
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| £m | £m | £m | £m | £m | ||||||||||||||||||
2014(1) | ||||||||||||||||||||||
In arrears | 425 | 144 | 390 | 959 | 59 | |||||||||||||||||
Performing(2) | 1,240 | 757 | 911 | 2,908 | (3) | 55 | ||||||||||||||||
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| 1,665 | 901 | 1,301 | 3,867 | 114 | ||||||||||||||||||
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Proportion of portfolio | 1.1% | 0.6% | 0.9% | 2.6% | – | |||||||||||||||||
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2013(1) | ||||||||||||||||||||||
In arrears | 499 | 181 | 495 | 1,175 | 68 | |||||||||||||||||
Performing(2) | 1,217 | 788 | 907 | 2,912 | (3) | 62 | ||||||||||||||||
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| 1,716 | 969 | 1,402 | 4,087 | 130 | ||||||||||||||||||
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Proportion of portfolio | 1.2% | 0.7% | 0.9% | 2.8% | – | |||||||||||||||||
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20142015 compared to 20132014(unaudited)
The average monthly level of forbearance commencedstarted in 2014 increased primarily due2015 was lower than in 2014. We also changed our forbearance policy in March 2015, so we no longer offer interest-only concessions to customers in financial difficulties. Instead, we offer reduced repayment arrangements for a higher level of capitalisations. The level of capitalisations increased duetime. Their account stays on capital and interest terms and any shortfall in capital repayment is added to improvements in the efficiency of the capitalisation process, enabling decisions on capitalisation to be made more rapidly, but the levels of inflows were still significantly below that observed prior to 2013.arrears.
At 31 December 2014, the stock of mortgage accounts that had their term extended or converted to interest-only was relatively stable, amounting to 1.5% of all mortgage accounts by value (2013: 1.6%).
Levels of adherence to revised payment terms agreed under Santander UK’s forbearance arrangements improved during 2014 to approximately 78% by value (2013: 75%) and 79% by volume (2013: 77%) of the accounts in forbearance. The high percentage of these accounts performing supports Santander UK’s view that its forbearance arrangements provide an important tool to improve the prospects of recovery of amounts owed. In addition, it is likely that some of the accounts which were in early arrears at the time of the initial forbearance would have otherwise deteriorated into a non-performing state.
At 31 December 2014,2015, the proportion of accounts that had been in forbearance for more than six months that had made their last six months’ contractual payments increased slightly to 85% (2014: 83% (2013: 82%). Furthermore, the accountsAccounts in forbearance classified asthat were performing remained stable at just overdecreased to £2.8bn or 77% by value (2014: £2.9bn or 75% by value (2013: £2.9bn or 71% by value). The weighted average LTV of all accounts in forbearance was 35% (2014: 38% (2013: 42%) compared to the weighted average portfolio LTV of 41% (2014: 43% (2013: 47%). Those accounts that reach the end of the concessionary forbearance period continue to show a good propensity to return to full repayments in accordance with the original contractual terms after the period of financial difficulty has passed.
At 31 December 2014,2015, impairment loss allowances as a percentage of the balance of accounts for the overall mortgage portfolio waswere 0.28% (2014: 0.39% (2013: 0.40%). The equivalent ratio for performing accounts in forbearance which were performing was 0.95% (2014: 1.89% (2013: 2.13%), and for accounts in arrears in forbearance which were in arrears was 4.07% (2014: 6.15% (2013: 5.79%). The higher ratios for accounts in forbearance reflectedreflect the higher levels of impairment loss allowances held, as a result ofwe hold on these accounts. This reflects the higher risk characteristics inherent in such accounts.on them.
At 31 December 2014,2015, the carrying value of mortgage loansmortgages classified as multiple forbearance increased to £89m (2013: £67m) mainly due to increased capitalisation activities and on-going activities on interest-only accounts that have reached maturity with a balance still remaining.£98m (2014: £89m).
Other changes in contractualcontract terms
In addition, atAt 31 December 2014 £6.3bn (2013: £7.3bn)2015, there were £5.7bn (2014: £6.3bn) of loansother mortgages on the balance sheet that we had been modified since January 2008. TheWe agreed these modifications on these accounts are not considered to have been forbearance as the borrowers were not exhibiting signs of being in financial difficulty. These modifications were entered into in order to retainkeep a good relationship with the customer relationship.customer. The customers were not showing any signs of financial difficulty at the time, so we don’t classify these changes as forbearance.
We keep the performance and profile of the modified accounts is kept under review. At 31 December 2014:2015:
| – | The average LTV was 39% (2014: 43% |
| – | The proportion of accounts |
Annual Report 2015
Risk review
Credit risk
continued
HIGHER RISK LOANS AND OTHER SEGMENTS OF PARTICULAR INTEREST
ThereWe are mainly a residential prime lender and we do not originate sub-prime or second charge mortgages. Despite that, some mortgage types of particular interest or which presentmortgages have higher risks than others.and others stand out for different reasons. These mortgages consist of:are:
– Interest-only loans;
– Flexible loans;
– Loans with LTV >100%; and
– Buy-to-let loans.
| Product | Description | |
| Interest-only loans and part interest-only, part repayment loans | With an interest-only mortgage, the customer pays the interest every month but does not repay the money borrowed (the principal) until the end of the mortgage. Some mortgages have a part that is interest-only, with the rest being a normal repayment mortgage. Customers with part interest-only, part repayment mortgages still have to pay back a lump sum at the end of their mortgage for the interest-only part. Since 2009, we have reduced the risk from new interest-only mortgages by lowering the maximum LTV (it has been 50% since 2012). When a customer plans to repay their mortgage by selling the property, we now only allow that if they own more than a set proportion of the equity. Customers with interest-only mortgages have to make arrangements to repay the principal at the end of the mortgage. We have a strategy to make sure that we tell these customers that they have to do this. We send them messages with their annual mortgage statements, and we run contact campaigns to encourage them to tell us how they plan to repay. We have done this for all customers whose mortgages mature before 2020, and plan to extend these campaigns to those with later maturities. If customers know they will not be able to repay their mortgage in full when it ends, or if their mortgage has already passed the date when it should have ended, we talk to them. If we think it is in the customer’s interests (and they can afford it), we look at other ways of managing it. That can mean turning the mortgage into a standard repayment one, and extending it. Or, if the customer is waiting for their means of repaying it (an investment plan or bonds, for example) to mature, it can just mean extending it. We only turn to legal action as a last resort. | |
| Flexible loans | Flexible mortgages allow customers to pay more or less than their usual amount each month, or even to take ‘payment holidays’ when they pay nothing at all. Customers do not have to take (or draw down) the whole loan all at once – so if they took out a mortgage big enough to allow them to build a home extension after three years, they do not have to start paying interest on that extra money until they are ready to spend it. There are conditions on when and how much customers can draw down: – There are often limits on how much can be drawn down in any month – The customer cannot be in payment arrears – The customer cannot have insolvency problems, such as a county court judgement, bankruptcy, an individual voluntary arrangement, an administration order or a debt relief order. A customer can ask us to increase their credit limit (the total amount they are allowed to borrow on their mortgage), but that means we will go through our full standard credit approval process. We can also lower the customer’s credit limit at any time, so it never goes above 90% of the property’s current market value. Flexible loan products are no longer offered for new mortgages. | |
Loans with an LTV >100% | Where the mortgage balance is more than the house is now worth, we cannot recover the full value of the loan by repossessing and selling the house. This means there is a higher credit risk on these loans. In some cases, house prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs over 100%. Before 2009, we sometimes allowed customers to borrow more than the price of the house. | |
| Buy-to-let loans | We have a relatively small share of the Buy-to-let market, but we believe we have an opportunity to grow our presence in a controlled manner. We focus on amateur landlords, as this segment is more closely aligned with residential mortgages and covers most of the Buy-to-let market. Our policy is that Buy-to-let mortgages should finance themselves, with the rent covering the mortgage payments and other costs. Even so, there is always the risk that income from the property may not cover the costs – if the landlord cannot find tenants for a while, for example. In 2015, we refined our Buy-to-let proposition to appeal to a wider catchment, and we are improving our systems to cater for this segment. We continue to adhere to prudent lending criteria, and have specific policies for Buy-to-let. We will lend on up to five buy-to-let properties, to a maximum 75% LTV. The first applicant must earn a minimum basic income of at least £25,000 per year, and we require evidence of income in all cases. We also use a Buy-to-let affordability rate as part of our assessment about whether or not to lend. This means that the rental income must be at least 125% of the monthly mortgage interest payments when calculated using a stressed interest rate. | |
The arrears performance of these mortgages has continued to be relatively stable with arrears and loss rates remaining low.
72 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
BorrowerHigher risk loans – borrower profile(1)
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||
| Stock | New business | Stock | New business | 2015 | 2014 | |||||||||||||||||||||||||||||||
| £m | £m | £m | £m | Stock £m | New business £m | Stock £m | New business £m | |||||||||||||||||||||||||||||
Full interest-only loans | 45,952 | 3,197 | 49,318 | 2,151 | 44,050 | 4,178 | 45,952 | 3,197 | ||||||||||||||||||||||||||||
Part interest-only, part repayment loans(2) | 15,602 | 2,580 | 15,534 | 1,693 | 15,299 | 1,996 | 15,602 | 2,580 | ||||||||||||||||||||||||||||
Flexi loans | 15,203 | 756 | 16,245 | 1,172 | 13,951 | 508 | 15,203 | 756 | ||||||||||||||||||||||||||||
Other flexible loans(3) | 6,177 | – | 7,469 | – | 5,156 | – | 6,177 | – | ||||||||||||||||||||||||||||
Loans with current LTV > 100% | 3,569 | – | 6,202 | 1 | ||||||||||||||||||||||||||||||||
Loans with LTV >100% | 2,672 | – | 3,569 | – | ||||||||||||||||||||||||||||||||
Buy-to-let | 3,138 | 1,270 | 2,201 | 432 | 4,956 | 2,393 | 3,138 | 1,270 | ||||||||||||||||||||||||||||
Interest-only and >100% current LTV
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Interest-only and LTV >100% | 1,980 | 1 | 2,592 | – | ||||||||||||||||||||||||||||||||
| (1) | Where a loan |
| (2) | Mortgage balance includes both the |
| (3) | Legacy Alliance & Leicester flexible |
20142015 compared to 20132014(unaudited)
TheIn 2015, the value and proportion of new business in 2014 that was pure interest-only marginally increased to 13% (2013: 12%). The proportion of lending in 2014 that wasloans together with part interest-only, part repayment was unchanged at 10%. The maximum allowable LTV forloans reduced, reflecting our strategy to manage down the interest-only element of the mortgage is 50%, and the maximum age permitted on a pure interest-only loan was capped at 65 years in July 2014.overall exposure to this lending profile.
The proportion of flexible loans new business in 2014 decreased to 3% (2013: 7%), whilst buy-to-letBuy-to-let lending in 20142015 increased to 9% (2014: 5% (2013: 2.5%) in line with the strategy to expand this line of business in a controlled manner.
The average earnings multiple of new business (at inception) increased slightly during 2014 to 3.11 (2013: 3.04)as described in line with the market.‘Borrower profile’ section.
From a mortgage asset stock perspective, loans with a current LTV greater than 100% in 20142015 decreased to 2% (2014: 3% (2013: 4%) driven by improvingrising house prices.
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CreditHigher risk loans – credit performance
| Segment of particular interest(1) | Segment of particular interest(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Interest- | Part interest-only | Flexible(2) | LTV > 100% | Buy-to-let | Other |
| Total
£m |
|
| Interest-only
£m |
| | Part interest-only part repayment £m | |
| Flexible(2)
£m |
|
| LTV > 100%
£m |
|
| Buy-to-let
£m |
|
| Other portfolio £m | (3)
| |||||||||||||||||||||||||||||
| only | part repayment | portfolio(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage portfolio | 150,057 | 45,952 | 15,602 | 21,380 | 3,569 | 3,138 | 78,582 | 152,819 | 44,050 | 15,299 | 19,107 | 2,672 | 4,956 | 84,786 | ||||||||||||||||||||||||||||||||||||||||||
Performing | 145,598 | 43,908 | 14,931 | 20,966 | 3,135 | 3,105 | 77,152 | 148,963 | 42,280 | 14,742 | 18,711 | 2,358 | 4,929 | 83,537 | ||||||||||||||||||||||||||||||||||||||||||
Early arrears | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Early arrears: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– 31 to 60 days | 1,185 | 528 | 171 | 85 | 76 | 12 | 459 | 979 | 441 | 143 | 81 | 48 | 7 | 382 | ||||||||||||||||||||||||||||||||||||||||||
– 61 to 90 days
| 756 | 354 | 118 | 63 | 51 | 3 | 282 | 625 | 289 | 87 | 52 | 38 | 5 | 238 | ||||||||||||||||||||||||||||||||||||||||||
NPLs
| 2,459 | 1,134 | 372 | 262 | 285 | 18 | 675 | 2,252 | 1,040 | 327 | 263 | 228 | 15 | 629 | ||||||||||||||||||||||||||||||||||||||||||
NPL ratio
| 1.64% | 2.47% | 2.38% | 1.23% | 7.99% | 0.57% | 0.86% | 1.47% | 2.36% | 2.14% | 1.38% | 8.53% | 0.30% | 0.74% | ||||||||||||||||||||||||||||||||||||||||||
Properties In possession
| 59 | 27 | 11 | 4 | 22 | – | 14 | 46 | 23 | 9 | 6 | 22 | 1 | 9 | ||||||||||||||||||||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage portfolio | 148,079 | 49,318 | 15,534 | 23,714 | 6,202 | 2,201 | 71,554 | 150,057 | 45,952 | 15,602 | 21,380 | 3,569 | 3,138 | 78,582 | ||||||||||||||||||||||||||||||||||||||||||
Performing | 142,806 | 46,762 | 14,882 | 23,260 | 5,442 | 2,161 | 69,872 | 145,598 | 43,909 | 14,930 | 20,966 | 3,135 | 3,105 | 77,152 | ||||||||||||||||||||||||||||||||||||||||||
Early arrears | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Early arrears: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– 31 to 60 days | 1,424 | 657 | 180 | 111 | 140 | 11 | 538 | 1,185 | 528 | 171 | 85 | 76 | 12 | 459 | ||||||||||||||||||||||||||||||||||||||||||
– 61 to 90 days
| 970 | 460 | 125 | 69 | 107 | 7 | 355 | 756 | 354 | 118 | 63 | 51 | 3 | 282 | ||||||||||||||||||||||||||||||||||||||||||
NPLs
| 2,788 | 1,388 | 335 | 269 | 471 | 21 | 773 | 2,459 | 1,134 | 372 | 262 | 285 | 18 | 675 | ||||||||||||||||||||||||||||||||||||||||||
NPL ratio
| 1.88% | 2.81% | 2.16% | 1.13% | 7.59% | 0.95% | 1.08% | 1.64% | 2.47% | 2.38% | 1.23% | 7.99% | 0.57% | 0.86% | ||||||||||||||||||||||||||||||||||||||||||
Properties In possession
| 91 | 51 | 12 | 5 | 42 | 1 | 16 | 59 | 27 | 11 | 4 | 22 | – | 14 | ||||||||||||||||||||||||||||||||||||||||||
| (1) | Where a loan exhibits more than one segment of particular interest, we have included it |
| (2) | Includes legacy Alliance & Leicester flexible |
| (3) | Includes other loans that are not in any segment of particular interest. |
Full interest-only maturity profile
| ||||||||||||||||||||||||
| Term | Within 2 | Between | Between | Greater than | Total | |||||||||||||||||||
| expired | years | 2-5 years | 5-15 years | 15 years | ||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
Full interest-only portfolio | 337 | 1,631 | 3,785 | 20,225 | 19,974 | 45,952 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75%
| 46 | 170 | 570 | 3,871 | 5,689 | 10,346 | ||||||||||||||||||
2013 | ||||||||||||||||||||||||
Full interest-only portfolio | 242 | 1,352 | 3,994 | 20,037 | 23,693 | 49,318 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75%
| 43 | 169 | 842 | 5,603 | 10,092 | 16,749 | ||||||||||||||||||
Part interest-only, part repayment maturity profile
| ||||||||||||||||||||||||
| Term | Within 2 | Between | Between | Greater than | Total | |||||||||||||||||||
| expired | years | 2-5 years | 5-15 years | 15 years | ||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
Part interest-only, part repayment portfolio | 4 | 235 | 745 | 6,199 | 8,419 | 15,602 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75%
| 1 | 6 | 36 | 758 | 1,914 | 2,715 | ||||||||||||||||||
2013 | ||||||||||||||||||||||||
Part interest-only, part repayment portfolio | 4 | 269 | 816 | 6,372 | 8,073 | 15,534 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75%
| – | 6 | 47 | 1,057 | 3,173 | 4,283 | ||||||||||||||||||
Annual Report 2015
Risk review
Credit risk
continued
Full interest-only maturity profile
Term expired £m | Within 2 years £m | Between 2-5 years £m | Between 5-15 years £m | Greater than 15 years £m | Total
£m | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
Full interest-only portfolio | 429 | 1,840 | 3,464 | 20,601 | 17,716 | 44,050 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75% | 30 | 264 | 382 | 3,137 | 3,714 | 7,527 | ||||||||||||||||||
2014 | ||||||||||||||||||||||||
Full interest-only portfolio | 337 | 1,631 | 3,785 | 20,225 | 19,974 | 45,952 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75% | 46 | 170 | 570 | 3,871 | 5,689 | 10,346 | ||||||||||||||||||
Part interest-only, part repayment maturity profile
| ||||||||||||||||||||||||
| Term expired £m | Within 2 years £m | Between 2-5 years £m | Between 5-15 years £m | Greater than 15 years £m | Total
£m | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
Part interest-only, part repayment portfolio | 5 | 230 | 726 | 6,231 | 8,107 | 15,299 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75% | – | 9 | 30 | 642 | 1,301 | 1,982 | ||||||||||||||||||
2014 | ||||||||||||||||||||||||
Part interest-only, part repayment portfolio | 4 | 235 | 745 | 6,199 | 8,419 | 15,602 | ||||||||||||||||||
of which value weighted average LTV (indexed) is greater than 75% | 1 | 6 | 36 | 758 | 1,914 | 2,715 | ||||||||||||||||||
20142015 compared to 20132014(unaudited)
At 31 December 2014, the NPL ratio decreased from 1.88% to 1.64% primarily due to a reduction in NPL stock. Interest-only2015, interest-only loans, part interest-only, part repayment loans, and loans with a currentan LTV over 100% have>100% had a higher than average NPL ratio. The decrease inHowever, the NPL ratioratios for interest-only and part interest-only, part repayment loansthese portfolios improved in 2014 was broadly2015 in line with the overall reduction in NPL stock. The NPL ratio for loans with an LTV > 100% and flexible loans increased slightly in 2014 due to a reduction in stock in these segments; the decrease in loans with an LTV > 100% being driven by house price increases. The buy-to-letwider portfolio remained better than average quality, with the reduction in the NPL ratio in 2014 being driven by the controlled growth of the portfolio.trends.
Santander UK providesFor full interest-only mortgages, to customers whereby payments made by the customer comprise of only interest for the term of the mortgage, with the customer responsible for repaying the principal outstanding at the end of the loan term. Further details are described in ‘Credit risk management – Retail Banking’. Of the £604m balance£675m that matured in the year ended 31 December 2014, £330m was subsequently repaid, £1m was refinanced under normal credit terms, £51m was refinanced under forbearance arrangements and £222m remained unpaid and was classified as term expired at 31 December 2014. 2015:
| – | £353m was subsequently repaid |
| – | none was refinanced under normal credit terms |
| – | £45m was refinanced under forbearance arrangements |
| – | £277m remained unpaid and was classified as term expired at 31 December 2015. |
Of the balance of £337mtotal £429m that was term expired at 31 December 2014, 93%2015, 91% continued to pay the interest due under theirthe expired contractualcontract terms.
Santander UK also providesFor part interest-only, part repayment loans to customers whereby a componentmortgages, of the loan is repayable on a capital and interest basis through the term of the loan, with the remaining loan component requiring monthly interest payments only, with the principal of this loan component repayable only at maturity. Further details are described in ‘Credit risk management – Retail Banking’. Of the £55m balance that matured in the year ended 31 December 2014, £49m was subsequently repaid, £2m was refinanced under forbearance arrangements and £4m remained unpaid and was classified as term expired at 31 December 2014.2015:
| – | £46m was subsequently repaid |
| – | £6m was refinanced under forbearance arrangements |
| – | £3m remained unpaid and was classified as term expired at 31 December 2015. |
Flexible mortgages permitlet customers to draw down additionalextra funds at any time – up to a predefined credit limit. By doing so,This means customers are able to varycan change their monthly payments, or take payment holidays. DrawdownsThese drawdowns are subject to the conditions as described in ‘Credit risk management – Retail Banking’. Customer limitsthat are actively managed where information collected suggestsoutlined above. We also analyse the predefined limit requires adjustment. The flexible loans portfolio is analysed to identify customers potentiallywho might be using these facilities to self-forbear (e.g. repeated(such as regularly drawing down small drawdowns), withamounts). If there is any evidence of increasedsign that the credit risk being appropriately reflectedhas significantly increased, we reflect this in our provision calculations where significant. calculations.
At 31 December 2014,2015, there were 122,354113,232 (2014: 122,354) flexible mortgage customers, with flexible mortgages (2013: 129,881), with undrawn facilities of £6,633m (2013: £6,539m)£6,608m (2014: £6,633m) and a utilisation rate of 68% (2014: 70% (2013: 71%). The portfolio’s value weighted LTV (indexed) of the portfolio was 32% (2014: 35% (2013: 39%).
During 2014, theIn 2015, good market conditions meant that our stock of properties in possession decreased due to favourable market conditions.PIPs decreased.
74 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
ForbearanceHigher risk loans – forbearance(1)(2)(3)(4)
The incidence of the main types of higher risk loans forbearance arrangements which commenced during the years ended 31 Decemberstarted in 2015 and 2014 and 2013 was:were:
| Interest-only | (4) | Flexible | LTV >100% | Buy-to-let | ||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Total value | £ | 290m | £60m | – | £8m | |||||||||||||||||||||||||||
Proportion of portfolio(5) | 61% | 13% | – | 2% | ||||||||||||||||||||||||||||
| Interest-only | (4) | Flexible | LTV > 100% | Buy-to-let | ||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
Total value | £298m | £59m | – | £3m | £ | 298m | £59m | – | £3m | |||||||||||||||||||||||
Proportion of portfolio(5)
| 56% | 11% | – | 1% | 56% | 11% | – | 1% | ||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||
Total value
| £242m | £61m | – | £3m | ||||||||||||||||||||||||||||
Proportion of portfolio(5)
| 57% | 14% | – | 1% | ||||||||||||||||||||||||||||
| (1) | Mortgages are included within the year that they were forborne. |
| (2) | The figures by year reflect the amount of forbearance activity undertaken during the year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts. |
| (3) | Where a loan exhibits more than one of the higher risk criteria, it is included in all the applicable categories. |
| (4) | Comprises full interest-only loans and part interest-only, part repayment loans. |
| (5) | Portfolio of total forbearance arrangements which commenced during the year. |
20142015 compared to 20132014(unaudited)
The valuesaverage monthly value of higher risk loans enteringstarting forbearance arrangements in 2014 increased in line with overall increases seen in flows into forbearance during the year.
Annual Report 2015 Risk review |
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BANKING
VEHICLE CONSUMER AND CONSUMER CREDITOTHER UNSECURED FINANCE
Santander UK also provides a range ofWe provide vehicle consumer and other unsecured lending facilities including bank account overdrafts, personal loans and credit cards tofinance for personal and business banking customers, together with a range of consumer finance products including finance leases.customers. This includes personal loans, credit cards, business banking and bank account overdrafts.
Lending
An analysis ofWe analyse movements in unsecured lending facilities is presented2015 and 2014 in the tables below.
| Overdrafts | Personal | Credit | Business | Consumer | Total | |||||||||||||||||||
| Loans | Cards | Banking | Finance | |||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
At 1 January | 543 | 2,016 | 1,679 | 151 | 3,145 | 7,534 | ||||||||||||||||||
Net lending in the year
| 1 | 192 | 568 | 4 | 158 | 923 | ||||||||||||||||||
At 31 December
| 544 | 2,208 | 2,247 | 155 | 3,303 | 8,457 | ||||||||||||||||||
2013 | ||||||||||||||||||||||||
At 1 January | 536 | 2,344 | 1,420 | 133 | 3,109 | 7,542 | ||||||||||||||||||
Net lending in the year
| 7 | (328) | 259 | 18 | 36 | (8) | ||||||||||||||||||
At 31 December
| 543 | 2,016 | 1,679 | 151 | 3,145 | 7,534 | ||||||||||||||||||
2014 compared to 2013(unaudited)
Total net lending increased by £923m (12%) in 2014, principally due to a strong uptake of 1I2I3 World credit cards by customers with an existing Santander UK relationship. Growth in net personal loan lending was driven by rising customer demand broadly in line with that observed across the market following a number of years of contraction. Consumer Finance growth benefited from a continued increase in customer confidence.
Credit performance
| Overdrafts | Personal | Credit | Business | Consumer | Total | |||||||||||||||||||
| Loans | Cards | Banking | Finance | |||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
Loans and advances | 544 | 2,208 | 2,247 | 155 | 3,303 | 8,457 | ||||||||||||||||||
Performing | 480 | 2,151 | 2,185 | 141 | 3,259 | 8,216 | ||||||||||||||||||
In arrears | 34 | 34 | 25 | 5 | 29 | 127 | ||||||||||||||||||
NPLs(1)(2) | 30 | 23 | 37 | 9 | 15 | 114 | ||||||||||||||||||
Impairment loss allowance
| 46 | 76 | 73 | 14 | 93 | 302 | ||||||||||||||||||
NPL ratio(2) | 1.35% | |||||||||||||||||||||||
Coverage ratio(3)
| 265% | |||||||||||||||||||||||
2013 | ||||||||||||||||||||||||
Loans and advances | 543 | 2,016 | 1,679 | 151 | 3,145 | 7,534 | ||||||||||||||||||
Performing | 471 | 1,936 | 1,609 | 131 | 3,097 | 7,244 | ||||||||||||||||||
In arrears | 28 | 47 | 29 | 5 | 33 | 142 | ||||||||||||||||||
NPLs(1)(2) | 44 | 33 | 41 | 15 | 15 | 148 | ||||||||||||||||||
Impairment loss allowance
| 51 | 90 | 86 | 16 | 85 | 328 | ||||||||||||||||||
NPL ratio(2) | 1.96% | |||||||||||||||||||||||
Coverage ratio(3)
| 222% | |||||||||||||||||||||||
| Other unsecured | ||||||||||||||||||||||||
Vehicle consumer finance £m | Personal loans
£m | Credit cards
£m | Business banking
£m | Overdrafts
£m | Total
£m | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
At 1 January | 3,303 | 2,208 | 2,247 | 155 | 544 | 8,457 | ||||||||||||||||||
Net lending in the year(1) | 526 | (7) | 587 | (5) | (8) | 1,093 | ||||||||||||||||||
Acquisitions | 2,461 | – | – | – | – | 2,461 | ||||||||||||||||||
At 31 December | 6,290 | 2,201 | 2,834 | 150 | 536 | 12,011 | ||||||||||||||||||
2014 | ||||||||||||||||||||||||
At 1 January | 3,145 | 2,016 | 1,679 | 151 | 543 | 7,534 | ||||||||||||||||||
Net lending in the year(1) | 158 | 192 | 568 | 4 | 1 | 923 | ||||||||||||||||||
At 31 December | 3,303 | 2,208 | 2,247 | 155 | 544 | 8,457 | ||||||||||||||||||
| (1) | Includes vehicle consumer finance gross lending of £2,958m in 2015 (2014: £1,609m). |
Credit performance
| Other unsecured | ||||||||||||||||||||||||
Vehicle consumer finance £m | Personal loans
£m | Credit cards
£m | Business banking
£m | Overdrafts
£m | Total
£m | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
Loans and advances | 6,290 | 2,201 | 2,834 | 150 | 536 | 12,011 | ||||||||||||||||||
Performing | 6,217 | 2,157 | 2,771 | 138 | 483 | 11,766 | ||||||||||||||||||
In early arrears | 45 | 27 | 23 | 4 | 25 | 124 | ||||||||||||||||||
NPLs(1)(2) | 28 | 17 | 40 | 8 | 28 | 121 | ||||||||||||||||||
Impairment loss allowance | 136 | 60 | 86 | 14 | 42 | 338 | ||||||||||||||||||
NPL ratio(2) | 1.01% | |||||||||||||||||||||||
Coverage ratio(3) | 279% | |||||||||||||||||||||||
2014 | ||||||||||||||||||||||||
Loans and advances | 3,303 | 2,208 | 2,247 | 155 | 544 | 8,457 | ||||||||||||||||||
Performing | 3,259 | 2,151 | 2,185 | 141 | 480 | 8,216 | ||||||||||||||||||
In early arrears | 29 | 34 | 25 | 5 | 34 | 127 | ||||||||||||||||||
NPLs(1)(2) | 15 | 23 | 37 | 9 | 30 | 114 | ||||||||||||||||||
Impairment loss allowance | 93 | 76 | 73 | 14 | 46 | 302 | ||||||||||||||||||
NPL ratio(2) | 1.35% | |||||||||||||||||||||||
Coverage ratio(3) | 265% | |||||||||||||||||||||||
| (1) | Banking and consumer credit lending is classified as non-performing in accordance with the definitions provided in the ‘Credit risk management’ section. |
| (2) | NPLs as a % of total loans and advances. |
| (3) | Total impairment loan loss allowances as a % of NPL stock. Total loan loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as accounts classified as NPL and hence the ratio exceeds 100%. |
20142015 compared to 20132014(unaudited)
During 2014,Total lending increased by £3,554m or 42% in 2015, mainly driven by the start of the PSA cooperation in February 2015. Other unsecured lending balances, which include personal loans, credit cards, business banking and overdrafts, increased 11% in line with the 1I2I3 World loyalty strategy.
In 2015, NPLs decreasedincreased by 23%£7m or 6% to £114m (2013: £148m) and£121m (2014: £114m) but the NPL ratio decreased by 6134 basis points to 1.01% (2014: 1.35% (2013: 1.96%). ReductionsThe decrease in NPLs were achieved across all productsthe NPL ratio was due to asset growth, mainly through the PSA cooperation.
76 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
Credit risk – Commercial Banking
| Overview | ||||||
We offer loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance. Credit risk management In this section, we explain how we manage credit risk, including how we mitigate it. Credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance and higher risk loans. Our main portfolios are: | Mid-Corporate and SME – banking, lending and treasury services principally to enterprises with an annual turnover up to £500m. Commercial Real Estate – commercial mortgages and treasury services for retail, office, and industrial projects for all phases of development, from land acquisition through construction. Social Housing – lending and treasury services for UK Housing Associations who own portfolios of residential real estate that is rented out. |
COMMERCIAL BANKING – CREDIT RISK MANAGEMENT
We classify most of our customers as non-standardised. Their transactions are for larger amounts of money, and have more diverse credit characteristics. We also have SME customers, a high volume portfolio with smaller individual exposures, that we mainly classify as standardised.
We described how we manage credit risk on standardised customers in the most significant being Overdraftsprevious section ‘Credit risk – Retail Banking’. We take the same approach to managing credit risk on standardised customers in Commercial Banking, except we do not use scorecards and Personal Loans, reflecting the higher credit quality of 1I2I3 Current Account customers, and unsecured personal loans that benefit from an improvement in new business credit quality.reference agencies.
In 2014, interest income recognisedthe rest of this section, we explain how we manage credit risk on impaired loans amountednon-standardised customers.
Risk strategy and planning
For details of how we set risk strategy and plans for Commercial Banking, see the ‘Santander UK group level – credit risk management’ section.
Assessment and origination
Managing credit risk begins with lending responsibly. That means only lending to £2m (2013: £2m, 2012: £7m)customers who:
| – | Can afford to pay us back, even if things get tighter for them |
| – | Are committed to paying us back. |
We do this mainly by assigning each customer a credit rating, using our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section). To do this, we look at the customer’s financial history and broader trends in the economy – backed up by the expert judgement of a risk analyst. We review our internal ratings at least every year.
We also assess the underlying risk of the transaction, taking into account any mitigating factors (see the table below) – and how it fits with our risk policies, limits and Risk Appetite, as set by the Board. We consider transactions in line with credit limits approved by the relevant credit authority. Our Executive Risk Committee is responsible for setting those limits, as well as reviewing and approving the highest value transactions.
Annual Report 2015
Risk review
Credit risk mitigation
The types of credit risk mitigation, including collateral, across each of our portfolios is:
| Portfolio | Description | |
| Mid-Corporate and SME | Includes both secured and unsecured lending. We can use covenants (financial or non-financial) to support a customer’s credit rating. For example, we can set limits on how much they can spend or borrow, or how they operate as a business. We take mortgage debentures as collateral. These are charges over a company’s assets. We also take guarantees, but we do not treat them as collateral, and we do not put a cash value on them unless they are secured against something tangible. We base our lending decision on the customer’s trading cash flow. If they default, we generally do not take control of their assets except as a last resort. In this case, we might appoint an administrator. We also lend against assets (like vehicles and equipment) and invoices for some of our customers. For assets, we value them before we lend. For invoices, we review the customer’s ledgers regularly and lend against debtors that meet agreed criteria. If the customer defaults, we repossess and sell their assets or call in their invoices. | |
| Commercial Real Estate | We take a first legal charge on commercial property as collateral. The loan is subject to strict criteria, including the: – Condition, age and location of the property – Quality of the tenant – Terms and length of the lease – Experience and creditworthiness of the sponsors. Before we agree the loan, we visit the property and get an independent professional valuation. This valuation assesses the property, the tenant and future demand (such as comparing the market rent to the current rent). Loan agreements typically allow us to get revaluations every 24 months after that, or more frequently if it is likely that the covenants may be breached. We also view the property each year. | |
| Social Housing | We take a first legal charge on portfolios of residential real estate owned and let by UK Housing Associations as collateral. We re-value this every three to five years (in line with industry practice), using the standard methods for property used for social housing. The value would be considerably higher if we based it on normal residential use. The value of the collateral is in all cases in excess of the loan balance. On average, the loan balance is 25% to 50% of the implied market value, using our LGD methodology. We have not had a default, loss or repossession on Social Housing. Older Social Housing loans that do not fit our current business strategy are managed and reported in Corporate Centre. | |
Monitoring
We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our Executive Risk Committee a detailed analysis of our credit exposures and risk trends every month. We also report our larger exposures and risks to the Board Risk Committee every month.
Our Watchlist
For non-standardised customers, we also use a Watchlist to help us identify potential problem debt early. Just because a customer is on our Watchlist does not always mean they have defaulted. It just means that something has happened that may make them more likely to default in the future. There are several reasons we might put customers on this list. For example, if they suffer a downturn in trade, breach a covenant, lose a major contract, slip into early arrears, or their key management resign. Whatever the trigger, we review the case to assess the potential financial impact.
We classify Watchlist cases as:
| – | Enhanced monitoring: for less urgent cases. If they are significant, we start to monitor them more often |
| – | Proactive management: for more urgent or serious cases. We may ask for more collateral, agree a lower credit limit, or seek repayment of the loan. |
We assess cases on the Watchlist for impairment collectively, unless they are in the hands of our Restructuring & Recoveries team at which point we assess them individually. If a case becomes NPL, we take it off the Watchlist and assess it for impairment individually.
When a customer is put on the Watchlist, we usually revalue any collateral as part of working out what to do next. We also assess whether we need to set up an impairment loss allowance. This is based on the value of the collateral compared to the loan balance. We also take into account any forbearance we offer (which we describe later on). This includes whether any extra security or guarantees are available, the likelihood of more equity and the potential to enhance value through asset management. We rarely take control of the collateral, except as a last resort.
78 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
Arrears management
We identify problem debt by close monitoring, supported by our Watchlist process. When there is a problem, our relationship managers are the first to act, supported by the relevant credit risk expert. If a case becomes more urgent or needs specialist attention, and if it becomes NPL, we transfer it to our Restructuring & Recoveries team.
We try to act before a customer actually defaults (to prevent it, if possible). The strategy we use depends on the type of customer, their circumstances and the level of risk. If all else fails or in extreme cases, we may decide to take legal action. We use rehabilitation tools to try to help our customers find their own way out of financial difficulty and agree on a plan that works for both of us. We do not want to lose good customers, and when we help them through difficult times they are more likely to stay with us when things improve.
We try to identify warning signs early by close monitoring of customers’ financial and trading data, checking to make sure they are not breaching any covenants, and by having regular dialogue with them. Once a month, we hold Watchlist meetings to agree a strategy for each portfolio. Our Restructuring & Recoveries team attend these meetings, and we may hand over cases to them that have become urgent or serious.
Forbearance
If a customer is having financial difficulty, we always try to come to an arrangement with them before they actually default. Their problems might be clear from the results of covenant testing, reviews of trading and other data they give us under the terms of their loan or as part of our ongoing conversations with them.
We may offer the following types of forbearance. We only do this if our assessments indicate the customer can meet the revised payments:
| Action | Description | |
| Term extension | We can extend the term of the loan, making each payment smaller. At a minimum, we expect the customer to be able to pay the interest in the short-term and have a realistic chance of repaying the full balance in the long-term. We may offer this option if the customer is up-to-date with their payments, but showing signs of financial difficulties. We may also offer this option where the loan is about to mature and near-term refinancing is not possible on market terms. | |
| Interest-only | We can agree to let a customer pay only the interest on the loan for a short time – usually less than a year. We only agree to this if we believe their financial problems are temporary and they are going to recover. After the interest-only period, we expect the customer to go back to making full payments of interest and capital once they are in a stronger financial position. We regularly look at the customer’s financial situation to see when they can afford to do that. | |
| Other payment rescheduling (including capitalisation) | If a customer is having cash flow issues, we may agree to lower or stop their payments until they have had time to recover. We may: – Reschedule payments to better match the customers’ cash flow – for example if the business is seasonal – Provide a temporary increase in facilities to cover peak demand ahead of the customer’s trading improving. We might do this by adding their arrears to their loan balance (we call this arrears capitalisation) or drawing from an overdraft. We may also offer other types of forbearance, including providing new facilities, interest rate concessions, seasonal profiling and interest roll-up. In rare cases, we agree to forgive or reduce part of the debt. For larger companies this could include debt-for-equity swaps, where we agree to exchange some of the debt for equity in the borrower. We only do this when their balance sheet is materially over-leveraged but we think the business can be turned around. We only tend to do this if the borrower raises new cash equity, puts in place a turnaround plan, and we believe that management can deliver their strategy. The book value of the converted debt is written off and, to begin with, the value of the equity is held at zero. We reassess it regularly in line with the borrower’s performance. | |
If an account is performing when we agree forbearance, we usually classify it as sub-standard. Once we see clear evidence that the customer is consistently meeting their new terms and the risk profile has improved, we may reclassify the loan as fully performing. If an account is in NPL when we agree forbearance, we keep it in the NPL category. Once we see that the customer is consistently meeting the new terms (usually for at least three months), we reclassify the loan as performing.
We assess our loan loss allowances regularly and have them independently reviewed. We look at a number of factors, including the:
| – | Cash flow available to service debt |
| – | Value of collateral, based on third-party professional valuations. |
Annual Report 2015
Risk review
Credit risk
continued
Other forms of debt management
We can also manage debt in other ways, depending on the facts of the specific case:
| Action | Description | |
| Waiving or changing covenants | If a borrower breaks a covenant, we can either waive it or change it, taking their latest and future financial position into account. We may also add a condition that they must use all their surplus cash (after operating costs) to pay down their debt to us. | |
| Asking for more collateral or guarantees | If a borrower has unencumbered assets, we may accept them as new or extra collateral in return for better terms. We may also take a guarantee from other companies in the same group and/or major shareholders. We only do this where we believe the guarantor will be able to meet their commitment. | |
| Asking for more equity | Where a borrower can no longer pay the interest on their debt, we may accept fresh equity capital from new or existing investors to change the capital structure in return for better terms on the existing debt. | |
Debt recovery
Consensual arrangements
Where we cannot find a solution like any of the ones we describe above, we may look for an exit. We do this by agreeing with the borrower to sell some of their assets on a voluntary basis before they become insolvent. We may also agree to give them time to refinance their debt with another lender.
Enforcement and recovery
Where we cannot find a way forward or reach a consensual arrangement, we may try to recover what we are owed through:
| – | The insolvency process |
| – | Selling off any collateral |
| – | Selling the debt on the secondary market. |
If there is a shortfall, we raise a loan loss allowance and write it off once the sale has gone through.
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
COMMERCIAL BANKING – CREDIT RISK – COMMERCIAL BANKINGREVIEW
In Commercial Banking, credit risk arises on asset balances and off-balance sheet transactions such as credit facilities or guarantees. Consequently,As a result, committed exposures are typically higher than asset balances.
Commercial Banking – committed exposures
Rating distribution
The rating distributionThese tables show theour credit risk exposure by Santander UK’saccording to our internal rating scale (see the ‘Credit quality’ section) for each portfolio. WithinOn this scale, the higher the rating, the better the quality of the counterparty.
During
Mid Corporate £m | Commercial Real Estate £m | Social Housing £m | Total
£m | |||||||||||||
2015 | ||||||||||||||||
9 | 14 | – | 970 | 984 | ||||||||||||
8 | 116 | 1 | 892 | 1,009 | ||||||||||||
7 | 335 | 659 | 257 | 1,251 | ||||||||||||
6 | 2,440 | 5,555 | 50 | 8,045 | ||||||||||||
5 | 4,396 | 3,486 | – | 7,882 | ||||||||||||
4 | 4,214 | 574 | – | 4,788 | ||||||||||||
1 to 3 | 536 | 215 | – | 751 | ||||||||||||
Other(1) | 292 | 56 | – | 348 | ||||||||||||
| 12,343 | 10,546 | 2,169 | 25,058 | |||||||||||||
2014 | ||||||||||||||||
9 | 109 | 1 | 378 | 488 | ||||||||||||
8 | 402 | 288 | 611 | 1,301 | ||||||||||||
7 | 489 | 579 | 234 | 1,302 | ||||||||||||
6 | 1,883 | 4,670 | 60 | 6,613 | ||||||||||||
5 | 3,653 | 3,695 | – | 7,348 | ||||||||||||
4 | 3,735 | 517 | – | 4,252 | ||||||||||||
1 to 3 | 571 | 222 | – | 793 | ||||||||||||
Other(1) | 353 | 86 | – | 439 | ||||||||||||
| 11,195 | 10,058 | 1,283 | 22,536 | |||||||||||||
| (1) | Consists of smaller exposures mainly in the commercial mortgages portfolio. We use scorecards for them, instead of a rating model. |
Annual Report 2015
Risk review
Geographical distribution
We classify geographical location according to country of risk – in other words, the country where each counterparty has its main business activity or assets. If our clients have operations in many countries, we use their country of incorporation.
Mid Corporate £m | Commercial Real Estate £m | Social Housing £m | Total
£m | |||||||||||||
2015 | ||||||||||||||||
UK | 12,269 | 10,546 | 2,169 | 24,984 | ||||||||||||
Peripheral eurozone | 25 | – | – | 25 | ||||||||||||
Rest of Europe | 47 | – | – | 47 | ||||||||||||
US | – | – | – | – | ||||||||||||
Rest of world | 2 | – | – | 2 | ||||||||||||
| 12,343 | 10,546 | 2,169 | 25,058 | |||||||||||||
2014 | ||||||||||||||||
UK | 11,110 | 10,058 | 1,283 | 22,451 | ||||||||||||
Peripheral eurozone | 17 | – | – | 17 | ||||||||||||
Rest of Europe | 42 | – | – | 42 | ||||||||||||
US | – | – | – | – | ||||||||||||
Rest of world | 26 | – | – | 26 | ||||||||||||
| 11,195 | 10,058 | 1,283 | 22,536 | |||||||||||||
2015 compared to 2014 the internal model used for the credit rating(unaudited)
Our lending to customers has grown consistently since 2008, and we continue to operate within our prudent Risk Appetite. At 31 December 2015, 99% (2014: 99%) of our portfolio was with UK counterparties.
In 2015, our committed exposures increased by £2.5bn or 11% to £25.1bn. Our Mid Corporate and SME exposures grew by 10% to £12.3bn in 2015, maintaining a positive momentum despite an increasingly competitive market that was contracting for much of the year. Our Commercial Real Estate portfolio increased by 5% to £10.5bn with new business levels more than offsetting repayments.
Our Social Housing portfolio increased by 69% to £2.2bn, driven by refinancing of longer-dated loans previously managed in Corporate Centre onto shorter maturities and on current market terms.
Commercial Banking – credit risk mitigation
At 31 December 2015, the collateral we held against impaired loans was re-calibrated to better reflect internal data. As a consequence43% (2014: 50%) of this re-calibration, the principal movements were incarrying amount of the mid-range rating bands (4, 5 and 6), with a reduction of £2.2bn in grade 6. We consider this to be a more appropriate characterisation for an SME book of this nature, where customers typically rate in the mid-range bands. On a like-for-like basis (pre re-calibration) the rating distribution remained similar.
| Mid Corporate | Commercial | Social | Total | |||||||||||||
| and SME | Real Estate | Housing | ||||||||||||||
| £m | £m | £m | £m | |||||||||||||
2014 (post re-calibration) | ||||||||||||||||
9 | 109 | 1 | 378 | 488 | ||||||||||||
8 | 402 | 288 | 611 | 1,301 | ||||||||||||
7 | 489 | 579 | 234 | 1,302 | ||||||||||||
6 | 1,883 | 4,670 | 60 | 6,613 | ||||||||||||
5 | 3,653 | 3,695 | – | 7,348 | ||||||||||||
4 | 3,735 | 517 | – | 4,252 | ||||||||||||
1 to 3 | 571 | 222 | – | 793 | ||||||||||||
Other(1)
| 353 | 86 | – | 439 | ||||||||||||
|
11,195
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10,058
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1,283
|
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|
22,536
|
| |||||
2014 (pre re-calibration) | ||||||||||||||||
9 | 109 | 1 | 378 | 488 | ||||||||||||
8 | 402 | 288 | 611 | 1,301 | ||||||||||||
7 | 998 | 579 | 234 | 1,811 | ||||||||||||
6 | 4,050 | 4,670 | 60 | 8,780 | ||||||||||||
5 | 2,000 | 3,695 | – | 5,695 | ||||||||||||
4 | 2,938 | 517 | – | 3,455 | ||||||||||||
1 to 3 | 345 | 222 | – | 567 | ||||||||||||
Other(1) | 353 | 86 | – | 439 | ||||||||||||
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11,195
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10,058
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1,283
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22,536
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2013 | ||||||||||||||||
9 | 200 | 127 | 263 | 590 | ||||||||||||
8 | 360 | 320 | 359 | 1,039 | ||||||||||||
7 | 663 | 1,447 | 231 | 2,341 | ||||||||||||
6 | 2,986 | 4,263 | 115 | 7,364 | ||||||||||||
5 | 2,028 | 2,737 | – | 4,765 | ||||||||||||
4 | 2,287 | 683 | – | 2,970 | ||||||||||||
1 to 3 | 225 | 324 | – | 549 | ||||||||||||
Other(1) | 516 | 144 | – | 660 | ||||||||||||
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9,265
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10,045
|
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|
968
|
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20,278
|
| |||||
82 Santander UK plc
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| Risk | ||||||||||||||||||||
Geographical distribution
The geographical location is classified by country of risk, being the country where each counterparty’s main business activity or assets are located. For clients whose operations are more geographically dispersed, the country of incorporation is applied.
| Mid Corporate | Commercial | Social | Total | |||||||||||||
| and SME | Real Estate | Housing | ||||||||||||||
| £m | £m | £m | £m | |||||||||||||
2014 | ||||||||||||||||
UK | 11,110 | 10,058 | 1,283 | 22,451 | ||||||||||||
Peripheral eurozone | 17 | – | – | 17 | ||||||||||||
Rest of Europe | 42 | – | – | 42 | ||||||||||||
US | – | – | – | – | ||||||||||||
Rest of world | 26 | – | – | 26 | ||||||||||||
|
11,195
|
| 10,058 | 1,283 | 22,536 | |||||||||||
2013 | ||||||||||||||||
UK | 9,154 | 10,045 | 968 | 20,167 | ||||||||||||
Peripheral eurozone | 18 | – | – | 18 | ||||||||||||
Rest of Europe | 54 | – | – | 54 | ||||||||||||
US | – | – | – | – | ||||||||||||
Rest of world | 39 | – | – | 39 | ||||||||||||
|
9,265
|
| 10,045 | 968 | 20,278 | |||||||||||
2014 compared to 2013(unaudited)
During 2014, total committed exposures increased by £2.3bn or 11% to £22.5bn principally due to the strong growth achieved in the Mid Corporate and SME portfolio. Our lending to Commercial Banking customers has grown consistently since 2008, and we continue to operate within our prudent risk appetite parameters. The Commercial Banking portfolio is 99% concentrated in UK-based counterparties.
Mid Corporate and SME exposures increased by 21% in 2014, reflecting the continued development of our franchise in the UK, not only in terms of broadening our distribution capabilities, but also in terms of the range of products and services available to UK companies. The Commercial Real Estate portfolio remained broadly stable with new business being offset by repayments of maturing loans which saw a greater proportion of higher-rated exposure repaid as investors sought to realise gains on higher-performing assets.
Social Housing exposures increased by 33% in 2014, through selective opportunities to write new business with highly-rated counterparties.
Commercial Banking – credit risk mitigation
At 31 December 2014, collateral held against impaired loans amounted to 31% (2013: 44%) of the carrying amount of impaired loan balances.
| Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks |
Risk review
Credit risk
continued
Commercial Banking – credit performance
Exposures exhibitingWe monitor exposures that show potentially higher risk characteristics are subject to risk monitoring under theusing our Watchlist process (described in ‘Risk monitoring’ in the ‘Credit risk management’ section). The table below sets outshows the portfolio showing exposures subject to risk monitoring under the Watchlist processwe monitor, and those classifiedwe classify as non-performing by portfolio at 31 December 20142015 and 2013:2014:
Mid Corporate £m | Commercial Real Estate £m | Social Housing £m | Total
£m | |||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 12,343 | 10,546 | 2,169 | 25,058 | ||||||||||||||||||||||||||||
– Performing (Non-Watchlist) | 10,617 | 10,083 | 2,162 | 22,862 | ||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | 969 | 150 | 7 | 1,126 | ||||||||||||||||||||||||||||
– Watchlist: Proactive Management | 341 | 123 | – | 464 | ||||||||||||||||||||||||||||
– Non-performing exposure(2) | 416 | 190 | – | 606 | ||||||||||||||||||||||||||||
Total impaired exposure of which: | 416 | 190 | – | 606 | ||||||||||||||||||||||||||||
– Performing | – | – | – | – | ||||||||||||||||||||||||||||
– Non-performing(2) | 416 | 190 | – | 606 | ||||||||||||||||||||||||||||
Total Observed impairment loss allowances of which: | 162 | 56 | – | 218 | ||||||||||||||||||||||||||||
– Performing | – | – | – | – | ||||||||||||||||||||||||||||
– Non-performing(2) | 162 | 56 | – | 218 | ||||||||||||||||||||||||||||
IBNO(3) | 42 | |||||||||||||||||||||||||||||||
Total impairment loss allowance | 260 | |||||||||||||||||||||||||||||||
Mid Corporate £m | Commercial Real Estate £m | Social Housing £m | Total
£m | |||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 11,195 | 10,058 | 1,283 | 22,536 | 11,195 | 10,058 | 1,283 | 22,536 | ||||||||||||||||||||||||
– Performing (Non-Watchlist) | 9,683 | 9,229 | 1,253 | 20,165 | 9,683 | 9,229 | 1,253 | 20,165 | ||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | 741 | 483 | 30 | 1,254 | 741 | 483 | 30 | 1,254 | ||||||||||||||||||||||||
– Watchlist: Proactive Management | 371 | 63 | – | 434 | 371 | 63 | – | 434 | ||||||||||||||||||||||||
– Non-performing exposure(2)
| 400 | 283 | – | 683 | 400 | 283 | – | 683 | ||||||||||||||||||||||||
Total impaired exposure of which: | 411 | 283 | – | 694 | 411 | 283 | – | 694 | ||||||||||||||||||||||||
– Performing | 11 | – | – | 11 | 11 | – | – | 11 | ||||||||||||||||||||||||
– Non-performing(2)
| 400 | 283 | – | 683 | 400 | 283 | – | 683 | ||||||||||||||||||||||||
Total Observed impairment loss allowances of which: | 158 | 99 | – | 257 | 158 | 99 | – | 257 | ||||||||||||||||||||||||
– Performing | 4 | – | – | 4 | 4 | – | – | 4 | ||||||||||||||||||||||||
– Non-performing
| 154 | 99 | – | 253 | ||||||||||||||||||||||||||||
– Non-performing(2) | 154 | 99 | – | 253 | ||||||||||||||||||||||||||||
IBNO(3) | 48 | 48 | ||||||||||||||||||||||||||||||
Total impairment loss allowance | 305 | 305 | ||||||||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 9,265 | 10,045 | 968 | 20,278 | ||||||||||||||||||||||||||||
– Performing (Non-Watchlist) | 8,071 | 9,074 | 933 | 18,078 | ||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | 587 | 295 | 35 | 917 | ||||||||||||||||||||||||||||
– Watchlist: Proactive Management | 266 | 357 | – | 623 | ||||||||||||||||||||||||||||
– Non-performing exposure(2)
| 341 | 319 | – | 660 | ||||||||||||||||||||||||||||
Total impaired exposure of which: | 352 | 414 | – | 766 | ||||||||||||||||||||||||||||
– Performing | 11 | 95 | – | 106 | ||||||||||||||||||||||||||||
– Non-performing(2)
| 341 | 319 | – | 660 | ||||||||||||||||||||||||||||
Total Observed impairment loss allowances of which: | 126 | 124 | – | 250 | ||||||||||||||||||||||||||||
– Performing | 3 | 15 | – | 18 | ||||||||||||||||||||||||||||
– Non-performing(3)
| 123 | 109 | – | 232 | ||||||||||||||||||||||||||||
IBNO(3) | 29 | |||||||||||||||||||||||||||||||
Total impairment loss allowance
| 279 | |||||||||||||||||||||||||||||||
(1)
| (1) | Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Risk monitoring‘ section. |
| (2) | Non-performing exposure includes committed facilities and derivative exposures. So it can be bigger than the NPLs in the table on page 84 which only include drawn balances. |
| (3) | Allowance for incurred but not observed (IBNO) losses as described in Note 1 to the Consolidated Financial Statements. |
Annual Report 2015
Risk review
Non-performing loans and derivatives. The terms ‘Enhanced Monitoring’ and ‘Proactive Management’advances(1)(2)
We analyse Commercial Banking NPLs below:
2015 £m | 2014 £m | |||||||
Loans and advances to customers of which:(2) | 20,943 | 18,637 | ||||||
NPLs(3) | 586 | 664 | ||||||
Impairment loan loss allowances | 260 | 305 | ||||||
| % | % | |||||||
NPL ratio(4) | 2.80 | 3.56 | ||||||
Coverage ratio(5) | 44 | 46 | ||||||
| (1) | We define NPLs in the ‘Credit risk management’ section. |
| (2) | Include Social Housing loans and finance leases. |
| (3) | All NPLs are in the UK and continue accruing interest. The balances include interest we have charged to the customer’s account. They do not include accrued interest we have not charged to the account yet. |
| (4) | NPLs as a percentage of loans and advances. |
| (5) | Impairment loan loss allowances as a percentage of NPLs. |
We analyse NPL movements in 2015 below. ‘Entries’ are defined in the ‘Risk Monitoring‘ section of the Risk Review.
(2) Non-performing exposure in the table above include committed facilities and derivative exposures and therefore can be larger than theloans which we have classified as NPLs in the table below which only include drawn balances.
(3) Allowance for incurred inherent losses (i.e. incurred butyear. ‘Exits (including repayments)’ are the part of loans that has been repaid (in full or in part), plus loans that returned to performing status. ‘Write-offs’ are the unrecovered part of loans where we have exhausted recovery options, including realising any collateral. Forbearance does not observed (‘IBNO’)) as described in Note 1 tochange the Consolidated Financial Statements.
2015 compared to 2014(unaudited)
In our Mid Corporate and SME portfolio, exposures subject to enhanced monitoring increased by £228m. This increase was spread across a number of borrowers and sectors and was partially offset by a decrease of £30m in exposures subject to proactive management.
In our Commercial Real Estate portfolio, exposures subject to enhanced monitoring decreased by £333m, driven by successful refinancing and repayments. Exposures subject to proactive management increased by £60m, driven by a single legacy case against which we are adequately secured.
At 31 December 2015, only £7m (0.3%) of our Social Housing portfolio exposures were subject to enhanced monitoring (2014: £30m and 2.3%).
NPLs reduced slightly to £586m at 31 December 2015 (2014: £664m) with lower levels of new entries due to the improved trading performance of borrowers.
The NPL ratio decreased to 2.80% at 31 December 2015 (2014: 3.56%), with credit quality remaining strong. The improvement in the NPL ratio was driven by the NPL reductions above, and an overall increase in loans and advances to customers.
84 Santander UK plc
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Non-performing loans and advances(1)(2)
An analysis of Commercial Banking NPLs is presented below.
2014 £m | 2013 £m | |||||||
Loans and advances to customers of which:(2) | 18,637 | 16,933 | ||||||
Customers in arrears | 664 | 663 | ||||||
NPLs(3) | 664 | 649 | ||||||
Impairment loan loss allowances
| 305 | 279 | ||||||
| % | % | |||||||
Arrears ratio(4) | 3.56 | 3.92 | ||||||
NPLs ratio(5) | 3.56 | 3.83 | ||||||
Coverage ratio(6)
| 46 | 43 | ||||||
(1) Loans and advances are classified as non-performing in accordance with the definitions provided in the ‘Credit risk management’ section.
(2) includes Social Housing and Finance leases.
(3) All NPL balances are UK based and continue accruing interest. For the data presented, the balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account.
(4) Loans and advances to customers in arrears as a percentage of loans and advances to customers.
(5) NPLs as a percentage of loans and advances to customers.
(6) Impairment loan loss allowances as a percentage of NPLs.
An analysis of the NPL movements during 2014 is presented below. ‘Entries’ represent loans which have become classified as NPLs during the year. ‘Exits (including repayments)’ represent loans that have been repaid (in full or in part) plus those returned to performing status. ‘Write-offs’ represent the unrecovered element of a loan where recovery options, including realisation of any collateral, have been exhausted. Forbearance activity does not result in a change in the NPL status.
2014 compared to 2013(unaudited)
Watchlist exposures subject to proactive management reduced to £434m at 31 December 2014 (2013: £623m). The reduction in the Commercial Real Estate portfolio more than offset the increase in the Mid Corporate and SME portfolio. In the Social Housing portfolio, there were no exposures subject to proactive management.
Watchlist exposures subject to enhanced monitoring increased in all portfolios except Social Housing. The increase in the Mid Corporate and SME portfolio was principally due to a tightening of the Care Homes policy whereby any customer with a Care Quality Commission flag (indicating operational deficiencies) is automatically added to the Watchlist. The increase in the Commercial Real Estate portfolio also reflected prudent policy requirements as transactions that have six months to maturity and no definitive exit or refinance plan in place, irrespective of their LTV ratio, are now automatically added to the Watchlist. At 31 December 2014 only 2.3% (2013: 3.6%) of portfolio exposures were subject to enhanced monitoring.
Loans and advances to customers in arrears remained stable at £664m at 31 December 2014 (2013: £663m), but given the high growth rates of this portfolio the arrears ratio decreased to 3.56% (2013: 3.92%). The NPL ratio decreased to 3.56% at 31 December 2014 (2013: 3.83%) for similar reasons.
In 2014, interest income recognised on impaired loans amounted to £17m (2013: £15m, 2012: £14m).
| Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks |
Risk review
Credit risk
continued
Commercial Banking loans – forbearance
We only make forbearance arrangements for lending to customers. We have not needed to make any forbearance arrangements with our Social Housing counterparties.
Forbearance commenced duringstarted in the year(1)
No forbearance arrangements have been necessary with respect to Social Housing counterparties. The exposures that entered forbearance during the years endedin 2015 and 2014 were:
| 2015 | 2014 | |||||||||||||||||||||||||
Mid Corporate and SME £m | Commercial Real Estate £m | Total
£m | Mid Corporate and SME £m | Commercial Real Estate £m | Total
£m | |||||||||||||||||||||
Term extension | 32 | 4 | 36 | 23 | 78 | 101 | ||||||||||||||||||||
Interest-only | 82 | 15 | 97 | 37 | 14 | 51 | ||||||||||||||||||||
Other payment rescheduling | 59 | 34 | 93 | 123 | 27 | 150 | ||||||||||||||||||||
| 173 | 53 | 226 | 183 | 119 | 302 | |||||||||||||||||||||
| (1) | The figures reflect the forbearance activity in the year, regardless of whether there was any forbearance on the accounts before. |
Forbearance total position
a) Performance when they entered forbearance
The exposures at 31 December 2015 and 2014, analysed by their payment status when they entered forbearance and 2013the forbearance we applied, were:
| 2014 | 2013 | |||||||||||||||||||||||||
| Mid Corporate | Commercial | Total | Mid Corporate | Commercial | Total | |||||||||||||||||||||
and SME £m | Real Estate £m | £m | and SME £m | Real Estate £m | £m | |||||||||||||||||||||
Payment rescheduling | 123 | 27 | 150 | 39 | 5 | 44 | ||||||||||||||||||||
Term extension | 23 | 78 | 101 | 15 | 121 | 136 | ||||||||||||||||||||
Interest-only
| 37 | 14 | 51 | 36 | 12 | 48 | ||||||||||||||||||||
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| 183
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| 119
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| 302
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| 90
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| 138
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| 228
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(1) The figures by year reflect the amount of forbearance activity undertaken during the year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.
Forbearance cumulative position a) Performance status when entering forbearance The forborne exposures at 31 December 2014 and 2013 when they originally entered forbearance, analysed by their payment status, were:
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| Payment | Term | Interest-only | Total | Impairment | ||||||||||||||||||||||
| rescheduling £m | extension £m | £m | £m | allowance £m | ||||||||||||||||||||||
2014(1) | ||||||||||||||||||||||||||
Forbearance of NPL | 8 | 37 | 13 | 58 | 16 | |||||||||||||||||||||
Forbearance of Non-NPL
| 187 | 234 | 318 | 739 | 124 | |||||||||||||||||||||
|
| 195
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| 271
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| 331
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| 797
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| 140
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2013(1) | ||||||||||||||||||||||||||
Forbearance of NPL | 14 | 76 | 92 | 182 | 48 | |||||||||||||||||||||
Forbearance of Non-NPL
| 143 | 287 | 298 | 728 | 81 | |||||||||||||||||||||
|
| 157
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| 363
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| 390
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| 910
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| 129
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(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
b) Performance status at the year-end The current status of forborne exposures analysed by their payment status, at 31 December 2014 and 2013 was:
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| Payment | Term | Interest-only | Total | Impairment | ||||||||||||||||||||||
| rescheduling £m | extension £m | £m | £m | allowance £m | ||||||||||||||||||||||
2014(1) | ||||||||||||||||||||||||||
Non-performing | 103 | 154 | 132 | 389 | 136 | |||||||||||||||||||||
Performing
| 92 | 117 | 199 | 408 | (2) | 4 | ||||||||||||||||||||
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| 195
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| 271
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| 331
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| 797
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| 140
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Proportion of portfolio
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| 0.9%
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| 1.2%
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| 1.5%
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| 3.5%
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2013(1) | ||||||||||||||||||||||||||
Non-performing | 96 | 123 | 119 | 338 | 113 | |||||||||||||||||||||
Performing
| 61 | 240 | 271 | 572 | (2) | 16 | ||||||||||||||||||||
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| 157
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| 363
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| 390
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| 910
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| 129
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Proportion of portfolio
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| 0.8%
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| 1.8%
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| 1.9%
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| 4.5%
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(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year. (2) This represents the carrying amount of financial assets that may otherwise be past due or impaired whose terms have been forborne.
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| Term extension £m | Interest-only £m | Other payment rescheduling £m | Total
£m | Impairment allowance £m | ||||||||||||||||
2015(1) | ||||||||||||||||||||
Forbearance of NPL | 4 | 46 | 42 | 92 | 35 | |||||||||||||||
Forbearance of Non-NPL | 163 | 261 | 189 | 613 | 111 | |||||||||||||||
| 167 | 307 | 231 | 705 | 146 | ||||||||||||||||
2014(1) | ||||||||||||||||||||
Forbearance of NPL | 37 | 13 | 8 | 58 | 16 | |||||||||||||||
Forbearance of Non-NPL | 234 | 318 | 187 | 739 | 124 | |||||||||||||||
| 271 | 331 | 195 | 797 | 140 | ||||||||||||||||
| (1) | We base forbearance type on the first forbearance we applied. Tables only show accounts that were open at the year-end. |
b) Performance at the year-end
The exposures at 31 December 2015 and 2014 analysed by their payment status at the year-end and the forbearance we applied were:
| Term extension £m | Interest-only £m | Other payment rescheduling £m | Total
£m | Impairment allowance £m | ||||||||||||||||
2015(1) | ||||||||||||||||||||
Non-performing | 95 | 169 | 141 | 405 | 144 | |||||||||||||||
Performing | 72 | 138 | 90 | 300 | 2 | |||||||||||||||
| 167 | 307 | 231 | 705 | 146 | ||||||||||||||||
Proportion of portfolio | 0.7% | 1.2% | 0.9% | 2.8% | ||||||||||||||||
2014(1) | ||||||||||||||||||||
Non-performing | 154 | 132 | 103 | 389 | 136 | |||||||||||||||
Performing | 117 | 199 | 92 | 408 | 4 | |||||||||||||||
| 271 | 331 | 195 | 797 | 140 | ||||||||||||||||
Proportion of portfolio | 1.2% | 1.5% | 0.9% | 3.5% | ||||||||||||||||
| (1) | We base forbearance type on the first forbearance we applied. Tables only show accounts that were open at the year-end. |
Annual Report 2015
Risk review
This data may be analysed by portfolio, as follows:
Mid Corporate and SME
| Term extension £m | Interest-only £m | Other payment rescheduling £m | Total
£m | Impairment allowance £m | ||||||||||||||||
2015(1) | ||||||||||||||||||||
Non-performing | 20 | 140 | 116 | 276 | 108 | |||||||||||||||
Performing | 22 | 79 | 85 | 186 | 1 | |||||||||||||||
| 42 | 219 | 201 | 462 | 109 | ||||||||||||||||
Proportion of Mid Corporate and SME portfolio | 0.3% | 1.8% | 1.6% | 3.7% | ||||||||||||||||
2014(1) | ||||||||||||||||||||
Non-performing | 26 | 92 | 97 | 215 | 84 | |||||||||||||||
Performing | 28 | 79 | 85 | 192 | 4 | |||||||||||||||
| 54 | 171 | 182 | 407 | 88 | ||||||||||||||||
Proportion of Mid Corporate and SME portfolio | 0.5% | 1.5% | 1.6% | 3.6% | ||||||||||||||||
(1) We base forbearance type on the first forbearance we applied. Tables only show accounts that were open at the year-end.
Commercial Real Estate
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| Term extension £m | Interest-only £m | Other payment rescheduling £m | Total
£m | Impairment allowance £m | ||||||||||||||||
2015(1) | ||||||||||||||||||||
Non-performing | 75 | 29 | 25 | 129 | 36 | |||||||||||||||
Performing | 50 | 59 | 5 | 114 | 1 | |||||||||||||||
| 125 | 88 | 30 | 243 | 37 | ||||||||||||||||
Proportion of Commercial Real Estate portfolio | 1.2% | 0.8% | 0.3% | 2.3% | ||||||||||||||||
2014(1) | ||||||||||||||||||||
Non-performing | 128 | 40 | 6 | 174 | 52 | |||||||||||||||
Performing | 89 | 120 | 7 | 216 | – | |||||||||||||||
| 217 | 160 | 13 | 390 | 52 | ||||||||||||||||
Proportion of Commercial Real Estate portfolio | 2.2% | 1.6% | 0.1% | 3.9% | ||||||||||||||||
| (1) | ||
2015 compared to 2014(unaudited)
The forbearance started in 2015 was lower than in 2014, with a significant reduction in our Commercial Real Estate portfolio as the credit quality continued to improve.
The cumulative forbearance stock decreased at 31 December 2015, as cases from older vintages in our Commercial Real Estate portfolio continue to work their way through the forbearance process (see the ‘Higher risk loans and other segments of particular interest’ section) and fewer cases entered forbearance. In our Mid Corporate and SME portfolio, the cases are newer and it will therefore take longer for them to exit. The accounts in forbearance as a percentage of the portfolio continued to decrease to 2.8% at 31 December 2015 (2014: 3.5%).
At 31 December 2015, 87% (2014: 93%) of total forborne exposure entered forbearance before default. At 31 December 2015, 43% (2014: 51%) of total forborne exposure was keeping to the forbearance terms showing that much of the action had been effective. The remaining cases moved to NPL despite the forbearance.
Debt-for-equity swaps
We also had £10m (2014: £10m) of equity securities that arose from debt-for-equity swaps at 31 December 2015.
86 Santander UK plc
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This data may be further analysed by portfolio, as follows:
Mid Corporate and SME
| Payment | Term | Interest-only | Total | Impairment | ||||||||||||||||
rescheduling £m | extension £m | £m | £m | allowance £m | ||||||||||||||||
2014(1) | ||||||||||||||||||||
Non-performing | 97 | 26 | 92 | 215 | 84 | |||||||||||||||
Performing
| 85 | 28 | 79 | 192 | (2) | 4 | ||||||||||||||
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| 171
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Proportion of Mid Corporate and SME portfolio
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| 3.6%
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2013(1) | ||||||||||||||||||||
Non-performing | 42 | 27 | 74 | 143 | 55 | |||||||||||||||
Performing | 46 | 36 | 99 | 181 | (2) | 3 | ||||||||||||||
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| 63 | 173 | 324 | 58 | ||||||||||||||
Proportion of Mid Corporate and SME portfolio | 0.9% | 0.7% | 1.9% | 3.5% | ||||||||||||||||
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(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
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Commercial Real Estate
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| Payment | Term | Interest-only | Total | Impairment | ||||||||||||||||
| rescheduling £m | extension £m | £m | £m | allowance £m | ||||||||||||||||
2014(1) | ||||||||||||||||||||
Non-performing | 6 | 128 | 40 | 174 | 52 | |||||||||||||||
Performing
| 7 | 89 | 120 | 216 | (2) | – | ||||||||||||||
| 13 | 217 | 160 | 390 | 52 | ||||||||||||||||
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Proportion of Commercial Real Estate portfolio | 0.1% | 2.2% | 1.6% | 3.9% | ||||||||||||||||
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2013(1) | ||||||||||||||||||||
Non-performing | 54 | 96 | 45 | 195 | 58 | |||||||||||||||
Performing | 15 | 204 | 172 | 391 | (2) | 13 | ||||||||||||||
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69 |
| 300 | 217 | 586 | 71 | ||||||||||||||
Proportion of Commercial Real Estate portfolio | 0.7% | 3.0% | 2.2% | 5.8% | ||||||||||||||||
(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year. |
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(2) This represents the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been forborne. |
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2014 compared to 2013(unaudited)
The incidence of forbearance that commenced in the year increased compared to 2013. This was primarily in the Mid Corporate and SME portfolio partially offset by a reduction in Commercial Real Estate. However, the cumulative forbearance stock decreased, especially in the Commercial Real Estate portfolio where older vintages that subsequently suffered financial distress continue to work their way through the forbearance process (see ‘Higher risk loans and other segments of particular interest’ on page 79). The proportion of Mid Corporate and SME forbearance as a percentage of the portfolio remained stable at 3.6% (2013: 3.5%).
Accounts that are in forbearance continue to be closely monitored, to ensure that the forbearance arrangements are sustainable. Not all forbearance will prove effective, and in certain circumstances, market conditions may lead either to a case remaining in NPL even post-forbearance or to the need for a second forbearance action. At 31 December 2014, 51% (2013: 63%) of total forborne exposure was performing in accordance with the revised terms agreed under the forbearance arrangements.
The level of compliance with revised terms agreed under forbearance arrangements is influenced by market conditions. Those cases where forbearance occurs prior to default, which at 31 December 2014 represented 93% (2013: 80%) of exposure, are generally more effective.
Forborne exposures are assessed for observed impairment loss allowances. The greater probability of a loss when compared to the performing book is reflected in the calculation of impairment loss allowances. A customer’s ability to adhere to any revised terms agreed is an indicator of the sustainability of Santander UK’s forbearance arrangements, although the forbearance is unlikely to be successful in all cases.
Risk review
Credit risk
continued
Debt-for-equity swaps(unaudited)
In addition to the forbearance activities shown above, Santander UK has on occasion entered into a small number of transactions where Santander UK agreed to exchange a proportion of the amount owed by the borrower for equity in that borrower. This arises in circumstances where a borrower’s balance sheet is materially over-leveraged but the underlying business is viewed as capable of being turned around. This will typically only be done alongside new cash equity being raised, the implementation of a detailed business plan to effect a turnaround in the prospects of the business, and satisfaction with management’s ability to deliver the strategy.
These debt-for-equity swaps amounted to £10m at 31 December 2014 (2013: £46m).
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks |
HIGHER RISK LOANS AND OTHER SEGMENTS OF PARTICULAR INTEREST
Commercial Real Estate
The Commercial Real Estate market has experienced a particularly challenging environment over recentin the years following the financial crisis and has been prone toseen regular cyclical downturns as most recently demonstrated in 2008.downturns. In particular, Commercial Real Estate loans originated before 2009 are a segment of relatively higher risk.
CreditHigher risk loans – credit performance
We analyse Commercial Real Estate non-performing exposures and weighted average LTVs at 31 December 20142015 and 2013 may be further analysed2014 between loans originated pre-2009before 2009 and thereafter as follows:afterwards below:
| 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Original vintage | Original vintage | Original vintage | Original vintage | |||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-2009 | 2009 onwards | Total | Pre-2009 | 2009 onwards | Total | Pre-2009
| 2009 onwards | Total
| Pre-2009
| 2009 onwards | Total
| |||||||||||||||||||||||||||||||||||||||||
Total committed exposure | £1,288m | £8,770m | £10,058m | £1,569m | £8,476m | £10,045m | £876m | £9,670m | £10,546m | £1,288m | £8,770m | £10,058m | ||||||||||||||||||||||||||||||||||||||||
Non-performing exposure ratio | 18.3% | 0.5% | 2.7% | 18.8% | 0.3% | 3.2% | 16.6% | 0.5% | 1.8% | 18.3% | 0.5% | 2.7% | ||||||||||||||||||||||||||||||||||||||||
Weighted average LTV
| 66% | 52% | 54% | 74% | 53% | 56% | 61% | 51% | 52% | 66% | 52% | 54% | ||||||||||||||||||||||||||||||||||||||||
20142015 compared to 20132014(unaudited)
At 31 December 2014,2015, 77% (2014: 85% (2013: 92%) of the non-performing exposures related to deals originated pre-2009.were pre-2009 loans. The pre-2009 vintage loans were written on market terms prevailing in the market at that time which, compared to more recent times, included higher original LTVs, lower interest coverage and exposure to development or letting risk. FollowingAfter the significant downturn in the Commercial Real Estate market in 2008 and 2009, some of these customers suffered financial stress resulting in their inabilitystress. This meant they were unable to meet the contractual payment terms, comply with covenants, or achieve refinancing/repayment at maturity. As a result, the pre-2009 sub-portfolio has experienced higher non-performing rates in recent years. At 31 December 2014, the non-performing exposure ratio of the pre-2009 sub-portfolio was 18.3% (2013: 18.8%).rates.
In light of the market deterioration, Santander UK’swe significantly tightened our lending criteria were significantly tightened from 2009 onwards,onwards. We reduced the maximum acceptable LTV and avoided loans with lower LTVs and the avoidance of transactionssignificant letting or development risks. At 31 December 2015, loans with material letting or development risks (at 31 December 2014, this element of the portfolio representedwere only 4% (2013:(2014: 4%) of the total Commercial Real Estate portfolio).portfolio. As a result, the sub-portfolio representingof loans originating from 2009 onwards continues to perform significantly better than the pre-2009 sub-portfolio. At 31 December 2014,2015, the pre-2009 sub-portfolio represented less thanwas 8% (2014: 13% (2013: 16%) of the total Commercial Real Estate portfolio.
SectorHigher risk loans – sector analysis
Sector | 2015 % | 2014 % | ||||||
Office | 26 | 22 | ||||||
Retail | 22 | 23 | ||||||
Industrial | 16 | 16 | ||||||
Residential | 12 | 13 | ||||||
Mixed use | 13 | 12 | ||||||
Student accommodation | 3 | 3 | ||||||
Hotels and leisure | 5 | 6 | ||||||
Other | 3 | 5 | ||||||
| 100 | 100 | |||||||
The Commercial Real Estate portfolio remainedwas well diversified by sector at 31 December 20142015 and 2013, as set out below.
| Sector | 2014 | 2013 | ||||||
| % | % | |||||||
Office | 22 | 26 | ||||||
Retail | 23 | 23 | ||||||
Industrial | 16 | 13 | ||||||
Residential | 13 | 10 | ||||||
Mixed use | 12 | 9 | ||||||
Student accommodation | 3 | 6 | ||||||
Hotels & Leisure | 6 | 6 | ||||||
Other | 5 | 7 | ||||||
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Annual Report 2015
Risk review
Credit risk
continued
Loan-to-valueHigher risk loans – LTV analysis
In Commercial Real Estate lending, the main form of credit mitigation is collateral. The table below analysesshows the LTV ratiosLTVs of loans within the Commercial Real Estate portfolio at 31 December 20142015 and 2013.2014. The LTV distribution is presentedLTVs are shown for the non-standardised portfolio (see the ‘Credit Risk Management’risk management’ section), which at £8.7bn represented 86%was 83% of the total Commercial Real Estate portfolio at 31 December 2014.2015 (2014: £8.7bn representing 86%). The residual elementrest of the portfolio consists of smaller value transactions, largely in the form ofmainly commercial mortgages. These loans have thereforenot been excluded from the analysisincluded below.
| 2014 | 2013 | |||||||||||||||||||||||||||||||||||
| Stock | New business | Stock | New business | |||||||||||||||||||||||||||||||||
| % | % | % | % | 2015 | 2014 | |||||||||||||||||||||||||||||||
Stock % | New business % | Stock % | New business % | |||||||||||||||||||||||||||||||||
Up to 50% | 33 | 31 | 33 | 26 | 40 | 42 | 33 | 31 | ||||||||||||||||||||||||||||
50% to 60% | 39 | 49 | 36 | 47 | 40 | 42 | 39 | 49 | ||||||||||||||||||||||||||||
60% to 70% | 21 | 20 | 18 | 22 | 17 | 16 | 21 | 20 | ||||||||||||||||||||||||||||
70% to 80% | 4 | – | 6 | 5 | 2 | – | 4 | – | ||||||||||||||||||||||||||||
80% to 90% | 1 | – | 3 | – | 1 | – | 1 | – | ||||||||||||||||||||||||||||
90% to 100% | 1 | – | – | – | – | – | 1 | – | ||||||||||||||||||||||||||||
> 100% i.e. negative equity | 1 | – | 4 | – | ||||||||||||||||||||||||||||||||
Total | 100 | 100 | 100 | 100 | ||||||||||||||||||||||||||||||||
>100% i.e. negative equity | – | – | 1 | – | ||||||||||||||||||||||||||||||||
| 100 | 100 | 100 | 100 | |||||||||||||||||||||||||||||||||
20142015 compared to 20132014(unaudited)
At 31 December 2014,2015, the LTV profile of the portfolio remained conservative with 80% (2014: 72% (2013: 69%) of the portfolio at or below 60% LTV. This reflectedreflects the more recent vintage of the portfolio withas 92% (2014: 87% (2013: 84%) was originated in 2009 or subsequent years. The majority oflater. Most higher LTV deals representare older deals which remainstill in the portfolio.
NoIn 2015, no new business was written above 70% LTV, in 2014, with 80%and 84% was written at or below 60% LTV. The majority of the cases with negative equity form part of the forborne element of the portfolio and are managed by the Restructuring & Recoveries team.
At 31 December 20142015, the average LTV, weighted by exposure, was 52% (2014: 54% (2013: 56%). The weighted average LTV of new deals written in 20142015 was 52% (2013: 54%(2014: 52%).
RefinancingHigher risk loans – refinancing risk
As part of theour annual review process, for Commercial Real Estate loans that are approaching maturity, consideration is given towe look at the prospects of refinancing the loan at prevailingon current market terms and applicable credit policy. The review will consider this andWe also look at other aspects (e.g.(such as covenant compliance) which could result inmean we have to put the case being placed on the Watchlist. Additionally, whereIn addition, if we do not receive an acceptable refinancing proposal has not been received within six months prior to maturity,before the case will be placedloan matures, we put it on the Watchlist.
At 31 December 2014, there was £1,342m (2013: £852m) of2015, Commercial Real Estate loans of £1,471m (2014: £1,342m) were due to mature within 12 months. Of these, £144m, i.e. 10% (2014: £139m, i.e. 10% (2013: £320m i.e. 27%) havehad an LTV ratio above that which would be consideredhigher than is acceptable under our current credit policy, allpolicy. £139m of which (2013: £313m) hasthis (2014: £139m) had been placedput on the Watchlist or recorded as NPL and hashad an impairment loss allowance of £40m (2013: £62m) associated with it.
88 Santander UK plc
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Credit risk – Global Corporate Banking
Overview | ||||
We are exposed to credit risk through lending and selling treasury products to large corporates, and through treasury markets activities. Credit risk management In this section, we explain how we manage credit risk, including how we mitigate it. Credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance. Our main portfolios are: | Sovereign and Supranational – securities issued by local and central governments, and government-guaranteed counterparties. We hold them for liquidity needs and short-term trading. Large Corporate – loans and treasury products for large corporates to support their working capital and liquidity needs. Financial Institutions – mainly derivatives, repurchase and reverse repurchase transactions (known as repos and reverse repos), and stock borrowing/lending. |
GLOBAL CORPORATE BANKING – CREDIT RISK MANAGEMENT
We classify our customers as non-standardised. Their transactions are for larger amounts of money, and have more diverse credit characteristics. We are exposed to credit risk through lending, selling treasury products, and treasury markets activities.
We set out how we manage credit risk on lending to non-standardised customers in the section ‘Credit risk – Commercial Banking’. We take the same approach in Global Corporate Banking.
In the rest of this section, we set out how we manage credit risk on treasury products and treasury markets activities where it differs from our approach for lending.
Risk strategy and planning
We take credit risk on treasury products up to limits for each client. We control, manage and report risks on a counterparty basis, regardless of which part of our business takes the risk – Global Corporate Banking or Corporate Centre.
Assessment and origination
A specialist analyst usually reviews a transaction at the start and over its life. They base their review on the financial strength of the client, its position in its industry, and its management strengths.
Monitoring
We monitor the credit quality of our portfolios of treasury products daily. We use both internal and third-party data to detect any potential credit deterioration.
Forbearance
We have not entered into forbearance on our treasury markets activities.
Risk measurement and control
We measure the credit risk on treasury products by adding their potential future exposure to market movements over their lives to their fair value. Then we add it to any other exposure and measure the total against our credit limits for each client.
Annual Report 2015
Risk review
Credit risk mitigation
The types of credit risk mitigation, including collateral, across each of our portfolios are:
| Portfolio | Description | |
Sovereign and Supranational | In line with market practice, there is no collateral against these assets. | |
| Large Corporate | Most of these loans and products are unsecured, but we attach covenants to our credit agreements. We monitor whether borrowers keep in line with them so we detect any financial distress early. Includes a small structured finance portfolio, where we hold legal charges over the assets we finance. | |
| Financial Institutions | We use standard legal agreements to reduce credit risk on derivatives, repos and reverse repos, and stock borrowing/lending. We also hold collateral and trade through central counterparties (CCPs) to reduce risk. Netting – We use netting agreements where they have legal force – mainly in the UK, the rest of Europe and the US. These mean that if a counterparty defaults, we can legally offset what we owe them and what they owe us, and settle the net amount. However, netting agreements often do not mean we can offset assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis. In line with market practice, we use standard legal agreements: – Derivatives: ISDA Master Agreements – Repos and reverse repos: Global Master Repurchase Agreements – Stock borrowing/lending and other Collateral– We use the Credit Support Annex with the ISDA Master Agreement. This gives us collateral for our net exposures. The collateral can be cash, securities or equities: – For stock borrowing/lending, and repos and reverse repos, it includes high-quality liquid debt securities and highly liquid equities listed on major developed markets – For derivatives, it is cash or high quality liquid debt securities. We revalue our exposures and collateral every day and adjust the collateral to reflect any deficits or surpluses. We have processes for controlling how we value and manage collateral. This includes documentation reviews and reporting. Collateral has to meet our ‘collateral parameters’ policy. This controls the quality and how much of any one kind of collateral we can hold. That gives us confidence we will be able to cash in the collateral when a client defaults. We have these controls for both equities and debt securities. The collateral we hold for reverse repos (including securities financing) is worth at least 100% of our exposure. CCPs – These are intermediaries between a buyer and a seller – generally a clearing house. We use CCPs as a way to reduce counterparty credit risk in derivatives. | |
90 Santander UK plc
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GLOBAL CORPORATE BANKING – CREDIT RISK – CORPORATE & INSTITUTIONAL BANKINGREVIEW
In Global Corporate & Institutional Banking, credit risk arises on asset balances and off-balance sheet transactions such as credit facilities or guarantees. Consequently,That means committed exposures are typically higher than asset balances. However,But in the following committed exposures tables below, we show Sovereigns and Supranationals are presented net of short positions andpositions. They also include Sovereign and Supranational exposures established forthat form part of our liquidity management purposes,strategy, managed by Short Term Markets on behalf of Corporate Centre.
Large Corporate reverse repurchase agreement exposures are presentedshown net of repurchase agreement liabilities and include OTC derivatives. As a result, the committed exposures can be smaller than the asset balances recognised on the balance sheet. In addition, the
The derivative riskand other treasury product exposures in the tables below (which are classified as ‘Financial Institutions’) shown are also typically lower than the balance sheet positionasset balances. This is because thewe show our overall risk exposure is monitored and therefore consideration is taken of margin posted, CSAs in ISDA Master Agreements, and master netting agreements and other financial instruments which reduce the Santander UK group’s exposures. Derivativetakes into account our procedures to mitigate credit risk. The asset balances recognised on theour balance sheet only reflect only the more restrictive netting permitted by IAS 32.
Global Corporate & Institutional Banking – committed exposures
Rating distribution
The rating distributionThese tables show theour credit risk exposure by Santander UK’saccording to our internal rating scale (see the ‘Credit quality’ section) for each portfolio. WithinOn this scale, the higher the rating, the better the quality of the counterparty.
| Sovereign and | Large | Structured | Financial | Total | ||||||||||||||||
| Supranational | Corporate | Finance | Institutions | |||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
2014 | ||||||||||||||||||||
9 | 2,679 | 20 | – | 210 | 2,909 | |||||||||||||||
8 | 4,079 | 1,631 | – | 3,229 | 8,939 | |||||||||||||||
7 | 928 | 4,444 | – | 2,928 | 8,300 | |||||||||||||||
6 | – | 8,333 | 28 | 220 | 8,581 | |||||||||||||||
5 | – | 3,050 | 96 | 79 | 3,225 | |||||||||||||||
4 | – | 56 | – | – | 56 | |||||||||||||||
1 to 3 | – | 79 | 76 | 103 | 258 | |||||||||||||||
Other | – | – | – | – | – | |||||||||||||||
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7,686 |
| 17,613 | 200 | 6,769 | 32,268 | ||||||||||||||
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2013 | ||||||||||||||||||||
9 | 1,296 | 10 | – | 72 | 1,378 | |||||||||||||||
8 | 3,893 | 1,375 | – | 3,396 | 8,664 | |||||||||||||||
7 | 860 | 5,060 | 30 | 2,650 | 8,600 | |||||||||||||||
6 | – | 6,647 | 6 | 143 | 6,796 | |||||||||||||||
5 | – | 2,326 | 40 | 19 | 2,385 | |||||||||||||||
4 | – | 145 | 72 | – | 217 | |||||||||||||||
1 to 3 | – | 23 | 136 | 28 | 187 | |||||||||||||||
Other | – | 2 | 24 | – | 26 | |||||||||||||||
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6,049 |
| 15,588 | 308 | 6,308 | 28,253 | ||||||||||||||
| ||||||||||||||||||||
Sovereign and Supranational £m | Large Corporate £m | Financial Institutions £m | Total
£m | |||||||||||||
2015 | ||||||||||||||||
9 | 889 | 3 | 266 | 1,158 | ||||||||||||
8 | 2,889 | 1,769 | 3,811 | 8,469 | ||||||||||||
7 | 789 | 5,963 | 2,982 | 9,734 | ||||||||||||
6 | – | 8,351 | 446 | 8,797 | ||||||||||||
5 | – | 3,823 | 10 | 3,833 | ||||||||||||
4 | – | 123 | – | 123 | ||||||||||||
1 to 3 | – | 32 | – | 32 | ||||||||||||
Other | – | – | – | – | ||||||||||||
| 4,567 | 20,064 | 7,515 | 32,146 | |||||||||||||
2014 | ||||||||||||||||
9 | 2,679 | 20 | 210 | 2,909 | ||||||||||||
8 | 4,079 | 1,631 | 3,229 | 8,939 | ||||||||||||
7 | 928 | 4,444 | 2,928 | 8,300 | ||||||||||||
6 | – | 8,361 | 220 | 8,581 | ||||||||||||
5 | – | 3,146 | 79 | 3,225 | ||||||||||||
4 | – | 56 | – | 56 | ||||||||||||
1 to 3 | – | 155 | 103 | 258 | ||||||||||||
Other | – | – | – | – | ||||||||||||
| 7,686 | 17,813 | 6,769 | 32,268 | |||||||||||||
Annual Report 2015
Risk review
Credit risk
continued
Geographical distribution
TheWe classify geographical location is classified byaccording to country of risk being– in other words, the country where each counterparty’scounterparty has its main business activity or assets are located, except whereunless there is a full risk transfer guarantee is in place, in which case we use the guarantor’s country of domicile of the guarantor is used. Forinstead. If our clients whosehave operations are more geographically dispersed, thein many countries, we use their country of incorporation is applied.incorporation.
| Sovereign and | Large | Structured | Financial | Total | Sovereign and Supranational £m | Large Corporate £m | Financial Institutions £m | Total
£m | ||||||||||||||||||||||||||||
| Supranational | Corporate | Finance | Institutions | |||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||
UK | – | 16,858 | 3,647 | 20,505 | ||||||||||||||||||||||||||||||||
Peripheral eurozone | 789 | 762 | 775 | 2,326 | ||||||||||||||||||||||||||||||||
Rest of Europe | 872 | 1,926 | 1,170 | 3,968 | ||||||||||||||||||||||||||||||||
US | – | 171 | 1,277 | 1,448 | ||||||||||||||||||||||||||||||||
Rest of world | 2,906 | 347 | 646 | 3,899 | ||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | 4,567 | 20,064 | 7,515 | 32,146 | ||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||
UK | 850 | 14,952 | 102 | 3,197 | 19,101 | 850 | 15,054 | 3,197 | 19,101 | |||||||||||||||||||||||||||
Peripheral eurozone | 928 | 608 | 41 | 967 | 2,544 | 928 | 649 | 967 | 2,544 | |||||||||||||||||||||||||||
Rest of Europe | 1,716 | 1,684 | 57 | 916 | 4,373 | 1,716 | 1,741 | 916 | 4,373 | |||||||||||||||||||||||||||
US | 2 | 30 | – | 1,331 | 1,363 | 2 | 30 | 1,331 | 1,363 | |||||||||||||||||||||||||||
Rest of world | 4,190 | 339 | – | 358 | 4,887 | 4,190 | 339 | 358 | 4,887 | |||||||||||||||||||||||||||
| 7,686 | 17,813 | 6,769 | 32,268 | ||||||||||||||||||||||||||||||||
| 7,686 | 17,613 | 200 | 6,769 | 32,268 | ||||||||||||||||||||||||||||||||
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2013 | ||||||||||||||||||||||||||||||||||||
UK | – | 12,908 | 108 | 3,038 | 16,054 | |||||||||||||||||||||||||||||||
Peripheral eurozone | 860 | 385 | 20 | 626 | 1,891 | |||||||||||||||||||||||||||||||
Rest of Europe | 1,029 | 1,663 | 75 | 1,185 | 3,952 | |||||||||||||||||||||||||||||||
US | – | 35 | 105 | 1,281 | 1,421 | |||||||||||||||||||||||||||||||
Rest of world | 4,160 | 597 | – | 178 | 4,935 | |||||||||||||||||||||||||||||||
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| 6,049 | 15,588 | 308 | 6,308 | 28,253 | ||||||||||||||||||||||||||||||||
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20142015 compared to 20132014(unaudited)
During 2014, totalIn 2015, our committed exposures increaseddecreased by £4.0bn£0.1bn or 14%1% to £32.3bn principally within the£32.1bn mainly due to decreases in our Sovereign and Supranational andportfolio, partially offset by increases in our Large Corporate and Financial Institutions portfolios.
Sovereign and Supranational exposures increaseddecreased by 27%41% in 2014, reflecting the continued development of the business2015. This reflected reduced holdings in this area. The increased exposures were mainly in the rating 9 category, most of which were inJapanese, Swiss, Danish and UK Switzerland, Denmark and Germany Sovereigns, as part of normal liquid asset portfolio management. The portfolio profile remained primarily short-term (up to 1 year), reflecting the purpose of the holdingsGovernment securities as part of normal liquid asset portfolio management and short-term markets trading activity. The portfolio profile stayed mainly short-term (up to one year) reflecting the purpose of the holdings.
Large Corporate exposures increased by 13% in 2014, as a result of the2015 with continued development of the franchise focusedfocus on high-rated multinational companies. Growth was focused onmainly in the UK, with some diversification in other countries with counterparties with good credit quality. The portfolio profile remained primarilystayed mainly short to medium-term (up to 5five years), reflecting the type of finance we provided to support the working capital and liquidity needs of our clients.
No new positions were takenclients’ needs. The weighted average credit quality remained broadly consistent in the Structured Finance portfolioyear.
At 31 December 2015 our committed exposures in 2014. The reduction in exposure reflected the exit from transactions on maturity or through debt sales.respect of direct lending to oil and gas customers was £1.7bn (2014: £1.7bn) and to mining customers was £1.2bn (2014: £1.1bn).
Financial Institutions exposures increased by 7%11% in 2014,2015, mainly driven by Banco Santander group guaranteeshigher fair values of exposures cleared through CCPs. The increase in our Rest of Europe exposure was mainly in new securitisation swaps and insurance coverage to support the trade finance activitiesreceivable repurchase activity of our customers in other geographies. This was also reflected in the portfolio credit rating profile improvement in 2014, through theLarge Corporate clients. The increase in ratings within the 7our Rest of world exposure was mainly due to 9 categories.investment in highly-rated covered bonds.
Global Corporate & Institutional Banking – credit risk mitigation
Credit risk to counterparties on derivative products is mitigated through netting arrangements, collateralisation andAt 31 December 2015 the use of CCPs. For details of the approach to credit risk mitigation, see ‘Credit Risk Management – Corporate & Institutional Banking’. The top 20 biggest clients with derivative exposure made up 70% (2014: 76%) of our total derivative exposure, all of which Santander UK had the biggest derivative exposures wereare banks and CCPs. These top 20 clients’ derivative exposure accounted for 76% of the total derivative exposure in Corporate & Institutional Banking at 31 December 2014 (2013: 90%). The risk exposure weighted-average credit rating was 7.6 (2013:7.4 (2014: 7.6).
In addition, at 31 December 2014,2015, we held no collateral held against impaired loans withinin the Structured FinanceLarge Corporate portfolio amounted to 64% (2013: 58%)(2014: 8% of the carrying amount of the impaired loan balances.
92 Santander UK plc
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Global Corporate & Institutional Banking – credit performance
Exposures exhibitingWe monitor exposures that show potentially higher risk characteristics are subject to risk monitoring under theusing our Watchlist process (described in ‘Risk monitoring’ in the ‘Credit risk management’ section). The table below sets outshows the portfolio showing exposures subject to risk monitoring under the Watchlist processwe monitor, and those classifiedwe classify as non-performing by portfolio at 31 December 20142015 and 2013:2014:
| Sovereign and | Large | Structured | Financial | Total | Sovereign and Supranational £m | Large Corporate £m | Financial Institutions £m | Total
£m | ||||||||||||||||||||||||||||
| Supranational | Corporate | Finance | Institutions | |||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 4,567 | 20,064 | 7,515 | 32,146 | ||||||||||||||||||||||||||||||||
– Performing – (Non-Watchlist) | 4,567 | 18,176 | 7,459 | 30,202 | ||||||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | – | 1,758 | 4 | 1,762 | ||||||||||||||||||||||||||||||||
– Watchlist: Proactive Management | – | 120 | 52 | 172 | ||||||||||||||||||||||||||||||||
– Non-performing exposure(2) | – | 10 | – | 10 | ||||||||||||||||||||||||||||||||
Total impaired exposure of which: | – | 10 | – | 10 | ||||||||||||||||||||||||||||||||
– Performing | – | – | – | – | ||||||||||||||||||||||||||||||||
– Non-performing(2) | – | 10 | – | 10 | ||||||||||||||||||||||||||||||||
Total Observed impairment loss allowances of which: | – | 9 | – | 9 | ||||||||||||||||||||||||||||||||
– Performing | – | – | – | – | ||||||||||||||||||||||||||||||||
– Non-performing | – | 9 | – | 9 | ||||||||||||||||||||||||||||||||
IBNO(3) | 24 | |||||||||||||||||||||||||||||||||||
Total impairment loss allowance | 33 | |||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 7,686 | 17,613 | 200 | 6,769 | 32,268 | 7,686 | 17,813 | 6,769 | 32,268 | |||||||||||||||||||||||||||
– Performing – (Non-Watchlist) | 7,686 | 16,452 | 47 | 6,703 | 30,888 | 7,686 | 16,499 | 6,703 | 30,888 | |||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | – | 1,095 | 77 | 5 | 1,177 | – | 1,172 | 5 | 1,177 | |||||||||||||||||||||||||||
– Watchlist: Proactive Management | – | 66 | 23 | 61 | 150 | – | 89 | 61 | 150 | |||||||||||||||||||||||||||
– Non-performing exposure(2) | – | – | 53 | – | 53 | – | 53 | – | 53 | |||||||||||||||||||||||||||
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Total impaired exposure of which: | – | – | 137 | – | 137 | |||||||||||||||||||||||||||||||
– Performing | – | – | 84 | – | 84 | |||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | 53 | – | 53 | |||||||||||||||||||||||||||||||
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Total Observed impairment loss allowances of which: | – | – | 49 | – | 49 | |||||||||||||||||||||||||||||||
– Performing | – | – | 21 | – | 21 | |||||||||||||||||||||||||||||||
– Non-performing | – | – | 28 | – | 28 | |||||||||||||||||||||||||||||||
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IBNO(3) | 24 | |||||||||||||||||||||||||||||||||||
Total impairment loss allowance | 73 | |||||||||||||||||||||||||||||||||||
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2013 | ||||||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 6,049 | 15,588 | 308 | 6,308 | 28,253 | |||||||||||||||||||||||||||||||
– Performing – (Non-Watchlist) | 6,049 | 15,292 | 105 | 6,246 | 27,692 | |||||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | – | 274 | 52 | 26 | 352 | |||||||||||||||||||||||||||||||
– Watchlist: Proactive Management | – | 22 | 132 | 36 | 190 | |||||||||||||||||||||||||||||||
– Non-performing exposure(2) | – | – | 19 | – | 19 | |||||||||||||||||||||||||||||||
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Total impaired exposure of which: | – | – | 203 | – | 203 | – | 137 | – | 137 | |||||||||||||||||||||||||||
– Performing | – | – | 184 | – | 184 | – | 84 | – | 84 | |||||||||||||||||||||||||||
– Non-performing | – | – | 19 | – | 19 | – | 53 | – | 53 | |||||||||||||||||||||||||||
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Total Observed impairment loss allowances of which: | – | – | 72 | – | 72 | – | 49 | – | 49 | |||||||||||||||||||||||||||
– Performing | – | – | 64 | – | 64 | – | 21 | – | 21 | |||||||||||||||||||||||||||
– Non-performing(2) | – | – | 8 | – | 8 | – | 28 | – | 28 | |||||||||||||||||||||||||||
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IBNO(3) | 5 | 24 | ||||||||||||||||||||||||||||||||||
Total impairment loss allowance | 77 | 73 | ||||||||||||||||||||||||||||||||||
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(1) Includes committed facilities and derivatives. The terms ‘Enhanced Monitoring’ and ‘Proactive Management’ are defined in the ‘Risk monitoring‘ section of the Risk review.
(2) Non-performing exposure in the table above include committed facilities and derivative exposures and therefore can be larger than the NPLs in the table on page 84 which only include drawn balances.
(3) Allowance for incurred inherent losses (i.e. incurred but not observed (‘IBNO’)) as described in Note 1 to the Consolidated Financial Statements.
| (1) | Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Risk monitoring‘ section. |
| (2) | Non-performing exposure includes committed facilities and derivative exposures. So it can be bigger than the NPLs in the table on page 94 which only include drawn balances. |
| (3) | Allowance for incurred but not observed (IBNO) losses as described in Note 1 to the Consolidated Financial Statements. |
Annual Report 2015
Risk review
Credit risk
continued
Non-performing loans and advances(1)(2)
An analysis ofWe analyse Global Corporate & Institutional Banking NPLs is presented below.
| 2014 | 2013 | |||||||
| £m | £m | |||||||
Loans and advances to customers of which:(2) | 5,224 | 5,142 | ||||||
Customers in arrears | 53 | 17 | ||||||
NPLs(3) | 53 | 17 | ||||||
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Impairment loan loss allowances | 73 | 77 | ||||||
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Arrears ratio(4) | 1.01 | 0.33 | ||||||
NPLs ratio(5) | 1.01 | 0.33 | ||||||
Coverage ratio(6) | 138 | 453 | ||||||
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| 2015 £m | 2014 £m | |||||||
Loans and advances to customers of which:(2) | 5,470 | 5,224 | ||||||
NPLs(3) | 10 | 53 | ||||||
Impairment loan loss allowances | 33 | 73 | ||||||
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NPL ratio(4) | 0.18 | 1.01 | ||||||
Coverage ratio(5) | 330 | 138 | ||||||
(1) Loans and advances are classified as non-performing in accordance with the definitions provided in the ‘Credit risk management’ section.
| (1) | We define NPLs in the ‘Credit risk management’ section. |
| (2) | Include finance leases. |
| (3) | All NPLs are in the UK and continue accruing interest. The balances include interest we have charged to the customer’s account. They do not include accrued interest we have not charged to the account yet. |
| (4) | NPLs as a percentage of loans and advances to customers. |
| (5) | Total impairment loss allowances as a percentage of NPLs. Total loan loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio is more than 100%. |
(2) Include finance leases.
(3) All NPL balances are UK based and continue accruing interest. For the data presented, the balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account.
(4) Loans and advances to customers in arrears as a percentage of loans and advances to customers.
(5) NPLs as a percentage of loans and advances to customers.
(6) impairment loan loss allowances as a % of NPLs. Total loan loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as accounts classified as NPL and hence the ratio exceeds 100%.
An analysis of theWe analyse NPL movements in 2014 is presented2015 below. ‘Entries’ representare loans which we have become classified as NPLs duringin the year. ‘Exits (including repayments)’ represent that elementare the part of loans to customers that havehas been repaid (in full or in part), plus thoseloans that returned to performing status. ‘Write-offs’ representare the unrecovered elementpart of a loanloans where we have exhausted recovery options, including realisation ofrealising any collateral, have been exhausted.collateral. Forbearance activity does not result in a change in the NPL status.
20142015 compared to 20132014(unaudited)
Watchlist exposures subject to proactive management decreasedincreased to £150m£172m at 31 December 2014 (2013: £190m)2015 (2014: £150m). The reduction in the Structured Finance portfolio more than offset increases in the Large Corporates and Financial Institutions portfolios. The reduction in Structured Finance was a consequence of the run-off strategy for this non-core legacy portfolio, through the exit from transactions on maturity or debt sales.
Watchlist exposures subject to enhanced monitoring increased in theour Large Corporate portfolio in 2015, mainly relating to holdings in the mining sector. This was due to increased monitoringfalls in the oilprices of metal and the UK supermarket sectors. There was a reduction in Financial Institutions.coal. In theour Sovereign and Supranational portfolio, there were no exposures were subject to proactive management or enhanced monitoring.
LoansNPLs decreased to £10m (2014: £53m) and advancesthe NPL ratio decreased to customers in arrears increased to £53m0.18% at 31 December 2014 (2013: £17m)2015 (2014: 1.01%). This was due to the exit of a single Structured Finance case, which also increasedloan of £49m and asset growth in the arrears ratio to 1.01% (2013: 0.33%). The NPL ratio also increased to 1.01% at 31 December 2014 (2013: 0.33%) for similar reasons.year.
In 2014, interest income recognised on impaired loans amounted to £nil (2013: £1m, 2012: £nil).
Global Corporate & Institutional Banking – forbearance
TheOur approach to forbearance in Global Corporate & Institutional Banking is the same as for Commercial Banking, although the volumes are significantly lower reflectingmuch lower. This reflects the credit quality of the majority of the portfolio. At 31 December 2014,2015, there was a single forborne case of £50m within the Structured Finance portfolio£10m (2014: £53m) which remainswas classified as NPL (2013: nil).
At 31 December 2014, there were no financial assets that may otherwise be past due or impaired whose terms have been forborne (2013: £13m).
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Credit risk – Corporate Centre
Overview | ||||
Exposures come from asset and Credit risk management In this section, we explain how we manage credit risk, including how we mitigate it. Credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance. Our main portfolios are: Sovereign and Supranational – securities issued by local and central governments, and government-guaranteed counterparties, held for liquidity. | Structured products There are two portfolios: – ALCO portfolio: high quality assets, chosen for diversification and to meet our liquidity needs – Legacy Treasury asset portfolio: mainly asset-backed securities. Derivatives – older total return swaps we held for liquidity, that we are running down. Legacy Portfolios in run-off– assets from acquisitions that do not fit with our strategy. These include certain commercial mortgages. Social Housing – older Social Housing loans that do not fit with our strategy. |
CORPORATE CENTRE – CREDIT RISK MANAGEMENT
We classify our customers as non-standardised. Their transactions are typically higher in value, and have more diverse credit characteristics. We are exposed to credit risk through lending and derivative transactions.
We set out how we manage credit risk on lending to non-standardised customers in the section ‘Credit risk – Commercial Banking’. We also set out how we manage credit risk on derivatives in the section ‘Credit risk – Global Corporate Banking’. We take the same approaches in Corporate Centre.
Annual Report 2015
Risk review
Credit risk mitigation
The types of credit risk mitigation, including collateral, for each of our portfolios are:
Portfolio | Description | |
Sovereign and Supranational | In line with market practice, there is no collateral against these assets. | |
Structured products | These are our ALCO and legacy Treasury asset portfolios: –ALCO portfolio: High quality assets, chosen for diversification and to meet our liquidity needs –Legacy Treasury asset portfolio: Mainly asset-backed securities. These assets are unsecured, but benefit from senior positions in the creditor hierarchy. Their credit rating reflects the over-collateralisation in the structure, and the assets that underpin their cash flows and repayment schedules. We use a detailed expected cash flow analysis to assess if there is any impairment. We take into account the structure and assets backing each individual security. We set up a loan loss allowance if we know an issuer has financial difficulties or they are not keeping to the terms of the contract. | |
| Derivatives | We manage the risk on this portfolio in the same way as for the derivatives in Global Corporate Banking. For more on this, see the earlier section ‘Credit risk – Global Corporate Banking’. | |
Legacy Portfolios in run-off | We often hold collateral through a first legal charge over the underlying asset or cash. With commercial mortgages, we do not have the right to a new professional valuation unless there is a default. We get independent third party valuations on fixed charge security like aircraft or shipping assets in line with industry guidelines. We then decide if we need to set up an impairment loss allowance. To do that, we bear in mind: – The borrower’s ability to generate cash flow – The age of the assets – Whether the loan is still performing satisfactorily – Whether or not the reduction in value is likely to be temporary – Whether there are other ways to solve the problem. Where a borrower gets into difficulty we look to dispose of the collateral, either with agreement or through the insolvency process. We do this as early as possible, to minimise any loss. We rarely take ownership of collateral. | |
| Social Housing | We manage the risk on this portfolio in the same way as for the Social Housing portfolio in Commercial Banking. For more on this, see the earlier section ‘Credit risk – Commercial Banking’. | |
96 Santander UK plc
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CORPORATE CENTRE – CREDIT RISK – CORPORATE CENTREREVIEW
Credit risk arises on assets in the balance sheet and in off-balance sheet transactions. Consequently,We show the committed exposure (whichin the tables below. This takes into account our procedures to mitigate credit mitigation procedures) is shown in the tables below.risk. It also excludes Sovereign exposures managed by Short Term Markets withinin Global Corporate & Institutional Banking.
Corporate Centre – committed exposures
Rating distribution
The rating distributionThese tables below show theour credit risk exposure by Santander UK’saccording to our internal rating scale (see the ‘Credit quality’ section) for each portfolio. WithinOn this scale, the higher the rating, the better the quality of the counterparty.
| Sovereign and | Structured | Derivatives | Legacy Portfolios | Social | Total | Sovereign and Supranational £m | Structured Products £m | Derivatives
£m | Legacy Portfolios £m | Social Housing £m | Total
£m | |||||||||||||||||||||||||||||||||||||
| Supranational | Products | in run-off | Housing | |||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
9 | 24,153 | 1,437 | – | – | 3,423 | 29,013 | ||||||||||||||||||||||||||||||||||||||||||
8 | – | 1,394 | 484 | 1 | 2,940 | 4,819 | ||||||||||||||||||||||||||||||||||||||||||
7 | – | 761 | 268 | 6 | 1,072 | 2,107 | ||||||||||||||||||||||||||||||||||||||||||
6 | – | – | 21 | 702 | 213 | 936 | ||||||||||||||||||||||||||||||||||||||||||
5 | – | – | – | 164 | – | 164 | ||||||||||||||||||||||||||||||||||||||||||
4 | – | – | – | 146 | – | 146 | ||||||||||||||||||||||||||||||||||||||||||
1 to 3 | – | – | – | 84 | – | 84 | ||||||||||||||||||||||||||||||||||||||||||
Other(1) | – | – | – | 596 | – | 596 | ||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | 24,153 | 3,592 | 773 | 1,699 | 7,648 | 37,865 | |||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
9 | 29,029 | 1,558 | – | – | 2,784 | 33,371 | 29,029 | 1,558 | – | – | 2,784 | 33,371 | ||||||||||||||||||||||||||||||||||||
8 | – | 1,013 | 741 | 3 | 4,215 | 5,972 | – | 1,013 | 741 | 3 | 4,215 | 5,972 | ||||||||||||||||||||||||||||||||||||
7 | – | 753 | 561 | 615 | 1,485 | 3,414 | – | 753 | 561 | 615 | 1,485 | 3,414 | ||||||||||||||||||||||||||||||||||||
6 | – | – | – | 385 | 223 | 608 | – | – | – | 385 | 223 | 608 | ||||||||||||||||||||||||||||||||||||
5 | – | 7 | – | 136 | – | 143 | – | 7 | – | 136 | – | 143 | ||||||||||||||||||||||||||||||||||||
4 | – | – | – | 165 | – | 165 | – | – | – | 165 | – | 165 | ||||||||||||||||||||||||||||||||||||
1 to 3 | – | – | – | 89 | – | 89 | – | – | – | 89 | – | 89 | ||||||||||||||||||||||||||||||||||||
Other(1) | – | – | – | 774 | – | 774 | – | – | – | 774 | – | 774 | ||||||||||||||||||||||||||||||||||||
| 29,029 | 3,331 | 1,302 | 2,167 | 8,707 | 44,536 | ||||||||||||||||||||||||||||||||||||||||||
| 29,029 | 3,331 | 1,302 | 2,167 | 8,707 | 44,536 | |||||||||||||||||||||||||||||||||||||||||||
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2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
9 | 29,688 | 694 | – | 2 | 2,654 | 33,038 | ||||||||||||||||||||||||||||||||||||||||||
8 | – | 707 | 1,061 | 2 | 4,382 | 6,152 | ||||||||||||||||||||||||||||||||||||||||||
7 | – | 1,091 | 453 | 790 | 1,713 | 4,047 | ||||||||||||||||||||||||||||||||||||||||||
6 | – | 54 | – | 464 | 238 | 756 | ||||||||||||||||||||||||||||||||||||||||||
5 | – | 90 | – | 170 | – | 260 | ||||||||||||||||||||||||||||||||||||||||||
4 | – | 72 | – | 291 | – | 363 | ||||||||||||||||||||||||||||||||||||||||||
1 to 3 | – | 131 | – | 137 | – | 268 | ||||||||||||||||||||||||||||||||||||||||||
Other(1) | – | 27 | – | 1,007 | – | 1,034 | ||||||||||||||||||||||||||||||||||||||||||
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| 29,688 | 2,866 | 1,514 | 2,863 | 8,987 | 45,918 | |||||||||||||||||||||||||||||||||||||||||||
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(1) Represents smaller exposures predominantly within the commercial mortgage portfolio which are subject to scorecards rather than a rating model.
| (1) | Consists of smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model. |
| (2) | Consists of commercial mortgages and residual structured and asset finance loans (shipping, aviation, and structured finance). |
Annual Report 2015
Risk review
Credit risk
continued
Geographical distribution
TheWe classify geographical location is classified byaccording to country of risk being– in other words, the country where each counterparty’scounterparty has its main business activity or assets are located. For clients whose operations are more geographically dispersed,unless there is a full risk transfer guarantee in place, in which case we use the guarantor’s country of incorporation is applied.domicile instead. If our clients have operations in many countries, we use their country of incorporation.
| Sovereign and | Structured | Derivatives | Legacy Portfolios | Social | Total | Sovereign and Supranational £m | Structured Products £m | Derivatives
£m | Legacy Portfolios £m | Social Housing £m | Total
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2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
UK | 19,354 | 1,202 | 289 | 1,420 | 7,648 | 29,913 | ||||||||||||||||||||||||||||||||||||||||||
Peripheral eurozone | – | 2 | – | 8 | – | 10 | ||||||||||||||||||||||||||||||||||||||||||
Rest of Europe | 1,093 | 1,546 | 194 | 27 | – | 2,860 | ||||||||||||||||||||||||||||||||||||||||||
US | 2,526 | 50 | 290 | 21 | – | 2,887 | ||||||||||||||||||||||||||||||||||||||||||
Rest of world | 1,180 | 792 | – | 223 | – | 2,195 | ||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | 24,153 | 3,592 | 773 | 1,699 | 7,648 | 37,865 | |||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
UK | 22,621 | 966 | 285 | 1,706 | 8,707 | 34,285 | 22,621 | 966 | 285 | 1,706 | 8,707 | 34,285 | ||||||||||||||||||||||||||||||||||||
Peripheral eurozone | – | 73 | – | 20 | – | 93 | – | 73 | – | 20 | – | 93 | ||||||||||||||||||||||||||||||||||||
Rest of Europe | 553 | 1,544 | 581 | 36 | – | 2,714 | 553 | 1,544 | 581 | 36 | – | 2,714 | ||||||||||||||||||||||||||||||||||||
US | 4,823 | 85 | 436 | 25 | – | 5,369 | 4,823 | 85 | 436 | 25 | – | 5,369 | ||||||||||||||||||||||||||||||||||||
Rest of world | 1,032 | 663 | – | 380 | – | 2,075 | 1,032 | 663 | – | 380 | – | 2,075 | ||||||||||||||||||||||||||||||||||||
| 29,029 | 3,331 | 1,302 | 2,167 | 8,707 | 44,536 | ||||||||||||||||||||||||||||||||||||||||||
| 29,029 | 3,331 | 1,302 | 2,167 | 8,707 | 44,536 | |||||||||||||||||||||||||||||||||||||||||||
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2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
UK | 24,036 | 880 | 453 | 2,241 | 8,987 | 36,597 | ||||||||||||||||||||||||||||||||||||||||||
Peripheral eurozone | – | 329 | – | 59 | – | 388 | ||||||||||||||||||||||||||||||||||||||||||
Rest of Europe | 53 | 1,207 | 600 | 63 | – | 1,923 | ||||||||||||||||||||||||||||||||||||||||||
US | 5,230 | 422 | 461 | 80 | – | 6,193 | ||||||||||||||||||||||||||||||||||||||||||
Rest of world | 369 | 28 | – | 420 | – | 817 | ||||||||||||||||||||||||||||||||||||||||||
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| 29,688 | 2,866 | 1,514 | 2,863 | 8,987 | 45,918 | |||||||||||||||||||||||||||||||||||||||||||
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20142015 compared to 20132014(unaudited)
During 2014, totalIn 2015, committed exposures decreased by £1.4bn£6.7bn or 3%15% to £44.5bn principally within the£37.9bn mainly in our Sovereign and Supranational portfolio and Legacy Portfolios in run-off, partially offset by an increase in Structured Products.
portfolio. Sovereign and Supranationals exposures principally reflectmostly are cash at central banks and holdings of highly-rated liquid assets as part of normal liquid asset portfolio management, and remained concentrated in the UK and US in 2014. Exposures to the UK and the US decreased as increased exposures to the Rest of Europe were taken in 2014, mainly related to bonds guaranteed by the German Government. The increase in exposures to the Rest of World reflected additional exposures to highly-rated Supranationals.
Structured Products exposures represent holdings of good credit quality rated covered bonds, floating rate notes and residential mortgage-backed securitieswe hold as part of normal liquid asset portfolio management. The increaseoverall decrease in exposures in 20142015 was driven by the reduction of UK Government securities and deposits in the US. The increase in Rest of Europe exposures was mainly issues guaranteed by the German and Austrian Governments.
The increase in Structured Products exposures in 2015 reflected the purchase of highly-ratedsecuritisations in the UK, and covered bonds,bond issuances mainly issued by Australian and Canadian banks primarilyand mostly with maturities of less than five years.
Derivative exposures decreased in the year due2015 as we continued to the continued managed reduction of thereduce this portfolio.
Legacy Portfolios in run-off decreased across all geographies andfurther in 2015 due to our ongoing exit strategy. A recalibration of the internal credit rating model for this portfolio during the year resulted in some movements, mainly between rating bands 6 and 7, but on a like-for-like basis there has been no reduction in 2014 as we continued to successfully implement our on-going exit strategy.the overall credit quality of the book.
Social Housing exposures reduced in 20142015 as a result of on-going refinancing ofwe continued to refinance longer-dated loans onto shorter maturities and(and on current market terms.terms) that are then managed in Commercial Banking.
Corporate Centre – credit risk mitigation
Most Structured Products are unsecured but benefit from senior positions in the creditor hierarchy. We reduce credit risk in derivatives with netting agreements, collateralisation and the use of CCPs. For details of our approach to credit risk mitigation, see the ‘Credit Risk Management – Global Corporate Banking’ section.
At 31 December 2015 we had cash collateral of £551m (2014: £670m) held against our Legacy Portfolios in run-off. The collateral we held against impaired loans was 100% (2014: 100%) of the impaired loan balances.
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Corporate Centre – credit risk mitigation
Structured Products are unsecured but benefit from senior positions in the creditor cascade. Credit risk in derivatives is mitigated by netting agreements, collateralisation and the use of CCPs. For details of the approach to credit risk mitigation, see ‘Credit Risk Management – Corporate & Institutional Banking’.
In the Legacy Portfolios in run-off, at 31 December 2014, collateral held against impaired loans amounted to 51% (2013: 62%) of the carrying amount of impaired loan balances, of which cash collateral of £670m (2013: £752m) was held. At 31 December 2014, of the aviation portfolio of £225m (2013: £406m), £194m (2013: £335m) was asset-backed and £31m (2013: £71m) was receivables-backed. Of the asset-backed loans, 96% (2013: 92%) had a collateral value in excess of the loan value.
At 31 December 2014, of the shipping portfolio of £289m (2013: £417m), £196m (2013: £324m) was asset-backed and £93m (2013: £93m) was backed by cash or bank guaranteed. Of the asset-backed loans, 47% (2013: 55%) had a collateral value in excess of the loan value. Collateral is rarely taken into possession, (2014: £nil, 2013: £23m) and Santander UK seeks to ensure the disposal of any collateral, either consensually or via an insolvency process, as early as practical in order to minimise its loss.
Corporate Centre – credit performance
Exposures exhibitingWe monitor exposures that show potentially higher risk characteristics are subject to risk monitoring under theusing our Watchlist process (described in ‘Risk monitoring’ in the ‘Credit risk management’ section). The table below sets outshows the portfolio showing exposures subject to risk monitoring under the Watchlist processwe monitor, and those classifiedwe classify as non-performing by portfolio at 31 December 20142015 and 2013:2014:
| Sovereign and | Structured | Derivatives | Legacy Portfolios | Social | Total | Sovereign and Supranational £m | Structured Products £m | Derivatives
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2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 24,153 | 3,592 | 773 | 1,699 | 7,648 | 37,865 | ||||||||||||||||||||||||||||||||||||||||||
– Performing (Non-Watchlist) | 24,153 | 3,592 | 773 | 1,493 | 7,574 | 37,585 | ||||||||||||||||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | – | – | – | 102 | 74 | 176 | ||||||||||||||||||||||||||||||||||||||||||
– Watchlist: Proactive Management | – | – | – | 10 | – | 10 | ||||||||||||||||||||||||||||||||||||||||||
– Non-performing exposure(2) | – | – | – | 94 | – | 94 | ||||||||||||||||||||||||||||||||||||||||||
Total impaired exposure of which: | – | – | – | 94 | – | 94 | ||||||||||||||||||||||||||||||||||||||||||
– Performing | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | – | 94 | – | 94 | ||||||||||||||||||||||||||||||||||||||||||
Total Observed impairment loss allowances of which: | – | – | – | 55 | – | 55 | ||||||||||||||||||||||||||||||||||||||||||
– Performing | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | – | 55 | – | 55 | ||||||||||||||||||||||||||||||||||||||||||
IBNO(3) | 47 | |||||||||||||||||||||||||||||||||||||||||||||||
Total impairment loss allowance | 102 | |||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 29,029 | 3,331 | 1,302 | 2,167 | 8,707 | 44,536 | 29,029 | 3,331 | 1,302 | 2,167 | 8,707 | 44,536 | ||||||||||||||||||||||||||||||||||||
– Performing (Non-Watchlist) | 29,029 | 3,331 | 1,302 | 1,917 | 8,707 | 44,286 | 29,029 | 3,331 | 1,302 | 1,917 | 8,707 | 44,286 | ||||||||||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | – | – | – | 94 | – | 94 | – | – | – | 94 | – | 94 | ||||||||||||||||||||||||||||||||||||
– Watchlist: Proactive Management | – | – | – | 14 | – | 14 | – | – | – | 14 | – | 14 | ||||||||||||||||||||||||||||||||||||
– Non-performing exposure(2) | – | – | – | 142 | – | 142 | – | – | – | 142 | – | 142 | ||||||||||||||||||||||||||||||||||||
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Total impaired exposure of which: | – | – | – | 238 | – | 238 | – | – | – | 238 | – | 238 | ||||||||||||||||||||||||||||||||||||
– Performing | – | – | – | 96 | – | 96 | – | – | – | 96 | – | 96 | ||||||||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | – | 142 | – | 142 | – | – | – | 142 | – | 142 | ||||||||||||||||||||||||||||||||||||
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Total Observed impairment loss allowances of which: | – | – | – | 109 | – | 109 | – | – | – | 109 | – | 109 | ||||||||||||||||||||||||||||||||||||
– Performing | – | – | – | 31 | – | 31 | – | – | – | 31 | – | 31 | ||||||||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | – | 78 | – | 78 | – | – | – | 78 | – | 78 | ||||||||||||||||||||||||||||||||||||
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IBNO(3) | 71 | 71 | ||||||||||||||||||||||||||||||||||||||||||||||
Total impairment loss allowance | 180 | 180 | ||||||||||||||||||||||||||||||||||||||||||||||
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2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Committed Exposure of which:(1) | 29,688 | 2,866 | 1,514 | 2,863 | 8,987 | 45,918 | ||||||||||||||||||||||||||||||||||||||||||
– Performing (Non-Watchlist) | 29,688 | 2,829 | 1,514 | 2,389 | 8,869 | 45,289 | ||||||||||||||||||||||||||||||||||||||||||
– Watchlist: Enhanced Monitoring | – | 37 | – | 173 | 118 | 328 | ||||||||||||||||||||||||||||||||||||||||||
– Watchlist: Proactive Management | – | – | – | 72 | – | 72 | ||||||||||||||||||||||||||||||||||||||||||
– Non-performing exposure(2) | – | – | – | 229 | – | 229 | ||||||||||||||||||||||||||||||||||||||||||
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Total impaired exposure of which: | – | – | – | 434 | – | 434 | ||||||||||||||||||||||||||||||||||||||||||
– Performing | – | – | – | 205 | – | 205 | ||||||||||||||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | – | 229 | – | 229 | ||||||||||||||||||||||||||||||||||||||||||
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Total Observed impairment loss allowances of which: | – | – | – | 161 | – | 161 | ||||||||||||||||||||||||||||||||||||||||||
– Performing | – | – | – | 54 | – | 54 | ||||||||||||||||||||||||||||||||||||||||||
– Non-performing(2) | – | – | – | 107 | – | 107 | ||||||||||||||||||||||||||||||||||||||||||
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IBNO(3) | 116 | |||||||||||||||||||||||||||||||||||||||||||||||
Total impairment loss allowance | 278 | |||||||||||||||||||||||||||||||||||||||||||||||
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(1) Includes committed facilities and derivatives. The terms ‘Enhanced Monitoring’ and ‘Proactive Management’ are defined in the ‘Risk Monitoring ‘section of the Risk Review.
(2) Non-performing exposure in the table above include committed facilities and derivative exposures and therefore can be larger than the NPLs in the table on page 88 which only include drawn balances.
(3) Allowance for incurred inherent losses (i.e. incurred but not observed (‘IBNO’)) as described in Note 1 to the Consolidated Financial Statements.
Non-core customer assets inconsistent with Santander UK’s business strategy at 31 December 2014 comprised Social Housing of £6.7bn (2013: £7.1bn), and Legacy Portfolios in run-off consisting of Commercial Mortgages of £0.9bn (2013: £1.2bn), Aviation of £0.2bn (2013: £0.4bn), Shipping of £0.2bn (2013: £0.4bn), and Others of £0.2bn (2013: £0.3bn).
| (1) | Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Risk Monitoring‘ section. |
| (2) | Non-performing exposure includes committed facilities and derivative exposures. So it can be bigger than the NPLs in the table on page 100 which only include drawn balances. |
| (3) | Allowance for incurred but not observed (IBNO) losses as described in Note 1 to the Consolidated Financial Statements. |
Annual Report 2015
Risk review
Credit risk
continued
Non-performing loans and advances(1)(2)
An analysis ofWe analyse Corporate Centre NPLs is presented below.
| 2014 | 2013 | |||||||
| £m | £m | |||||||
Loans and advances to customers of which:(2) | 8,276 | 9,360 | ||||||
Customers in arrears | 145 | 239 | ||||||
NPLs(3) | 134 | 221 | ||||||
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Impairment loan loss allowances | 180 | 278 | ||||||
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Arrears ratio(4) | 1.75 | 2.55 | ||||||
NPLs ratio(5) | 1.62 | 2.36 | ||||||
Coverage ratio(6) | 134 | 125 | ||||||
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| 2015 £m | 2014 £m | |||||||
Loans and advances to customers of which:(2) | 7,391 | 8,276 | ||||||
NPLs(3) | 87 | 134 | ||||||
Impairment loan loss allowances | 102 | 180 | ||||||
| % | % | |||||||
NPLs ratio(4) | 1.18 | 1.62 | ||||||
Coverage ratio(5) | 117 | 134 | ||||||
(1) Loans and advances are classified as non-performing in accordance with the definitions provided in the ‘Credit risk management’ section.
| (1) | We define NPLs in the ‘Credit risk management’ section. |
| (2) | Include Social Housing loans and finance leases. |
| (3) | All NPLs are in the UK and continue accruing interest. The balances include interest we’ve charged to the customer’s account. They don’t include accrued interest we haven’t charged to the account yet. |
| (4) | NPLs as a percentage of loans and advances to customers. |
| (5) | Total impairment loan loss allowances, as a percentage of NPLs. Total loan loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio is more than 100%. |
(2) Include Social Housing loans and finance leases.
(3) All NPL balances are UK based and continue accruing interest. For the data presented, the balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account.
(4) Loans and advances to customers in arrears as a percentage of loans and advances to customers.
(5) NPLs as a percentage of loans and advances to customers.
(6) Total impairment loan loss allowances, as a % of NPL stock. Total loan loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as accounts classified as NPL and hence the ratio exceeds 100%.
An analysis of theWe analyse NPL movements during 2014 is presentedin 2015 below. ‘Entries’ representare loans which we have become classified as NPLs duringin the year. ‘Exits (including repayments)’ represent that elementare the part of loans that havehas been repaid (in full or in part) plus thoseloans that returned to performing status. ‘Write-offs’ representare the unrecovered elementpart of a loanloans where we have exhausted recovery options, including realisation ofrealising any collateral, have been exhausted.collateral. Forbearance activity does not result in a change in the NPL status.
20142015 compared to 20132014(unaudited)
Watchlist exposures subject to proactive management reduced to £14mwere stable at £10m at 31 December 2014 (2013: £72m)2015 (2014: £14m). Watchlist exposures subject to enhancingenhanced monitoring also reducedincreased to £94m (2013: £328m). The only Watchlist exposures arose in£176m (2014: £94m) due to the Legacy Portfolios in run-off and, in 2013 in Social Housing.
Legacy Portfolios in run-off exposures subject to Watchlist decreased as a consequenceaddition of the strategy to exit these exposures. Similarly, the level of provision decreased during the year reflecting disposal of assets.two Social Housing exposures subject to enhanced monitoring decreased following the resolution of governance issues as anticipated.cases.
Loans and advances to customers in arrearsNPLs decreased to £145m£87m at 31 December 2014 (2013: £239m)2015 (2014: £134m) as we continued to execute the strategy of exiting problemexit from exposures through sale of the debt or through the realisation of the collateral. The arrears ratio decreased to 1.75% (2013: 2.55%) as a result of the decrease in arrears described above which was achieved at a slightly faster rate than theline with our run-off of the loans and advances.strategy. The NPL ratio decreased to 1.18% (2014: 1.62% at 31 December 2014 (2013: 2.36%) for the same reason. In 2015, the coverage ratio decreased to 117% (2014: 134%), reflecting the continuing strategy to exitexits from exposures where possible. In 2014, coverage increased to 134% (2013: 125%) reflecting the successful disposal programme without incurring significant further losses.
In 2014, interest income recognised on impaired loans amounted to £4m (2013: £9m, 2012: £13m).
100 Santander UK plc
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Corporate Centre – forbearance
Forbearance commenced during the year(1)
Forbearance arrangementsWe have only been entered into with respect tomade forbearance arrangements for the Legacy Portfolios in run-off.
Forbearance started in the year(1)
The exposures that entered forbearance during the years endedin 2015 and 2014 were:
| 2015 | 2014 | |||||||
| £m | £m | |||||||
Term extension | – | 41 | ||||||
Interest-only | 7 | 13 | ||||||
Other payment rescheduling | 6 | 22 | ||||||
| 13 | 76 | |||||||
| (1) | The figures by year reflect the forbearance undertaken in the year irrespective of whether there was any previous forbearance on the accounts. |
a) Performance status when entering forbearance
The forborne exposures at 31 December 2015 and 2014 and 2013 were:when they originally entered forbearance, analysed by their payment status, was:
| 2014 | 2013 | Term extensions | Interest-only | Other payment rescheduling | Total | Impairment allowance | ||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
Payment rescheduling | 22 | 11 | ||||||||||||||||||||||||||||||||||||
Term extensions | 41 | 2 | ||||||||||||||||||||||||||||||||||||
Interest-only | 13 | 36 | ||||||||||||||||||||||||||||||||||||
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| 76 | 49 | |||||||||||||||||||||||||||||||||||||
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(1) The figures by year reflect the amount of forbearance activity undertaken during the year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.
a) Performance status when entering forbearance The forborne exposures at 31 December 2014 and 2013 when they originally entered forbearance, analysed by their payment status, was:
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| Payment | Term extensions | Interest-only | Total | Impairment | ||||||||||||||||||||||||||||||||||
| rescheduling | allowance | |||||||||||||||||||||||||||||||||||||
2015(1) | ||||||||||||||||||||||||||||||||||||||
Forbearance of NPL | – | 5 | 4 | 9 | 2 | |||||||||||||||||||||||||||||||||
Forbearance of Non-NPL | 36 | 46 | 29 | 111 | 26 | |||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | 36 | 51 | 33 | 120 | 28 | |||||||||||||||||||||||||||||
2014(1) | ||||||||||||||||||||||||||||||||||||||
Forbearance of NPL | 8 | – | 10 | 18 | 8 | – | 10 | 8 | 18 | 8 | ||||||||||||||||||||||||||||
Forbearance of Non-NPL | 188 | 61 | 64 | 313 | 42 | 61 | 64 | 188 | 313 | 42 | ||||||||||||||||||||||||||||
| 61 | 74 | 196 | 331 | �� | 50 | ||||||||||||||||||||||||||||||||
(1) We categorise forbearance types based on the first forbearance on the accounts. Tables only show accounts open at the end of the year.
b) Performance status at the year-end The current status of forborne exposures analysed by their payment status, at 31 December 2015 and 2014 was:
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(1) We categorise forbearance types based on the first forbearance on the accounts. Tables only show accounts open at the end of the year.
b) Performance status at the year-end The current status of forborne exposures analysed by their payment status, at 31 December 2015 and 2014 was:
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| Term extensions | Interest-only | Other payment rescheduling | Total | Impairment allowance | ||||||||||||||||||||||||||||||||||
| 196 | 61 | 74 | 331 | 50 | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||
2015(1) | ||||||||||||||||||||||||||||||||||||||
Non-performing | 21 | 8 | 7 | 36 | 26 | |||||||||||||||||||||||||||||||||
Performing | 15 | 43 | 26 | 84 | 2 | |||||||||||||||||||||||||||||||||
| 36 | 51 | 33 | 120 | 28 | |||||||||||||||||||||||||||||||||
2013(1) | ||||||||||||||||||||||||||||||||||||||
Forbearance of NPL | 6 | 16 | 36 | 58 | 18 | |||||||||||||||||||||||||||||||||
Forbearance of Non-NPL | 188 | 32 | 102 | 322 | 32 | |||||||||||||||||||||||||||||||||
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| 194 | 48 | 138 | 380 | 50 | ||||||||||||||||||||||||||||||||||
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(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
b) Performance status at the year-end The current status of forborne exposures analysed by their payment status, at 31 December 2014 and 2013 was:
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| Payment | Term extensions | Interest-only | Total | Impairment | ||||||||||||||||||||||||||||||||||
| rescheduling | allowance | |||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||
Proportion of Legacy Portfolios in run-off | 2.1% | 3.0% | 1.9% | 7.0% | ||||||||||||||||||||||||||||||||||
2014(1) | ||||||||||||||||||||||||||||||||||||||
Non-performing | 8 | 49 | 29 | 86 | 47 | 49 | 29 | 8 | 86 | 47 | ||||||||||||||||||||||||||||
Performing | 188 | 12 | 45 | 245 | (2) | 3 | 12 | 45 | 188 | 245 | 3 | |||||||||||||||||||||||||||
| 61 | 74 | 196 | 331 | 50 | |||||||||||||||||||||||||||||||||
| 196 | 61 | 74 | 331 | 50 | ||||||||||||||||||||||||||||||||||
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Proportion of Legacy Portfolios in run-off | 9.0% | 2.8% | 3.4% | 15.3% | 2.8% | 3.4% | 9.0% | 15.3% | ||||||||||||||||||||||||||||||
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2013(1) | ||||||||||||||||||||||||||||||||||||||
Non-performing | 7 | 15 | 52 | 74 | 37 | |||||||||||||||||||||||||||||||||
Performing | 187 | 33 | 86 | 306 | (2) | 13 | ||||||||||||||||||||||||||||||||
| 194 | 48 | 138 | 380 | 50 | ||||||||||||||||||||||||||||||||||
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Proportion of Legacy Portfolios in run-off | 6.8% | 1.7% | 4.8% | 13.3% | ||||||||||||||||||||||||||||||||||
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(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
(2) This represents the carrying amount of financial assets that may otherwise be past due or impaired whose terms have been forborne.
| (1) | We categorise forbearance types based on the first forbearance on the accounts. Tables only show accounts open at the end of the year. |
20142015 compared to 20132014(unaudited)
In 2014, the level of new2015, we carried out less forbearance undertaken during the year increased in theour Legacy Portfolios in run-off. Howeverrun-off due to the reducing portfolio and lower incidence of financial difficulty. The cumulative stock of forborne exposure reduced duringsignificantly in the year as the strategywe continued to exit these exposures continued to be executed where we saw the opportunity arose. An element of the residual forborne exposure is expected to take longer to exit given their profile and the more limited market appetite for the purchase or refinancing of certain assets.
Annual Report 2015
Risk review
Market risk
continued
Market risk comprises trading market risk and banking market risk. Trading market risk is the risk of losses in balance sheet and off-balance sheet positions arising from movements in market prices. Banking market risk includes exposures arising as a result of the structure of portfolios of assets and liabilities. Banking market risk is classified as a balance sheet management risk and is discussed in the balance sheet management risk section. Santander UK’s exposure to market risk arises in the following business segments:
Market risk comprises trading market risk and banking market risk. Trading market risk |
Banking market risk is the risk of loss of income or economic value due to changes to interest rates in the The current low rate environment remains a key concern for the
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In this section, we set out which of our assets and liabilities are exposed to trading and banking market |
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Balance sheet allocation by market risk classification
Santander UK’s assets and liabilities subject to market risk may be analysed between trading and banking market risk classification as follows:
| 2014 | 2013 | |||||||||||||||||||||||||||||
| Market risk classification | Market risk classification | |||||||||||||||||||||||||||||
| Trading | Banking | Total | Trading | Banking | Total | |||||||||||||||||||||||||
| risk | risk | balance | risk | risk | balance | |||||||||||||||||||||||||
| sheet | sheet | |||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | Key risk factors | ||||||||||||||||||||||||
Assets subject to market risk | ||||||||||||||||||||||||||||||
Cash and balances at central banks | – | 21,104 | 21,104 | – | 25,160 | 25,160 | Interest rate, foreign exchange | |||||||||||||||||||||||
Trading assets | 21,700 | – | 21,700 | 22,294 | – | 22,294 | Equity, foreign exchange, interest rate | |||||||||||||||||||||||
Derivative financial instruments | 18,760 | 4,261 | 23,021 | 15,733 | 4,316 | 20,049 | Equity, foreign exchange, interest rate | |||||||||||||||||||||||
Financial assets designated at fair value | 433 | 2,448 | 2,881 | 372 | 2,375 | 2,747 | Interest rate, credit spread | |||||||||||||||||||||||
Loans and advances to banks | – | 2,057 | 2,057 | – | 2,347 | 2,347 | Foreign exchange, interest rate | |||||||||||||||||||||||
Loans and advances to customers | – | 188,691 | 188,691 | – | 184,587 | 184,587 | Interest rate | |||||||||||||||||||||||
Available-for-sale securities | – | 8,944 | 8,944 | – | 5,005 | 5,005 | Foreign exchange, interest rate, inflation, | |||||||||||||||||||||||
| credit spread | ||||||||||||||||||||||||||||||
Loans and receivables securities | – | 118 | 118 | – | 1,101 | 1,101 | Foreign exchange, interest rate | |||||||||||||||||||||||
Macro hedge of interest rate risk | – | 963 | 963 | – | 769 | 769 | Interest rate | |||||||||||||||||||||||
Retirement benefit assets | – | 315 | 315 | – | 118 | 118 | Equity, foreign exchange, interest rate, | |||||||||||||||||||||||
| inflation, credit spread | ||||||||||||||||||||||||||||||
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| 40,893 | 228,901 | 269,794 | 38,399 | 225,778 | 264,177 | |||||||||||||||||||||||||
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Liabilities subject to market risk | ||||||||||||||||||||||||||||||
Deposits by banks | – | 8,214 | 8,214 | – | 8,696 | 8,696 | Foreign exchange, interest rate | |||||||||||||||||||||||
Deposits by customers | – | 153,606 | 153,606 | – | 147,167 | 147,167 | Interest rate | |||||||||||||||||||||||
Derivative financial instruments | 19,241 | 3,491 | 22,732 | 16,294 | 2,569 | 18,863 | Equity, foreign exchange, interest rate | |||||||||||||||||||||||
Trading liabilities | 15,333 | – | 15,333 | 21,278 | – | 21,278 | Equity, foreign exchange, interest rate | |||||||||||||||||||||||
Financial liabilities designated at fair value | – | 2,848 | 2,848 | – | 3,407 | 3,407 | Interest rate, credit spread | |||||||||||||||||||||||
Debt securities in issue | – | 51,790 | 51,790 | – | 50,870 | 50,870 | Foreign exchange, interest rate | |||||||||||||||||||||||
Subordinated liabilities | – | 4,002 | 4,002 | – | 4,306 | 4,306 | Foreign exchange, interest rate | |||||||||||||||||||||||
Macro hedge of interest rate risk | – | 139 | 139 | – | – | – | ||||||||||||||||||||||||
Retirement benefit obligations | – | 199 | 199 | – | 672 | 672 | Equity, foreign exchange, interest rate, | |||||||||||||||||||||||
| inflation, credit spread | ||||||||||||||||||||||||||||||
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| 34,574 | 224,289 | 258,863 | 37,572 | 217,687 | 255,259 | |||||||||||||||||||||||||
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Key metrics
NIM sensitivity to +50bps increased to £131m and to -50bps increased to £39m The movement in NIM sensitivities in 2015 was largely due to changes in the underlying models used for risk measurement purposes. The assumptions used in these have been updated to better reflect the current low rate environment. Economic Value of Equity (EVE) sensitivity to +50bps reduced to £86m and to -50bps reduced to £(54)m The decreases in 2015 largely reflected the increased volume of fixed rate assets left unhedged as well as the changes in the underlying models used for risk measurement purposes mentioned above. Available-for-sale securities three month stressed loss increased to £259m The increase in 2015 was largely due to more severe stresses to the underlying market risk factors to reflect a more prudent methodology, and changes in the composition of our bond portfolio as part of normal liquidity management activities. | ||
102 Santander UK plc
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For
BALANCE SHEET ALLOCATION BY MARKET RISK CLASSIFICATION
We analyse our assets and liabilities classified, either whollyexposed to market risk between trading and banking market risk as follows:
| 2015 | 2014 | |||||||||||||||||||||||||||
| Market risk classification | Market risk classification | |||||||||||||||||||||||||||
| Trading £m | Banking £m | Total £m | Trading £m | Banking £m | Total £m | Key risk factors | ||||||||||||||||||||||
Assets subject to market risk | ||||||||||||||||||||||||||||
Cash and balances at central banks | – | 16,842 | 16,842 | – | 21,104 | 21,104 | Interest rate, foreign exchange | |||||||||||||||||||||
Trading assets | 23,961 | – | 23,961 | 21,700 | – | 21,700 | Equity, foreign exchange, interest rate | |||||||||||||||||||||
Derivative financial instruments | 17,698 | 3,213 | 20,911 | 18,760 | 4,261 | 23,021 | Equity, foreign exchange, interest rate | |||||||||||||||||||||
Financial assets designated at fair value | 438 | 1,960 | 2,398 | 433 | 2,448 | 2,881 | Interest rate, credit spread | |||||||||||||||||||||
Loans and advances to banks | – | 3,548 | 3,548 | – | 2,057 | 2,057 | Foreign exchange, interest rate | |||||||||||||||||||||
Loans and advances to customers | – | 198,045 | 198,045 | – | 188,691 | 188,691 | Interest rate | |||||||||||||||||||||
Loans and receivables securities | – | 52 | 52 | – | 118 | 118 | Foreign exchange, interest rate | |||||||||||||||||||||
Available-for-sale securities | – | 9,012 | 9,012 | – | 8,944 | 8,944 | Foreign exchange, interest rate, inflation, credit spread | |||||||||||||||||||||
Macro hedge of interest rate risk | – | 781 | 781 | – | 963 | 963 | Interest rate | |||||||||||||||||||||
Retirement benefit assets | – | 556 | 556 | – | 315 | 315 | Equity, foreign exchange, interest rate, inflation, credit spread | |||||||||||||||||||||
| 42,097 | 234,009 | 276,106 | 40,893 | 228,901 | 269,794 | |||||||||||||||||||||||
Liabilities subject to market risk | ||||||||||||||||||||||||||||
Deposits by banks | – | 8,278 | 8,278 | – | 8,214 | 8,214 | Foreign exchange, interest rate | |||||||||||||||||||||
Deposits by customers | – | 164,074 | 164,074 | – | 153,606 | 153,606 | Interest rate | |||||||||||||||||||||
Trading liabilities | 12,722 | – | 12,722 | 15,333 | – | 15,333 | Equity, foreign exchange, interest rate | |||||||||||||||||||||
Derivative financial instruments | 17,950 | 3,558 | 21,508 | 19,241 | 3,491 | 22,732 | Equity, foreign exchange, interest rate | |||||||||||||||||||||
Financial liabilities designated at fair value | – | 2,016 | 2,016 | – | 2,848 | 2,848 | Interest rate, credit spread | |||||||||||||||||||||
Debt securities in issue | – | 49,615 | 49,615 | – | 51,790 | 51,790 | Foreign exchange, interest rate | |||||||||||||||||||||
Subordinated liabilities | – | 3,885 | 3,885 | – | 4,002 | 4,002 | Foreign exchange, interest rate | |||||||||||||||||||||
Macro hedge of interest rate risk | – | 110 | 110 | – | 139 | 139 | Interest rate | |||||||||||||||||||||
Retirement benefit obligations | – | 110 | 110 | – | 199 | 199 | Equity, foreign exchange, interest rate, inflation, credit spread | |||||||||||||||||||||
| 30,672 | 231,646 | 262,318 | 34,574 | 224,289 | 258,863 | |||||||||||||||||||||||
We classify assets or partially,liabilities as trading market risk (in total or just in the previous table, the basis for that risk classification ispart) as follows:
Trading assets and liabilities
Assets and liabilities are classified as held for trading if they have been acquired or incurred principally for the purpose of selling or repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. These assets and liabilities are treated as trading risk.
Financial assets designated at fair value
Financial assets designated at fair value representing a portfolio of roll-up mortgages, as described in Note 16 to the Consolidated Financial Statements, are treated as trading risk; the remainder are treated as banking risk.
Derivative financial instruments
Derivatives are held for trading or for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedging relationship. Most derivative exposures arise from sales and trading activities and are treated as trading risk. Derivatives not risk managed on a trading intent basis are treated as banking risk. They include non-qualifying hedging derivatives and derivatives qualifying for fair value and cash flow hedge accounting. Details of derivatives in fair value and cash flow hedge accounting relationships, and the use of non-qualifying hedges are given in Note 15 to the Consolidated Financial Statements.
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Trading assets and liabilities | We classify all our trading portfolios as trading market risk. This is because we are planning to sell or repurchase them in the | |
Financial assets designated at fair value | We classify a portfolio of roll-up mortgages (loans which are repaid with interest once the borrower vacates the property) as trading market risk. This is because they are managed on a fair value basis in line with a documented strategy, and data on them is provided on that basis to management. For more, see Note 14 to the Consolidated Financial Statements. We classify all our other financial assets designated at fair value as banking market risk. | |
Derivative financial instruments | For accounting purposes, we classify derivatives as held for trading unless they are designated as being in a hedging relationship. Most of our derivative exposures arise from sales and trading activities and are treated as trading market risk. We treat derivatives not risk managed on a trading intent basis as banking market risk. They include non-qualifying hedging derivatives and derivatives qualifying for fair value and cash flow hedge accounting. For more on derivatives in hedge accounting relationships, and our use of non-qualifying hedges, see Note 13 to the Consolidated Financial Statements. | |
Managing and controlling market risk | ||
— | We include market risk in our Risk Appetite Framework.
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Annual Report 2015
Risk review
Market risk
continued
Our main exposure to trading market risk is in the Global Corporate Bank and is an inherent part of providing financial services for our customers. It comes from the provision of derivative products and services to corporate and business customers. It also comes from our short-term market activities and hedging of structured products designed for onward sale to retail and wholesale investors. The exposures are mainly affected by market movements in interest rates, equities, property, credit spreads, and foreign exchange. We have no exposures in Retail Banking, Commercial Banking, or Corporate Centre.
Trading market risk arisescan reduce our net income. Its effect can be seen in connection withour Consolidated Income Statement, where it appears in the provision of financial services for customers‘Net trading and the buying, selling and positioning mainly in fixed income, equities, foreign exchange and property markets. This trading activity may lead to a potential decline in net income due to variations in market factors including interest rates, inflation rates, equity indices, exchange rates, credit spreads, bond prices and property indices. Trading market risk is principally linked to potential variability in theother income’ line, under ‘Net trading and funding of other items by the trading book’ element of the ‘Net trading and other income’ line in the Consolidated Income Statement.
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Risk measures
Santander UK uses a comprehensive and complementary set of methodologies and techniques to measure trading market risk. One of the primary tools to measure and control market risk is a statistical risk measure, value at risk (‘VaR’).
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— | Our framework for dealing with market risk is part of our overall Risk Framework. The Market Risk Framework sets out our high-level arrangements and minimum standards for managing, controlling and overseeing trading market risk. | |
— | Our Risk Appetite sets the controls, risk limits and key risk metrics for trading market risk. The key risk metrics include a stress economic loss limit and risk-factor stress scenarios. We report these key metrics to the Board Risk Committee and the Executive Risk Committee each month. | |
Risk measures
We have a range of ways of measuring trading market risk, but one of the most important is a statistical measure based on a historical simulation of events called ‘Value at Risk’ (VaR).
VaR
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— | VaR estimates the maximum losses that we might suffer because of unfavourable changes in the markets. | |
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— | We work with three main types of VaR, | |
Internal VaR
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The limitations of VaR
The main limitation of VaR is that it assumes what happened in the past is a reliable way to predict what will happen in the future. If something that affected the markets over the past two years is no longer relevant, then the actual value at risk could be much more or less than the VaR predicts.
Sometimes it is obvious that the past data will not predict the future: there is unlikely to be enough data on the history of the market if a product is brand new, for example. In that case, we use proxy data – calculations of what might have happened if the product had existed. That helps make VaR data more complete, but it makes it less accurate. We control and keep a record of how we use proxy data.
Another limitation is that VaR is based on positions at the end of the business day. So the actual value at risk at 1pm could be higher than that at the end of the day. And, when we are calculating a ten-day time horizon using the square root of time approach, it means we do not capture the actual ten-day price movements. This can lead to under or over estimating the ten-day result. But we analyse this every quarter and the analysis is also sent to the PRA.
There is also the fact that VaR gives no guide to how big the loss could be on the 1% of trading days that it is greater than the VaR. To make up for that (and for other reasons), we use stress testing and expected shortfall, which we explain later in this section.
Using a time horizon of one day means VaR does not tell us everything about exposures that we cannot liquidate or hedge within a day, or products with infrequent pricing or whose structures are more complex. We monitor those exposures using illiquid risk metrics (explained in ‘Other ways of measuring risk’) and stress testing. In addition to the illiquid risk metric, to ensure such exposures are adequately included in our capital requirements the Risks Not in VaR (RNIV) framework has been developed.
In general, VaR takes account of the main ways risk factors affect each other, and the way most market movements affect valuations. But the more complex the products, and the larger the markets’ current movements, the less well the model is likely to fare.
Back-testing – comparing VaR estimates with reality
Every day, we back-test the one day 99% Internal and Regulatory VaR. That means looking at the VaR estimates for the last 250 days and seeing how they compare to the actual profits and losses. Or, to be more precise, how they compare to the market risk-related revenue, as the CRR and PRA define it. It is not normally possible to back-test the Stressed VaR model, because it is not intended to tell us anything about our performance in normal conditions.
To back-test VaR, we use a one-day time horizon. Our back-testing looks at two different types of profit and loss metrics:
| – | Actual Cleaned: trading profit and loss, less fees, commissions, brokerage, reserves that are not related to market risk, and day-one profits and losses |
| – | Hypothetical Cleaned: like the ‘Actual Cleaned’ type but also excluding intra-day figures and the effects of the passage of time. It is, in effect, just leaving the pure market risk driven effects on the profit and loss. |
Exceptions
Back-testing allows us to identify exceptions – times when the predictions were out of line with what happened. We can then look for trends in these exceptions, which can help us decide whether to change our VaR model.
The CRR sets out criteria for how many exceptions are acceptable. The PRA’s Supervisory Statements clarify them further. If there are five or more exceptions in 250 days, then points are added to our capital requirement multiplier. In 2015, as in 2014, no points were added to our multiplier, and we did not find any trends in the exceptions we experienced.
Other ways of measuring risk
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Risk review
Market risk
continued
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Stress testing
The Basel Capital Accord underlined that stress testing is an essential part of risk management. It helps us to measure and control the risk of losses in difficult, volatile or unusual markets, and makes us more transparent as the scenarios are easy to understand in headline terms.
Stress testing scenarios
The scenarios we use for stress testing are part of our process for setting our trading market risk appetite, and they are central to the monthly Board Risk Appetite reporting. These scenarios are also part of the daily processes for setting and monitoring risk management limits.
The scenarios we create are partly inspired by past events, like the global financial crisis. But they also include plausible ways that unusual market conditions could come about in future. This includes changes in things like interest rates, equity prices, exchange rates and credit spreads.
Some scenarios are more severe than others. We consider them all, along with VaR, so that we have a more complete and accurate idea of our overall risk profile. When we set the sizes of the ‘shocks’ (sudden market changes) in each scenario, we look at how long each different type of risk would last. This is because we can sell some assets more easily than others. If it would take a long time to sell a particular asset in the stressed circumstances, we need to apply a correspondingly large shock to that asset (as prices will move further over a longer time period).
That helps us to see how different amounts of liquidity in the markets would affect us if a ‘stress event’, such as an equity crash, happened. It is important to make sure that the stress result we report is as realistic as possible.
How we use stress testing
We use limits to manage how much risk we take. They are expressed as how much we could lose in a stress event. We need to make sure the effects of potential poor market conditions do not exceed the Risk Appetite set by the Board.
Each of our desks uses stress testing as part of their daily risk management metrics. We regularly inform senior managers – including the Executive and Board Risk Committees – about the results of our stress calculations, based on our current positions.
Capital requirement measures(unaudited)
Whenever we make changes to our models, we assess their effect on capital requirements. Sometimes that means we need to tell the PRA and get their approval before we can make the change.
The Internal Models Approach (IMA)
The PRA has given us permission to use the IMA, described in the CRR, and every three months the PRA reviews what we are doing. The IMA means we can use Regulatory and Stressed VaR and RNIV to calculate the capital requirement for the risk factors and businesses we have got PRA approval for.
The standardised approach
For risk factors and businesses not included in the IMA, we use the standardised approach set out by the CRR and PRA’s Supervisory Statements. At 31 December 2015, this amounted to 17% of our total market risk capital requirement.
Stressed versus Regulatory VaR
Stressed VaR is the biggest part of our trading market risk capital requirements. In 2015, it was an average of five times bigger than the Regulatory VaR part; in 2014 it was also five times bigger. The factors that had the biggest effect on Stressed VaR in 2015 were interest rate delta and interest rate basis, and in 2014 were interest rate delta, interest rate basis and equity volatility. (There is more explanation of each of those factors in the footnotes to the table below.)
The difference is caused by the way the market was behaving during the time the Stressed VaR data covers. We regularly check the stress period we use, to make sure we are using the worst period of stress since 2007 that is relevant to our portfolio.
Risks Not in VaR (RNIV) risk capital
In 2015, RNIV risk factors made up, on average, less than 5% (2014: 4%) of our IMA capital requirements for trading market risk. The biggest of these factors is dividend risk, caused by changes in market expectations about dividends. The VaR approach does not capture this risk very well because of the illiquid nature of the risk factor.
We normally find new RNIVs by analysing profit and loss, and new products. Then we include them in our calculation of our capital requirement, whether or not they are material at the time.
We can use two approaches to calculate how much RNIV capital we should hold, depending on what kind of market data is available. The first approach means doing a calculation like those for Regulatory and Stressed VaR. For this approach we also use a multiplication factor, following the CRR and PRA rules. The second approach is stress-based, using sensitivities and plausible stressed market moves.
At the moment, we only have stress-based RNIVs. And each individual RNIV value is independent, so it does not benefit from diversification in the capital requirements calculation.
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The following
Risk review
This table shows our Internal VaR for 2013, 2014 and 2015. There are figures for exposure to each of the Internal VaR-based consolidated exposuresmain classes of risk. And for the major risk classes at 31 December 2014, 2013 and 2012, together witheach year, we show the highest figures, the lowest, the average, and average exposures for each year. Exposures within each risk class reflect a range of exposures associated with movements in that financial market. those at the year end.
The VaR amounts representfigures show how much the potential change in fair values of trading instruments.all our tradeable instruments (like shares or bonds) could have changed. Since trading instruments are recorded at fair value, these are also the amounts also represent the potential effect onby which they could have increased or reduced our income.
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| Trading | Year-end exposure | Average exposure | Highest exposure | Lowest exposure | Year-end exposure | Average exposure | Highest exposure | Lowest exposure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| instruments | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2015 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2013 £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
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Interest rate risks(1) | 2.2 | 3.0 | 3.8 | 3.6 | 4.7 | 4.1 | 5.6 | 7.6 | 7.5 | 1.9 | 2.9 | 2.7 | 2.0 | 2.2 | 3.0 | 2.8 | 3.6 | 4.7 | 4.6 | 5.6 | 7.6 | 1.7 | 1.9 | 2.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity risks(2) | 0.6 | 1.4 | 1.8 | 1.0 | 1.9 | 2.2 | 1.9 | 4.6 | 5.0 | 0.5 | 0.7 | 1.4 | 0.8 | 0.6 | 1.4 | 0.7 | 1.0 | 1.9 | 1.1 | 1.9 | 4.6 | 0.5 | 0.5 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property risks(3) | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.2 | 0.2 | 0.1 | – | 0.1 | – | 0.1 | 0.1 | – | 0.1 | 0.1 | – | 0.1 | 0.2 | – | 0.1 | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit (spread) risks(4) | – | 0.3 | 0.2 | 0.2 | 0.4 | 0.2 | 0.6 | 1.0 | 0.8 | – | 0.2 | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit (spread) | – | – | 0.3 | – | 0.2 | 0.4 | 0.2 | 0.6 | 1.0 | – | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other risks(5) | 0.1 | – | 0.5 | – | 0.1 | 0.8 | 0.1 | 0.5 | 2.3 | – | – | 0.4 | 0.1 | 0.1 | – | 0.1 | – | 0.1 | 0.1 | 0.1 | 0.5 | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Correlation | (0.9 | ) | (0.6 | ) | (1.5 | ) | (0.9 | ) | (1.1 | ) | (2.2 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Correlation offsets(6) | (0.6 | ) | (1.5 | ) | (2.1 | ) | (1.1 | ) | (2.2 | ) | (2.7 | ) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total correlated | 2.0 | 2.4 | 3.3 | 2.7 | 3.8 | 5.0 | 4.7 | 6.3 | 8.0 | 1.6 | 1.9 | 3.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total correlated one-day VaR | 2.4 | 3.3 | 4.3 | 3.8 | 5.0 | 4.7 | 6.3 | 8.0 | 8.3 | 1.9 | 3.0 | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Annual Report 2015
Risk review
Balance sheet management risk
continued
Balance sheet management risk arises as a result of the structure of portfolios of assets and liabilities, or where the liquidity of the market is such that the exposure could not be closed out over a short-time horizon. The risk exposure is generated by features inherent in either a product or portfolio and normally presented over the life of the product or portfolio. Such exposures are a result of the decision to undertake specific business activities, can take a number of different forms, and are generally managed over a longer-time horizon. Balance sheet management risks are transferred from the originating business to FMIR in Corporate Centre where they are monitored, controlled and managed in conjunction with exposures arising from the funding and liquidity management activities of FMIR.
The key areas of balance sheet management risk, which are discussed in the sections that follow, are:
Banking market riskBANKING MARKET RISK
Banking market risk mainly arises through the provision ofcomes from providing banking products and services to personal and corporate customers – as well as structural exposures arising in Santander UK’sour balance sheet. Banking market riskIt arises in Retail Banking, Commercial Banking and Corporate Centre.
Banking market risks are originatedcome about in Retail Banking and Commercial Banking only as a by-product of writing customer businessbusiness. Our main exposures are interest rates (yield and are typically transferred from the originating business to Corporate Centre. Funds received with respect to deposits taken are lent onbasis), inflation and credit spreads. We transfer banking market risks in Retail Banking and Commercial Banking to Corporate Centre on matching termswho manage them. Corporate Centre also manages structural exposures arising in our balance sheet, such as regards interest rate re-pricingforeign exchange and maturity. In a similar manner, loans are funded through matching borrowings. Market risks arising from structured products, including exposure to changesincome statement volatility. We have no exposures in the levelsGlobal Corporate Banking.
The only kinds of equity markets, are hedged with Corporate & Institutional Banking. Materialmaterial banking market risk exposureswe keep in Retail Banking and Commercial Banking are transferred to and reside in Corporate Centre. Only short-term mismatches due to forecasting variances in prepayment and launch risk (i.e.– that is, where customers pre-pay loans before their contractual maturity or maydo not take the expected volume of new products) are retained in Retail Banking and Commercial Banking. In addition,products. Corporate Centre also manages structural exposures arising in theour balance sheet, are managed by Corporate Centre (e.g.such as foreign exchange and income statement volatility risk).
We have always treated Banking market risk as a significant risk. Due to global and domestic uncertainty following the financial crisis, we considered banking market risk to be an emerging and future risk. In recent years, the Base Rate has been held at historically low levels, and has been considered unlikely to rise. However, in 2015, the economic outlook for the UK and the expectation of interest rate rises increased. If the Base Rate does not rise as expected and continues to stay at current low levels, our net interest margins could be negatively impacted. In this context, we now consider Banking market risk to be a top risk. We continue to monitor events and forecasted rates closely while taking an enterprise wide approach to mitigate risks.
Our main exposures to banking market risks come from:
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Interest rate risk | The
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We monitor the market risks of these portfolios
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We mitigate this volatility For our accounting policies for derivatives and hedge accounting,
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Risk review
Balance sheet management risk
continued
Risk measures
For banking market risk, Santander UK predominantly measures itswe mainly measure our market risk exposures with both NIM and EVE sensitivity analysis supplemented– supported by the risk measures describedwe explained in the Trading market risk section.
NIM and EVE sensitivities
NIM and EVE sensitivity measures are commonly used throughoutin the financial services industry. The calculations for NIM and EVE sensitivities involve many assumptions, including expected customer behaviour (e.g.(such as early repayment of loans) and how interest rates may evolve. move.
These assumptions formare a key part of the overall control framework, so we update and are updated and reviewed on an on-going basis. Thereview them regularly. Our NIM and EVE sensitivities include the interest rate risk from all material Santander UKour banking book positions. TheOur banking book positions generate almost all theour reported net interest income in Santander UK.income.
NIM sensitivity
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We use sensitivities to measure the impact of standard, instantaneous, parallel shifts in relevant yield curves (using a 0% interest rate floor where needed). The advantage of using standard parallel shifts is they generally give us a constant measure of the size of our market risk exposure, with a simple and consistent stress. This compares to specific scenarios like ‘flat rates’. The magnitude of flat rates depends on the shape of the current curve and the shift required to reach the flat rate scenario. There is one exception to the relative simplicity of parallel shifts. In order to prevent negative interest rates, the yield curve may be ‘floored’ at 0%. Using material parallel shocks does not always seem realistic, or it might not necessarily test the scenarios that have the most impact on us. So we run non-parallel stress tests too – to calculate the impact of some plausible non-parallel scenarios, and over various time periods for income stresses (usually one or three years). | ||
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Stress testing
We use stress testing of market risk factors to complement the risk measurement we get from standard sensitivities. Simple stress tests (like parallel shifts in relevant curves), give us clear measures of risk control and a consistent starting point for setting limits. More complex, multi-factor and multi-time period stress tests can:
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We can also use stress tests to estimate losses in extreme market events beyond the confidence level used in VaR models.
We discuss stress testing results at senior level management committees. They affect Corporate Centre’s decisions by highlighting possible risks in the banking book and the effectiveness of remedial actions we could take. We compare stress test results with stress limits and triggers set by our internal committees, or against metrics set by the PRA. If the results are over our limits or triggers, we take remedial actions and follow an escalation process.
We can adapt stress tests to reflect current concerns or market conditions quicker than we can with other risk measures, like VaR. We can include both individual business area stresses and Santander UK-wide scenarios.
Our stress tests fall into one of these categories:
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Other ways of measuring risk
As well as using sensitivities and stress tests, we can measure banking market risk using net notional positions. This can give us a simple expression of our exposure, although it generally needs to be combined with other risk measures to cover all aspects of a risk profile (like projected changes over time).
Risk review
Balance sheet management risk
continued
Interest rate risk
Yield curve risk
The table below reflectsshows how our base case income and valuation across Santander UK would be affected by a 50 basis point parallel shift (both upwards and downwards) applied instantaneously to the yield curve at 31 December 20142015 and 2013.2014. Sensitivity to parallel shifts represents the quantumamount of risk in a mannerway that we think is considered to be both simple and scaleable.scalable. 50 basis points is the stress which is nowwe typically focussedfocus on for banking market risk controls, across Santander UK, although we also monitor sensitivities to other parallel shifts are also regularly monitored. This is a change from 2013 when sensitivities to a 100 basis point shift were shown, as the changing market conditions and the lower yield curve mean sensitivity to a 50 basis point shift is now considered a more appropriate risk measure.shifts.
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| +50bps | -50bps | +50bps | -50bps | 2015 | 2014 | |||||||||||||||||||||||||||||||
| £m | £m | £m | £m | +50bps £m | -50bps £m | +50bps £m | -50bps £m | |||||||||||||||||||||||||||||
NIM sensitivity | 15 | 5 | 90 | 85 | 131 | 39 | 15 | 5 | ||||||||||||||||||||||||||||
EVE sensitivity | 103 | (195 | ) | 26 | 65 | 86 | (54 | ) | 103 | (195 | ) | |||||||||||||||||||||||||
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The changemovement in sensitivities in 20142015 was largely attributabledue to a change in balance sheet product mix, and a changechanges in the modelling ofunderlying models used for risk measurement purposes. The assumptions used in these have been updated to better reflect the underlying pricing assumptions for administeredcurrent low rate products during the year to reflect current market conditions. This was partially offset by a rise in theenvironment. The increased volume of fixed rate assets left un-hedged.unhedged over the year also contributed to the increases. These increases were partially offset by growth in bank account liability volumes.
Basis risk
Santander UK is exposed toWe measure basis risks associated with Bank of Englandrisk using various risk measures, including VaR. The VaR measure uses the same VaR methodology as our trading book. The Basis Risk VaR at 31 December 2015 was £1m (2014: £3m). It reflects our basis risk exposure between the Base Rate, reserve rate linked assets deposited with central banks, the Sterling Overnight Index Average (‘SONIA’)(SONIA) rate and between LIBOR rates of different terms. Basis risk is measured using a variety of risk measures, including VaR. The VaR measure uses the same VaR methodology as that for the trading book. The Basis Risk VaR at 31 December 2014 was £3m (2013: £8m). It reflects the basis risk exposure between Bank of England Base Rate and LIBOR. The decrease in Basis VaR during 2014reduction was largely due to growth in bank account liability volumes and a continued reduction in SVR mortgages. This was partially offset by including ten years of market data in the natural evolutionVaR model, instead of the balance sheet leading to a reduced underlying net basis position.only two years, which resulted in more severe stresses being applied.
Inflation and spread risks
The VaR of the portfolios of securities we held for liquidity and investment purposes at 31 December 20142015 was £5m (2013:£3m (2014: £5m). The main risk factors areremain the inflation and spread risk exposures of these positions. These portfolios areThe reduction in VaR in 2015 was mainly due to a decrease in inflation risk driven by the ageing of the index-linked gilt portfolio.
We regularly stress testedtest these portfolios against a variety of historical and hypothetical scenarios. There are limits established againstUsing the potentialpossible losses estimated bywe estimate from the stress tests, we establish limits that complement theour VaR-based limits discussed above.limits. At 31 December 2014,2015, using historic deterministic stress tests, we estimated the worst three month stressed loss for these portfolios was estimated to be £218m (2013: £139m) using historic deterministic stress tests.£259m (2014: £218m). The increase in stressed loss in 20142015 was due to more severe stresses being applied to the underlying market risk factors to reflect increased macro-economic uncertainties as well asa more prudent methodology, and changes in the composition of theour bond portfolio as part of normal liquidity management activities.
110 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk |
| Other key risks | ||||||||||
| Liquidity risk is the risk that, while still being solvent, we do not have sufficient liquid financial resources available to meet our obligations as they fall due, or we can only secure such resources at excessive cost. It is split into three parts: – Funding or structural liquidity risk: the risk that we may not have sufficient liquid assets to meet the payments required at a given time due to maturity transformation. – Contingent liquidity risk: the risk that future events may require a larger than expected amount of liquidity i.e. the risk of not having sufficient liquid assets to meet sudden and unexpected short-term obligations. – Market liquidity risk:the risk that assets we hold to mitigate the risk of failing to meet our obligations as they fall due, which are normally liquid, become illiquid when they are needed. In this section, we describe our sources and uses of liquidity and how we manage liquidity risk. We also analyse our key liquidity metrics, including our Liquidity Coverage Ratio (LCR) and our eligible liquidity pool. We then explain our funding strategy and structure and we also analyse our loan to deposit ratio (LDR) and our wholesale funding. Finally, we analyse how we have encumbered some of our assets to support our funding activities. Key metrics LCR increased to 120% Our LCR eligible liquidity pool decreased by £0.8bn to £38.7bn, reflecting lower liquidity funding requirements, largely due to short and medium-term funding maturities. Wholesale funding with maturity of <1yr down to £21.1bn Wholesale funding with a residual maturity of less than one year decreased by £2.0bn to £21.1bn in 2015, reflecting changes in the maturity profile of our medium-term funding. LCR eligible liquidity pool coverage of wholesale funding of <1yr increased to 183% Our LCR eligible liquidity pool significantly exceeded wholesale funding with a residual maturity of less than one year, with a 183% coverage ratio, up from 171% in 2014. Loan-to-deposit ratio reduced to 121% The LDR reduced to 121% in 2015 from 124% in 2014, mainly driven by the continued strong growth in retail current accounts and deposits in Commercial Banking and Global Corporate Banking. |
Annual Report 2015
Risk review
SOURCES AND USES OF LIQUIDITY
Our main sources of liquidity
Most of our customer lending is financed by customer deposits. Although these funds are mostly callable, they give us a stable and predictable core of funding. This is due to the nature of retail accounts and the breadth of our retail customer relationships.
We also have a strong wholesale funding base which is diversified across locations and product types. We have active relationships with many counterparties across various sectors. These include banks, other financial institutions, corporates and investment funds. Our main sources of wholesale funding are:
| – | Secured and unsecured money-market funding (includes unsecured cash, repurchase agreements, certificates of deposit and commercial paper issuance) |
| – | Senior debt issuance (includes public and private bond issuances) |
| – | Asset-backed funding (includes securitisation and covered bond issuance) |
| – | Subordinated debt and capital issuance (although the main purpose is not funding). |
Our main programmes for issuing debt are managed by (and in the name of) Abbey National Treasury Services plc on its own behalf. Our US commercial paper programme is managed by (and in the name of) Abbey National Treasury Services plc, US branch. However, some issuances still remain in the name of Abbey National North America LLC – a guaranteed subsidiary of Santander UK plc. For more on our programmes, see Note 30 to the Consolidated Financial Statements.
We generate funding on the strength of our balance sheet, our profitability and our own network of investors. We do not rely on guarantees from Banco Santander SA or any other member of the Banco Santander group. We do not raise funds to finance other members of the Banco Santander group or guarantee their debts (other than some of our own subsidiaries). As a PRA-regulated group, Santander UK plc has to meet our PRA liquidity needs on a stand-alone basis.
While we manage our funding and liquidity on a stand-alone basis, we do coordinate our issuance plans with the rest of the Banco Santander group where appropriate. And while we manage, consolidate and monitor liquidity risk centrally, we also monitor, measure and control it in the business area it comes from.
Our main uses of liquidity
Our main uses of liquidity are:
| – | Funding our lending in Retail Banking and Commercial Banking |
| – | Paying interest expenses |
| – | Paying dividends to shareholders |
| – | Repaying debt |
| – | Consideration for business combinations. |
Our ability to pay dividends depends on various factors. These include our regulatory capital needs, distributable reserves and financial performance.
112 Santander UK plc
Liquidity risk is the risk that, although solvent, Santander UK either does not have sufficient liquid financial resources available to meet its obligations as they fall due, or can only secure such resources at excessive cost. The Santander UK Risk Framework splits this into three elements. Firstly, funding or structural liquidity risk, relating to the capacity to raise sufficient liquid resources to meet payments required due to the maturity transformation required to lend long-term, but to fund predominantly through short-term liabilities (such as customer deposits). The second, market liquidity risk, is the risk that assets, held to mitigate the risk of failing to meet obligations as they fall due, which are normally liquid, become illiquid when they are needed. Finally, contingent liquidity risk is the risk that abnormal future events may require a larger than expected amount of liquidity than originally projected.
Primary sources and uses of liquidity
Santander UK is primarily funded by retail deposits. This, together with corporate deposits, forms its commercial bank franchise, which attracts deposits through a variety of entities. More than three quarters of Santander UK’s customer lending is financed by customer deposits, primarily originating from the retail business. Although largely callable, these funds provide a stable and predictable core of funding due to the nature of the retail accounts and the breadth of personal customer relationships. Additionally, Santander UK has a strong wholesale funding base, which is diversified across product types and geography.
Through the wholesale markets, Santander UK has active relationships with many counterparties across a range of sectors, including banks, other financial institutions, corporates and investment funds. Other sources of funding include collateralised borrowings, mortgage securitisations and long-term debt issuance. Short-term funding is accessed through money market instruments, including time deposits, certificates of deposit and commercial paper. Medium to long-term funding is accessed primarily through asset securitisation and covered bond arrangements and Santander UK’s euro and US dollar medium-term note programmes. The major debt issuance programmes are managed by, and in the name of, Abbey National Treasury Services plc on its own behalf (except for the US commercial paper programme, which is managed by, and in the name of, Abbey National North America LLC, a guaranteed subsidiary of Santander UK plc) and are set out in Note 32 to the Consolidated Financial Statements.
The principal uses of liquidity for Santander UK are the funding of the lending of Retail Banking and Commercial Banking, payment of interest expenses, dividends paid to shareholders, the repayment of debt and consideration for business combinations. Santander UK’s ability to pay dividends depends on a number of factors, including Santander UK’s regulatory capital requirements, distributable reserves and financial performance.
Santander UK generates funding on the strength of its balance sheet, its profitability and its own network of investors. It does not rely on a guarantee from Banco Santander, S.A. or any other member of the Banco Santander group. Santander UK does not raise funds to finance other members of the Banco Santander group or guarantee the debts of other members of the Banco Santander group (other than certain of Santander UK plc’s own subsidiaries). As a PRA regulated group, Santander UK is expected to satisfy the PRA liquidity requirements on a standalone basis.
Whilst Santander UK manages its funding and maintains adequate liquidity on a stand-alone basis, Santander UK coordinates issuance plans with the Banco Santander group where appropriate. In addition to Santander UK’s liquidity risk being consolidated and centrally controlled, liquidity risk is also measured, monitored and controlled within the specific business area or the subsidiary where it arises.
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
Risk review
Balance sheet management risk
continued
KeyOur key liquidity risks
Santander UK’s key ongoingThrough our liquidity risk appetite framework, we manage our funding, or structural, market and contingent risks are:wherever they arise. This can be in any of the following areas:
Key
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Annual Report 2015
Risk review
LIQUIDITY RISK MANAGEMENT
We manage liquidity risk on a consolidated basis. We created our governance, oversight and control frameworks, and our liquidity risk appetite, on the same basis.
Under this model (and the PRA’s regulatory liquidity rules) Santander UK plc and its subsidiaries Abbey National Treasury Services plc and Cater Allen Limited form the Domestic Liquidity Sub-group (DoLSub). Each member of the DoLSub is required to support the others by transferring surplus liquidity in times of stress. We manage liquidity flows between the DoLSub and other areas of our business efficiently. The same arrangement existed before October 2015 under the Defined Liquidity Group rules of the PRA in place until that date.
Our approach to liquidity risk | ||
| — | We identify, assess, manage and report liquidity risk in line with our liquidity risk framework. | |
| — | We aim to comply with our liquidity risk appetite and requirements of our regulators. We do this by holding prudent levels of highly liquid assets. We also manage possible cash outflows and make sure we have access to funds from a wide range of sources. | |
— | Our Board delegates responsibility for liquidity risk to the CEO. In turn, he delegates the: – Management to the CFO – Control and oversight to the CRO and the Risk Division. | |
| — | We maintain strong operational and management governance as part of our overall liquidity and funding risk management framework. We aim to be as resilient as possible to liquidity and funding stresses. We do this by structuring our balance sheet in a prudent and sensible way. | |
| — | Our framework applies to all aspects of liquidity risk. It is in line with our liquidity risk appetite and we monitor it on a daily, weekly and monthly basis. We do this through different committees and levels of management, including ALCO and the Board Risk Committee. | |
| — | We have clear responsibilities for short-term funding, medium-term funding, encumbrance, collateral and liquid asset management. This also ensures we manage liquidity risks in our daily operations, strategy and planning. | |
Within our framework of prudent funding and liquidity management, we manage our activities to minimise our liquidity risk. We do this in part by distinguishing between short-term and strategic activities.
Short-term tactical liquidity management | ||
| Liquid resources | We maintain liquid assets, contingent liquidity and defined management actions to source funds. We do this to cover unexpected demands on cash in both a plausible and significant stress scenario and other more distant and severe but less probable scenarios. Our main stress events are large and unexpected deposit withdrawals by retail customers and the loss of unsecured wholesale funding. | |
Funding profile | We use metrics to help control outflows in different maturities. | |
Intra-day collateral management | We make sure we have enough collateral to support our involvement in payment and settlement systems. | |
Strategic funding management | ||
Structural balance sheet shape | We manage our: – Maturity transformation (where we invest shorter-term funding in longer-term assets) – Use of wholesale funding for non-marketable assets – Use of non-marketable assets to generate liquidity. | |
| Wholesale funding strategy | We avoid: – Relying too much on any individual or groups of customer, currency, market or product that might become highly correlated in a time of stress – Excessive concentrations in the maturity of our wholesale funding. | |
| Wholesale funding capacity | We maintain and promote our client relationships, monitor our line availability and maintain our funding capacity by using lines and markets. | |
We set limits and triggers for our key tactical and strategic liquidity risk drivers. We monitor and report them monthly to oversight committees and the Board.
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LIQUIDITY RISK MANAGEMENT
Santander UK manages liquidity risk on a consolidated basis, and has created governance, oversight arrangements, its Liquidity Risk Appetite and associated control framework on this basis. Within this model, and under the PRA’s regulatory liquidity regime, Santander UK and its subsidiaries Abbey National Treasury Services plc and Cater Allen Limited form the Santander UK Defined Liquidity Group (‘DLG’). Under these arrangements, each member of the DLG is liable to support the others in terms of transferring or receiving surplus liquidity in times of stress. Santander UK ensures that liquidity flows between the DLG and other business areas within the Santander UK group are managed efficiently.
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Within the framework of prudent funding and liquidity management, Santander UK manages its activities to minimise liquidity risk, differentiating between short-term and strategic activities.
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Risk review
Balance sheet management risk
continued
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Risk limits and triggers are set for the key tactical and strategic
Our liquidity risk drivers. These are monitored by and reported monthly to oversight committees and the Board.
Financial adaptability(unaudited)
Santander UK also considers its ability to take effective action to alter the amounts and timing of cash flows so that it can respond to unexpected needs or opportunities. In determining its financial adaptability, Santander UK has considered its ability to:
Liquidity Risk Appetiteappetite(unaudited)
The Board’s risk objective isBoard aims to be a riskmake our balance sheet resilient institution at all times and for it to be perceived as such by stakeholders, preserving thestakeholders. This preserves our short and long-term viability of Santander UK.viability. The Board recognises that a bank engagingas we are involved in maturity transformation, we cannot hold sufficientenough liquidity to cover all possible stress scenarios butscenarios.
The Board requires Santander UKus to hold sufficientenough liquidity to ensure that itmake sure we will survive the current most plausible and significant stress scenario throughscenario. We do this by keeping a prudent balance sheet structure and the maintenance ofmaintaining our approved liquid resources. TheWe review this scenario is regularly reviewed to ensure thatkeep it reflectsrelevant to the current economic and market environment.
The Board’s Liquidity Risk AppetiteOur liquidity risk appetite statement is set inbased on the context of principles of liquidity management by which Santander UK chooseswe use to manage itsour balance sheet, and the desiresheet. It also supports our need to meet or exceed regulatory requirements. Thethe rules of our regulators.
Our liquidity management principles include:are that we:
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| – | Use long-term funding to give diversification, manage the liquidity structure of our balance sheet and support our liquid resources |
| – | Use a funding strategy that: |
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The Liquidity Risk Appetite has been recommended by the CEO andOur liquidity risk appetite is approved by the Board, under advice from the Board Risk Committee. The Liquidity Risk Appetite, withinOur liquidity risk appetite, in the context of theour overall Risk Appetite,risk appetite, is reviewed and approved by the Board at least annuallyeach year or more frequentlyoften if necessary (e.g.needed. This can be due to changes in the case of significant methodologicalour business or business change). This is designedapproach. We do this to ensure that the Liquidity Risk Appetite will continue to be consistentmake sure our liquidity risk appetite stays in line with Santander UK’sour current and planned business activities.
The CEO, under advice from the BoardExecutive Risk Committee, approves more detailed allocation of liquidity risk limits. The CRO, supported by the Risk Division, (including the CRMO and the Director of Liquidity and Banking Market Risk), is responsible for monitoring the ongoingmonitors our compliance with our liquidity risk appetite.
As well as the liquidity risk appetite.
In addition to the Liquidity Risk Appetite, Santander UK also compliesappetite, we comply with regulatory requirementsrules set by the PRA, other regulatory bodiesregulators and Banco Santander group standards.
Annual Report 2015
Risk review
Stress testing(unaudited)
We have a liquidity stress test framework in place that includes the most plausible and significant stress scenario. It is approved as part of our liquidity risk appetite. The liquidity outflows that come from this stress test must, to fit with our risk appetite, be fully covered with high-quality liquid assets.
We must cover the outcome of other plausible (but less likely) stress tests with a combination of:
| – | High-quality liquid assets |
| – | Other liquid assets |
| – | Management actions sanctioned at the right level of governance. |
Our Risk Division runs these stress tests. They are:
Activity | Description | |
| Our liquidity risk appetite stress | A comprehensive stress test that looks at all our risks during an idiosyncratic shock in a time of market-wide disruption that causes a loss of confidence in our brand. | |
Global economic stress | A stress test that looks at a slowdown in emerging markets that results in a downturn in the UK | |
| US stress | Stress tests that look at the impact of losing the confidence of investors in the US, affecting our access to US funding markets. | |
Acute retail stress | Stress tests that look at the impact of losing the confidence of retail depositors, causing major, acute loss of deposits. | |
Slow bleed stress | Stress tests that look at the impact of a prolonged loss of deposits. | |
Wholesale stress | A stress test where losing corporate and wholesale customer confidence causes us a prolonged loss of deposits. | |
| Protracted stress | A 12-month stress with a three-month period of severe liquidity constraint and the loss of retail customer confidence and subsequent loss of deposits | |
Eurozone severe stress | A stress test that looks at a more extreme scenario in which a major deterioration in the eurozone economies has a knock-on (or contagion) effect on us, causing severe liability outflows and rating agency action. | |
We also conduct sensitivity analysis and reverse stress testing for instant liquidity shocks by each key liquidity risk. We do this to understand the impacts they would have on our liquidity risk appetite and our regulatory liquidity metrics.
Financial adaptability
We also consider our ability to change the amounts and timing of cash flows to respond to unexpected needs or opportunities. To determine our financial adaptability, we have considered our ability to:
| – | Find new sources of finance |
| – | Get financial support from other Banco Santander group companies |
| – | Continue in business by reducing our operations or using different resources. |
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Stress testing(unaudited)
A liquidity stress test framework is in place. This incorporates the current most plausible stress scenario approved as part of the Santander UK Liquidity Risk Appetite. The liquidity outflows that result from this stress test must, in accordance with the Risk Appetite, be fully covered with high quality liquid assets. The outcome of a series of other plausible but less likely stress tests must be covered with a combination of high quality liquid assets, other assets and management actions sanctioned at the appropriate level of governance. These stress tests are run independently by the Risk Division and are as follows:
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These stress tests are supplemented with sensitivity analysis and reverse stress testing for instantaneous liquidity shocks by each major liquidity risk driver to understand the impact on internal Liquidity Risk Appetite and regulatory liquidity metrics.
Risk review
Balance sheet management risk
continued
Compliance with internal and regulatory stress tests
During 2014, Santander UK monitored and reported both the PRA Individual Liquidity Guidance (‘ILG’) and the Basel III regime-based liquidity ratios – the Liquidity Coverage Ratio (‘LCR’)(3) and the Net Stable Funding Ratio (‘NSFR’). It is acknowledged though that the exact calculation requirements for each ratio have been evolving over time. Santander UK monitored and managed the LCR ratio during 2014 based upon an internal view, referencing the most recent pronouncements of the EBA. A version of the LCR based upon Basel III requirements is also tracked. Santander UK uses the LCR and NSFR, especially the former, as key reference points as balance sheet plans and funding strategies are developed.
Santander UK reviewed and revised its Liquidity Risk Appetite in 2014, and it was updated to represent the coverage of the current most plausible stress by qualifying liquid resources. The Liquidity Risk Appetite for 2013 has been restated on a consistent basis. The restated 2013 figure can therefore provide a general comparison but changes in the economic and market environment and the composition of the balance sheet provide an additional context for the two sets of figures. The current Santander UK interpretation of the NSFR is also tracked and remained in excess of 100% throughout 2014.
| 2014 | 2014 | 2013 | 2013 | |||||||||||||
| Santander UK LRA | EBA LCR | Santander UK LRA | Estimated | |||||||||||||
| (two month | (revised text | (two month | Basel III LCR | |||||||||||||
| Santander UK | October 2014) | (1) | Santander UK | (revised text | ||||||||||||
| specific | restated specific | January 2013) | (2) | |||||||||||||
| requirement) | requirement) | |||||||||||||||
| £bn | £bn | £bn | £bn | |||||||||||||
Eligible liquidity pool | 36.6 | 38.9 | 30.0 | 31.8 | ||||||||||||
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Asset inflows | 0.5 | 1.0 | 0.6 | 0.9 | ||||||||||||
Stress outflows: | ||||||||||||||||
Retail and commercial deposit outflows | (5.3 | ) | (7.0 | ) | (4.7 | ) | (6.2 | ) | ||||||||
Wholesale funding and derivatives | (12.8 | ) | (19.0 | ) | (4.4 | ) | (13.8 | ) | ||||||||
Contractual credit rating downgrade exposure | (5.3 | ) | (7.3 | ) | (6.6 | ) | (9.2 | ) | ||||||||
Drawdowns of loan commitments | (2.2 | ) | (3.0 | ) | (2.2 | ) | (2.6 | ) | ||||||||
Other | (1.6 | ) | – | (1.6 | ) | – | ||||||||||
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Total stress net cash outflows | (26.7 | ) | (35.3 | ) | (18.9 | ) | (30.9 | ) | ||||||||
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Surplus | 9.9 | 3.6 | 11.1 | 0.9 | ||||||||||||
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Liquidity pool as a percentage of anticipated net cash flows | 137% | 110% | 159% | 103% | ||||||||||||
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(1) Takes into account Santander UK’s interpretation of the EU Liquidity Coverage Ratio Delegated Act ((EU) 575/2013).
(2) Takes into account Santander UK’s interpretation of the Basel III LCR as revised by the Basel Committee in January 2013.
(3) Non-IFRS measure. See page 355.
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Compliance with internal and regulatory stress tests
In 2015, we monitored and reported the:
| – | PRA Individual Liquidity Guidance (ILG) |
| – | Basel III regime LCR defined by the relevant EU Delegated Act and updated PRA liquidity regime. |
| – | Net Stable Funding Ratio (NSFR). We do this even though the rules for this ratio are not yet finalised. |
We reviewed and revised our liquidity risk appetite in 2015. We updated it to represent the coverage of our most plausible and significant stress by qualifying liquid resources. This stress scenario is more severe than the one we used in 2014, so it requires us to hold more eligible liquid assets.
In 2014, the LRA Pillar 2 stress was focused on the next most plausible stress event that might occur. This was viewed to possibly result from the review by Standard & Poor’s (S&P) of the credit ratings of UK banks that followed the UK government decision to implement the EU Bank Resolution and Recovery Directive ahead of other EU states.
In 2015, S&P completed their review and affirmed our credit rating. As a result, we have updated the scenario. The most plausible stress that we could face is now considered more distant but more significant than the one in 2014. This is due to the current economic and geopolitical climate.
This table shows the Santander UK LRA and LCR reflecting the stress testing methodology in place at that time.
LRA (two-month Santander UK | LCR | |||||||||||||||
| 2015 £bn | 2014 £bn | 2015 £bn | 2014(1) £bn | |||||||||||||
Eligible liquidity pool | 34.4 | 36.6 | 37.8 | 38.9 | ||||||||||||
Asset inflows | 0.8 | 0.5 | 1.5 | 1.0 | ||||||||||||
Stress outflows: | ||||||||||||||||
Retail and commercial deposit outflows | (9.2 | ) | (5.3 | ) | (7.6 | ) | (7.0 | ) | ||||||||
Wholesale funding and derivatives | (9.0 | ) | (12.8 | ) | (16.3 | ) | (19.0 | ) | ||||||||
Contractual credit rating downgrade exposure | (4.4 | ) | (5.3 | ) | (5.9 | ) | (7.3 | ) | ||||||||
Drawdowns of loan commitments | (2.7 | ) | (2.2 | ) | (3.1 | ) | (3.0 | ) | ||||||||
Other | (1.2 | ) | (1.6 | ) | – | – | ||||||||||
Total stress net cash outflows | (25.7 | ) | (26.7 | ) | (31.4 | ) | (35.3 | ) | ||||||||
Surplus | 8.7 | 9.9 | 6.4 | 3.6 | ||||||||||||
Liquidity pool as a percentage of anticipated net cash flows | 134% | 137% | 120% | 110% | ||||||||||||
| (1) | Non-IFRS measure. See page 332. |
Annual Report 2015
Risk review
OUR LIQUIDITY POOL
Santander UK holds, at all times,To minimise our liquidity risk we hold a portfolio of unencumbered liquid assets to mitigateat all times.
Our liquidity risk. Therisk appetite and regulatory requirements determine the size and composition of this portfolio is determined by Santander UK’s Liquidity Risk Appetite and regulatory requirements.portfolio.
EligibleLCR eligible liquidity pool
TheThis table below shows the carrying value and liquidity value of the assets in our eligible liquidity pool held by Santander UK at 31 December 20142015 and 2013 and2014. It also shows the weighted average carrying value duringin the year:
| Carrying value | Liquidity value(1) | Weighted average carrying value during the year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | Carrying value | Liquidity value(1) | Weighted average carrying value in the year | ||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | 2015 £bn | 2014 £bn | 2015 £bn | 2014 £bn | 2015 £bn | �� 2014 £bn | |||||||||||||||||||||||||||||||||||||||||||||
Cash and deposits with central banks | 22.5 | 26.0 | 22.5 | 26.0 | 24.5 | 30.9 | 15.9 | 22.5 | 15.9 | 22.5 | 19.1 | 24.5 | ||||||||||||||||||||||||||||||||||||||||||||
Government bonds | 13.1 | 4.4 | 13.1 | 3.7 | 5.6 | 4.4 | 18.1 | 13.1 | 17.8 | 13.1 | 12.5 | 5.6 | ||||||||||||||||||||||||||||||||||||||||||||
Supranational bonds and multilateral development banks | 1.0 | 0.1 | 1.0 | 0.1 | 0.9 | 0.2 | 1.2 | 1.0 | 1.2 | 1.0 | 1.1 | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||
Covered bonds | 1.8 | 1.3 | 1.6 | 1.2 | 2.0 | 0.7 | 2.1 | 1.8 | 1.8 | 1.6 | 2.3 | 2.0 | ||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | 0.5 | 0.1 | 0.4 | 0.1 | 0.2 | 0.1 | 0.7 | 0.5 | 0.7 | 0.4 | 0.6 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | – | 0.5 | – | 0.4 | 0.6 | 0.8 | 0.1 | – | 0.1 | – | 0.1 | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||
Equities | 0.6 | 0.4 | 0.3 | 0.3 | 0.8 | 0.5 | 0.6 | 0.6 | 0.3 | 0.3 | 0.5 | 0.8 | ||||||||||||||||||||||||||||||||||||||||||||
| 38.7 | 39.5 | 37.8 | 38.9 | 36.2 | 34.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 39.5 | 32.8 | 38.9 | 31.8 | 34.6 | 37.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Liquidity value represents
| (1) | Liquidity value is the carrying value with the applicable LCR haircut applied. |
Our LCR haircut applied.
The eligible liquidity pool consists of high-quality liquid assets which, according to Santander UK’s interpretation at 31 December 2014, are eligible for inclusionincluded in the LCR as high quality liquid assets. KeyLCR.
The key qualifying criteria are listed below:are:
| – | Available cash and central bank reserves that we can draw |
| – | Government bonds or government-guaranteed bonds, but only |
| – | Supranational bonds and multilateral development banks |
| – | Covered |
| – | Senior tranches of asset-backed |
| – | Corporate |
| – | Equity shares that are listed on major stock |
Santander UK periodically testsWe regularly test the liquidity of theour eligible liquidity pool, it holds, in accordanceline with the PRA and Basel requirements to realise a proportionrules. We do this by realising some of thesethe assets through repurchase or outright sale to the market. Santander UK ensuresWe make sure that the cumulative effect of its periodic realisation over any twelve month12-month period is thatwe realise a significant proportionpart of the assets in itsour eligible liquidity pool.
As well as our eligible liquidity pool, is realised.
In deciding on the precise composition of its eligible liquidity pool, Santander UK ensures that it tailors the contents of the portfolio to the needs of its business and the liquidity risk that it potentially faces. In particular, Santander UK ensures that it holds assets in its eligible liquidity pool which can be realised with the speed necessary to meet its liabilities as they fall due.
In addition to the eligible liquidity pool, Santander UK haswe have access to other unencumbered assets which provideassets. These give us a source of contingent liquidity. A portionWe can realise some of these assets may be realised in a time of stress scenario to generatecreate liquidity through either repurchase or outright sale to the market.
Balance sheet classification
The classification of the carrying value of the assets in the eligible liquidity pool in the Consolidated Balance Sheet, or their treatment as off-balance sheet at 31 December 2014 and 2013 was as follows:
| On balance sheet | Off balance sheet | |||||||||||||||||||||||||
| Eligible | Cash and | Trading | Available-for- | Loans and | Collateral | |||||||||||||||||||||
| liquidity | balances at | assets | sale securities | receivables | received/ | |||||||||||||||||||||
| pool | central banks | securities | (pledged) | |||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||
Cash and deposits with central banks | 22.5 | 22.5 | – | – | – | – | ||||||||||||||||||||
Government bonds | 13.1 | – | 6.3 | 4.5 | – | 2.3 | ||||||||||||||||||||
Supranational bonds and multilateral development banks | 1.0 | – | – | 1.1 | – | (0.1) | ||||||||||||||||||||
Covered bonds | 1.8 | – | – | 2.2 | – | (0.4) | ||||||||||||||||||||
Asset-backed securities | 0.5 | – | – | 0.4 | 0.1 | – | ||||||||||||||||||||
Corporate bonds | – | – | – | – | – | – | ||||||||||||||||||||
Equities | 0.6 | – | 3.5 | – | – | (2.9) | ||||||||||||||||||||
| ||||||||||||||||||||||||||
| 39.5 | 22.5 | 9.8 | 8.2 | 0.1 | (1.1) | |||||||||||||||||||||
| ||||||||||||||||||||||||||
118 Santander UK plc
Risk review
Balance sheet management risk
continued
| On balance sheet | Off balance sheet | |||||||||||||||||||||||||
| Eligible | Cash and | Trading | Available-for- | Loans and | Collateral | |||||||||||||||||||||
| liquidity | balances at | assets | sale securities | receivables | received/ | |||||||||||||||||||||
| pool | central banks | securities | (pledged) | |||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||
Cash and deposits with central banks | 26.0 | 26.0 | – | – | – | – | ||||||||||||||||||||
Government bonds | 4.4 | – | 3.4 | 3.1 | – | (2.1 | ) | |||||||||||||||||||
Supranational bonds and multilateral development banks | 0.1 | – | – | 0.1 | – | – | ||||||||||||||||||||
Covered bonds | 1.3 | – | – | 1.3 | – | – | ||||||||||||||||||||
Asset-backed securities | 0.1 | – | – | – | 0.1 | – | ||||||||||||||||||||
Corporate bonds | 0.5 | – | – | 0.5 | – | – | ||||||||||||||||||||
Equities | 0.4 | – | 0.6 | – | – | (0.2 | ) | |||||||||||||||||||
| ||||||||||||||||||||||||||
| 32.8 | 26.0 | 4.0 | 5.0 | 0.1 | (2.3 | ) | ||||||||||||||||||||
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Geographical distribution The table below shows the geographical distribution of the carrying value of the eligible liquidity pool at 31 December 2014 and 2013:
|
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| UK | USA | EEA | Other | Total | ||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||
Cash and deposits with central banks | 18.1 | 4.4 | – | – | 22.5 | |||||||||||||||||||||
Government bonds(5) | 9.2 | 3.2 | 0.6 | (1) | 0.1 | (2) | 13.1 | |||||||||||||||||||
Supranational bonds and multilateral development banks(6) | – | 0.5 | 0.5 | – | 1.0 | |||||||||||||||||||||
Covered bonds(7) | 0.3 | – | 1.4 | 0.1 | 1.8 | |||||||||||||||||||||
Asset-backed securities(8) | 0.3 | – | 0.2 | – | 0.5 | |||||||||||||||||||||
Corporate bonds(9) | – | – | – | – | – | |||||||||||||||||||||
Equities | 0.4 | – | 0.1 | 0.1 | 0.6 | |||||||||||||||||||||
| ||||||||||||||||||||||||||
| 28.3 | 8.1 | 2.8 | 0.3 | 39.5 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||
Cash and deposits with central banks | 21.1 | 4.9 | – | – | 26.0 | |||||||||||||||||||||
Government bonds(5) | 1.8 | 1.9 | 0.4 | (3) | 0.3 | (4) | 4.4 | |||||||||||||||||||
Supranational bonds and multilateral development banks(6) | – | – | 0.1 | – | 0.1 | |||||||||||||||||||||
Covered bonds(7) | 0.4 | – | 0.9 | – | 1.3 | |||||||||||||||||||||
Asset-backed securities(8) | 0.1 | – | – | – | 0.1 | |||||||||||||||||||||
Corporate bonds(9) | 0.5 | – | – | – | 0.5 | |||||||||||||||||||||
Equities | 0.2 | – | – | 0.2 | 0.4 | |||||||||||||||||||||
| ||||||||||||||||||||||||||
| 24.1 | 6.8 | 1.4 | 0.5 | 32.8 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||
(1) Consists of Germany (2) Consists of Switzerland (3) Consists of Denmark, Germany and European Investment Bank (4) Consists of Japan and Canada (5) Consists of AAA rated bonds of £13.1bn (2013: £2.6bn) and AA+ to AA- rated bonds of £nil (2013: £1.8bn) (6) Consists of A- or above rated bonds of £1.0bn (2013: £0.1bn) (7) Consists of A- or above rated bonds of £1.8bn (2013: £1.3bn) (8) Consists of AA- or above rated bonds of £0.5bn (2013: £0.1bn) (9) Consists of A+ bonds of £nil (2013: £0.5bn)
Currency analysis The table below shows the carrying value of the eligible liquidity pool by major currencies at 31 December 2014 and 2013:
|
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| US Dollar | Euro | Sterling | Other | Total | ||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||
31 December 2014 | 9.6 | 1.4 | 28.3 | 0.2 | 39.5 | |||||||||||||||||||||
| ||||||||||||||||||||||||||
31 December 2013 | 7.5 | 0.6 | 24.0 | 0.7 | 32.8 | |||||||||||||||||||||
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| Risk | ||||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||
Balance sheet classification
This table shows the carrying value of the assets in our eligible liquidity pool in our Consolidated Balance Sheet – or their treatment as off-balance sheet at 31 December 2015 and 2014.
| On balance sheet | Off balance sheet | |||||||||||||||||||||||
| Eligible liquidity pool | Cash and balances at central banks | Trading assets | Available-for- sale securities | Loans and receivables securities | Collateral received/ (pledged) | |||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
Cash and deposits with central banks | 15.9 | 15.9 | – | – | – | – | ||||||||||||||||||
Government bonds | 18.1 | – | 3.9 | 4.3 | – | 9.9 | ||||||||||||||||||
| Supranational bonds and multilateral development banks | 1.2 | – | – | 1.2 | – | – | ||||||||||||||||||
Covered bonds | 2.1 | – | – | 2.4 | – | (0.3) | ||||||||||||||||||
Asset-backed securities | 0.7 | – | – | 0.6 | 0.1 | – | ||||||||||||||||||
Corporate bonds | 0.1 | – | – | 0.1 | – | – | ||||||||||||||||||
Equities | 0.6 | – | 5.7 | – | – | (5.1) | ||||||||||||||||||
| 38.7 | 15.9 | 9.6 | 8.6 | 0.1 | 4.5 | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
| Cash and deposits with central banks | 22.5 | 22.5 | – | – | – | – | ||||||||||||||||||
| Government bonds | 13.1 | – | 6.3 | 4.5 | – | 2.3 | ||||||||||||||||||
| Supranational bonds and multilateral development banks | 1.0 | – | – | 1.1 | – | (0.1) | ||||||||||||||||||
| Covered bonds | 1.8 | – | – | 2.2 | – | (0.4) | ||||||||||||||||||
| Asset-backed securities | 0.5 | – | – | 0.4 | 0.1 | – | ||||||||||||||||||
| Corporate bonds | – | – | – | – | – | – | ||||||||||||||||||
| Equities | 0.6 | – | 3.5 | – | – | (2.9) | ||||||||||||||||||
| 39.5 | 22.5 | 9.8 | 8.2 | 0.1 | (1.1) | |||||||||||||||||||
Geographical distribution
This table shows the geographical distribution of the carrying value of the assets in our eligible liquidity pool at 31 December 2015 and 2014:
| UK £bn | USA £bn | EEA £bn | Other £bn | Total £bn | ||||||||||||||||
2015 | ||||||||||||||||||||
| Cash and deposits with central banks | 13.7 | 2.2 | – | – | 15.9 | |||||||||||||||
| Government bonds(3) | 10.6 | 4.9 | 1.5 | (1) | 1.1 | (2) | 18.1 | |||||||||||||
| Supranational bonds and multilateral development banks(4) | 0.1 | 0.6 | – | 0.5 | 1.2 | |||||||||||||||
| Covered bonds(5) | 0.3 | 0.1 | 1.1 | 0.6 | 2.1 | |||||||||||||||
| Asset-backed securities(6) | 0.5 | – | 0.1 | 0.1 | 0.7 | |||||||||||||||
| Corporate bonds(7) | – | – | 0.1 | – | 0.1 | |||||||||||||||
| Equities | 0.1 | – | 0.4 | 0.1 | 0.6 | |||||||||||||||
| 25.3 | 7.8 | 3.2 | 2.4 | 38.7 | ||||||||||||||||
2014 | ||||||||||||||||||||
| Cash and deposits with central banks | 18.1 | 4.4 | – | – | 22.5 | |||||||||||||||
| Government bonds(3) | 9.2 | 3.2 | 0.6 | (1) | 0.1 | (2) | 13.1 | |||||||||||||
| Supranational bonds and multilateral development banks(4) | – | 0.5 | 0.5 | – | 1.0 | |||||||||||||||
| Covered bonds(5) | 0.3 | – | 1.4 | 0.1 | 1.8 | |||||||||||||||
| Asset-backed securities(6) | 0.3 | – | 0.2 | – | 0.5 | |||||||||||||||
| Corporate bonds(7) | – | – | – | – | – | |||||||||||||||
| Equities | 0.4 | – | 0.1 | 0.1 | 0.6 | |||||||||||||||
| 28.3 | 8.1 | 2.8 | 0.3 | 39.5 | ||||||||||||||||
| (1) | Consists of Germany of £0.9bn (2014: £0.6bn), Netherlands of £0.2bn (2014: £nil), France of £0.2bn (2014: £nil) and other |
| (2) | Consists of Japan of £1.1bn (2014: £nil) and Switzerland of £nil (2014: £0.1bn). |
| (3) | Consists of AAA rated bonds of £11.6bn (2014: £8.4bn), AA+ rated bonds of £5.1bn (2014: £4.6bn), AA rated bonds of £0.3bn (2014: £0.1bn) and A rated bonds of £1.1bn (2014: £nil). |
| (4) | Consists of AAA rated bonds of £1.2bn (2014: £0.9bn) and AA+ rated bonds of £nil (2014: £0.1bn). |
| (5) | Consists of AAA rated bonds of £2.0bn (2014: £1.7bn), AA+ rated bonds of £0.1bn (2014: £nil) and A rated bonds of £nil (2014: £0.1bn). |
| (6) | Consists of AAA rated bonds of £0.7bn (2014: £0.5bn). |
| (7) | Consists of AA rated bonds of £0.1bn (2014: £nil). |
Annual Report 2015
Risk review
Currency analysis
This table shows the carrying value of our eligible liquidity pool by major currencies at 31 December 2015 and 2014:
| US Dollar £bn | Euro £bn | Sterling £bn | Other £bn | Total £bn | ||||||||||||||||
2015 | 9.8 | 1.5 | 26.3 | 1.1 | 38.7 | |||||||||||||||
2014 | 9.6 | 1.4 | 28.3 | 0.2 | 39.5 | |||||||||||||||
Composition of the eligible liquidity pool
This table shows the allocation of the carrying value of the assets in our eligible liquidity pool for LRA, PRA and LCR purposes at 31 December 2015 and 2014. Following the PRA’s adoption of the EBA regime in 2015, the qualifying criteria for inclusion in the eligible liquidity pool for PRA and LCR purposes are now aligned.
| Eligible | Of which | Of which | Of which LCR eligible | |||||||||||||||||||||
| liquidity | LRA | PRA | ||||||||||||||||||||||
| pool | eligible | eligible | Level 1 | Level 2A | Level 2B | |||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
Cash and deposits with central banks | 15.9 | 14.8 | 15.9 | 15.9 | – | – | ||||||||||||||||||
Government bonds | 18.1 | 18.1 | 18.1 | 17.0 | 1.1 | – | ||||||||||||||||||
Supranational bonds and multilateral development banks | 1.2 | 1.2 | 1.2 | 1.2 | – | – | ||||||||||||||||||
Covered bonds | 2.1 | 1.8 | 2.1 | 1.5 | 0.6 | – | ||||||||||||||||||
Asset backed securities | 0.7 | 0.4 | 0.7 | – | – | 0.7 | ||||||||||||||||||
Corporate bonds | 0.1 | – | 0.1 | – | 0.1 | – | ||||||||||||||||||
Equities | 0.6 | 0.6 | 0.6 | – | – | 0.6 | ||||||||||||||||||
| 38.7 | 36.9 | 38.7 | 35.6 | 1.8 | 1.3 | |||||||||||||||||||
2014 | ||||||||||||||||||||||||
Cash and deposits with central banks | 22.5 | 20.8 | 20.8 | 22.5 | – | – | ||||||||||||||||||
Government bonds | 13.1 | 13.1 | 12.6 | 13.1 | – | – | ||||||||||||||||||
Supranational bonds and multilateral development banks | 1.0 | 1.0 | 1.0 | 1.0 | – | – | ||||||||||||||||||
Covered bonds | 1.8 | 1.8 | – | 1.4 | 0.4 | – | ||||||||||||||||||
Asset backed securities | 0.5 | 0.5 | – | – | – | 0.5 | ||||||||||||||||||
Corporate bonds | – | – | – | – | – | – | ||||||||||||||||||
Equities | 0.6 | – | – | �� | – | – | 0.6 | |||||||||||||||||
| 39.5 | 37.2 | 34.4 | 38.0 | 0.4 | 1.1 | |||||||||||||||||||
2015 compared to 2014(unaudited)
Late 2014 and the first half of 2015 saw an easing of monetary policy after the European Central Bank (ECB) announcement in January of a programme of sovereign bond purchases which is planned to continue until March 2017 or until a sustained adjustment to inflation is achieved. In addition, general concerns about global economic growth and the risk of deflation led other central banks to ease their monetary policy. This resulted in lower short-term interest rates and, with some volatility, longer-term rates.
Investor sentiment remained positive through the year, continuing the trend in 2014 of a search for enhanced yield and increased appetite for riskier assets. This positive trend was not significantly impacted by uncertainty surrounding Greece and the eurozone. In the second half of the year, focus shifted towards the economic situation in China and emerging markets. This saw a withdrawal of capital from these areas, and a focus on the timing and trajectory of rate increases in the US and the UK. Other geopolitical tensions did not have a discernible impact.
In 2015, we continued to benefit from our strong liquidity position and conservative balance sheet structure. This was reflected by S&P affirming our credit rating as part of their UK banking assessment, while some peer banks experienced a credit rating downgrade.
Throughout 2015, we maintained robust risk management controls to monitor and manage the levels of our eligible liquidity pool and encumbrance. Our eligible liquidity pool significantly exceeded wholesale funding of less than one year, with a coverage ratio of 183% at 31 December 2015 (2014: 171%). The change in the coverage ratio (which is expected to be volatile due to the management of normal short-term business commitments) was driven mainly by:
| – | A decrease in wholesale funding with a residual maturity of less than one year of £2.0bn to £21.1bn at 31 December 2015 (2014: £23.1bn). This reflected changes in the maturity profile of our medium-term funding. |
| – | An offsetting decrease in eligible liquidity pool assets by £0.8bn to £38.7bn at 31 December 2015 (2014: £39.5bn). This reflected lower liquidity requirements, largely due to the phasing of short-term funding and of medium-term maturities. |
The LCR increased to 120% at 31 December 2015 (2014: 110%(1)).
(1) Non-IFRS measure. See page 332.
120 Santander UK plc
Composition of the eligible liquidity pool
The allocation of the carrying value of the assets in the eligible liquidity pool for LRA, PRA and LCR purposes at 31 December 2014 and 2013 was as follows:
| Eligible | Of which | Of which | Of which LCR-eligible | |||||||||||||||||||||
| liquidity | LRA | PRA | ||||||||||||||||||||||
| pool | eligible | eligible | Level 1 | Level 2A | Level 2B | |||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||
Cash and deposits with central banks | 22.5 | 20.8 | 20.8 | 22.5 | – | – | ||||||||||||||||||
Government bonds | 13.1 | 13.1 | 12.6 | 13.1 | – | – | ||||||||||||||||||
Supranational bonds and multilateral development banks | 1.0 | 1.0 | 1.0 | 1.0 | – | – | ||||||||||||||||||
Covered bonds | 1.8 | 1.8 | – | 1.4 | 0.4 | – | ||||||||||||||||||
Asset backed securities | 0.5 | 0.5 | – | – | – | 0.5 | ||||||||||||||||||
Corporate bonds | – | – | – | – | – | – | ||||||||||||||||||
Equities | 0.6 | – | – | – | – | 0.6 | ||||||||||||||||||
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| 39.5 | 37.2 | 34.4 | 38.0 | 0.4 | 1.1 | |||||||||||||||||||
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31 December 2013 | ||||||||||||||||||||||||
Cash and deposits with central banks | 26.0 | 24.9 | 24.9 | 26.0 | – | – | ||||||||||||||||||
Government bonds | 4.4 | 4.4 | 4.4 | 4.4 | – | – | ||||||||||||||||||
Supranational bonds and multilateral development banks | 0.1 | 0.1 | – | 0.1 | – | – | ||||||||||||||||||
Covered bonds | 1.3 | 1.3 | – | – | 1.3 | – | ||||||||||||||||||
Asset backed securities | 0.1 | 0.1 | – | – | 0.1 | – | ||||||||||||||||||
Corporate bonds | 0.5 | 0.5 | – | – | – | 0.5 | ||||||||||||||||||
Equities | 0.4 | – | – | – | – | 0.4 | ||||||||||||||||||
| ||||||||||||||||||||||||
| 32.8 | 31.3 | 29.3 | 30.5 | 1.4 | 0.9 | |||||||||||||||||||
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Liquidity developments in 2014(unaudited)
2014 was characterised by steadily improving sentiment regarding the UK and US economies. Confidence in the eurozone economies has been slow to recover and remains volatile. In addition, overall investor sentiment continued to strengthen. A developing trend towards the search for enhanced yield and increased risk appetite was observed through the year.
During 2014, Santander UK benefited from low wholesale, unsecured and secured MTF rates and increased confidence both in the UK banking sector and wider economic environment. This allowed a beneficial mix of MTF to be issued in line with funding plans.
Throughout 2014, Santander UK continued to maintain a strong liquidity position and a conservative balance sheet structure as well as robust risk management controls to monitor and manage the levels of the eligible liquidity pool and encumbrance. The eligible liquidity pool continued to significantly exceed wholesale funding of less than one year, with a coverage ratio of 171% at 31 December 2014 (2013: 155%). The change in the ratio (which is expected to be volatile due to the management of normal short term business commitments) was driven by an increase in eligible liquidity pool assets by £6.7bn to £39.5bn at 31 December 2014 (2013: £32.8bn) offset by an increase in wholesale funding with a residual maturity of less than one year of £1.9bn to £23.1bn at 31 December 2014 (2013: £21.2bn), due partly to the timing of secured funding maturities. In addition, the LCR was 110%(1) at 31 December 2014 (2013: 103%(1)).
(1) Non-IFRS measure. See page 355.
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
Risk review
Balance sheet management risk
continued
OUR FUNDING STRATEGY AND STRUCTURE(unaudited)
Santander UK’sOur funding strategy continues to be based upon the maintenance ofon maintaining a conservatively structured balance sheet. The majoritysheet and diverse sources of Santander UK’sfunding.
Most of our funding is sourcedcomes from customer deposits; the balancedeposits. The rest is sourced from a mix of secured and unsecured funding in the wholesale markets. This strategy avoids an over-reliancemeans that we do not rely too heavily on wholesale funds, both medium and short-term, whilst atshort-term. At the same time ensuring thatit makes sure our sources of funding are not overlytoo concentrated in relation toon any one particular product. Santander UK maintainsWe have checks and controls to limit the level ofour asset encumbrance from secured funding operations.
A key source of funding for Santander UK is its significant Our base of stable retail and corporate deposits. Santander UK leverages itsdeposits is a key funding source for us. We leverage our large and diverse customer base to offer products that providegive us a long termlong-term sustainable source of funding through an emphasisfunding. We do this by focusing on the building long-term relationships. More than 90% of long term relationships. Ofour total core retail customer liabilities in excess of 90% are covered by the FSCS.Financial Services Compensation Scheme (the FSCS).
Behavioural maturities
The contractual maturity of balance sheet assets and liabilities highlights the maturity transformation whichthat underpins the role of banks to lend long-term, but to fund themselves predominantly through short-termmostly with shorter-term liabilities, such aslike customer deposits. This is achieved through the diversified
We achieve this by diversifying our funding franchise of the Santander UK groupoperations across an extensivea wide customer base, both numericallyin numbers and by depositor type.type of depositor. In practice, the behavioural profiles of many liabilities exhibit greatershow more stability and longer maturity than the contractual maturity. This is particularlyespecially true of many types of retail and corporate deposits which, whilstthat, while they may be repayable on demand or at short notice, have demonstrated very stable characteristicsshown good stability even in periodstimes of stress.
Santander UK modelsWe model behaviour profiles using our experience of historical customer behaviour. TheseWe use these behavioural maturities are used to determine the funds transfer pricing interest rates at which businesses are rewardedwe reward and chargedcharge our business units for sources and uses of funds in connection with newly originated business prior tofunds. We will apply this rate until a customer contracting to an alternativechanges onto a different product or service offered by Santander UKus or by a competitor.one of our competitors.
TheWe continue to improve the quality of our retail, commercial and wholesale deposits continues to be enhanced.deposits. Across all customer segments, Santander UK aimswe aim to deepen our customer relationships and sorelationships. We do this to lengthen the contractual and behavioural profile of theour liability base. In Retail Banking, we support this has been complemented by market leadingaim with attractive products such as the 1l2l3 World offering.
Deposit funding
TheThis table below shows our customer loans, customer deposits and the loan-to-deposit ratio for Santander UK, as well as for the business divisions, at 31 December 20142015 and 2013.2014. Retail Banking and Commercial Banking activities are largelymostly funded by customer deposits with the remainingdeposits. The rest is funded withby long-term debt and equity (including funding secured against our customer loans and advances).
The data for theour business divisions excludessegments does not include accrued interest. The total data for Santander UK includes accrued interest but excludesdoes not include repurchase agreements and reverse repurchase agreements, as described in the ‘Key Performance Indicators’ section.agreements.
| Customer | Customer | Loan-to- | Customer £bn | Customer £bn | Loan-to- % | |||||||||||||||||||
| loans | deposits | deposit ratio | ||||||||||||||||||||||
| £bn | £bn | % | ||||||||||||||||||||||
2015 | ||||||||||||||||||||||||
Retail Banking | 164.8 | 137.3 | 120 | |||||||||||||||||||||
Commercial Banking | 20.9 | 18.1 | 115 | |||||||||||||||||||||
Global Corporate Banking | 5.5 | 3.0 | 183 | |||||||||||||||||||||
Corporate Centre | 7.4 | 3.9 | 190 | |||||||||||||||||||||
Total customer loans and deposits | 198.6 | 162.3 | ||||||||||||||||||||||
Adjust for: fair value loans, loan loss reserves, accrued interest and other | (0.6 | ) | 0.9 | |||||||||||||||||||||
Statutory loans and advances to customers/deposits by customers(1) | 198.0 | 163.2 | ||||||||||||||||||||||
Less: repurchase agreements and reverse repurchase agreements | (1.0 | ) | (0.5 | ) | ||||||||||||||||||||
Total(2) | 197.0 | 162.7 | 121 | |||||||||||||||||||||
2014 | ||||||||||||||||||||||||
Retail Banking | 158.5 | 129.6 | 122 | 158.5 | 129.6 | 122 | ||||||||||||||||||
Commercial Banking | 18.7 | 15.3 | 122 | 18.7 | 15.3 | 122 | ||||||||||||||||||
Corporate & Institutional Banking | 5.2 | 2.3 | 226 | |||||||||||||||||||||
Global Corporate Banking | 5.2 | 2.3 | 226 | |||||||||||||||||||||
Corporate Centre | 8.3 | 5.2 | 160 | 8.3 | 5.2 | 160 | ||||||||||||||||||
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Total customer loans and deposits | 190.7 | 152.4 | 190.7 | 152.4 | ||||||||||||||||||||
Adjust for: fair value loans, loan loss reserves, accrued interest and other | (2.0) | 1.2 | (2.0 | ) | 1.2 | |||||||||||||||||||
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Statutory loans and advances to customers/deposits by customers(1) | 188.7 | 153.6 | 188.7 | 153.6 | ||||||||||||||||||||
Less: repurchase agreements and reverse repurchase agreements | (0.2) | (0.5) | (0.2 | ) | (0.5 | ) | ||||||||||||||||||
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Total(2) | 188.5 | 153.1 | 124 | 188.5 | 153.1 | 124 | ||||||||||||||||||
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2013 | ||||||||||||||||||||||||
Retail Banking | 155.6 | 123.2 | 126 | |||||||||||||||||||||
Commercial Banking | 17.0 | 13.8 | 123 | |||||||||||||||||||||
Corporate & Institutional Banking | 5.1 | 2.6 | 196 | |||||||||||||||||||||
Corporate Centre | 9.4 | 6.8 | 138 | |||||||||||||||||||||
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Total customer loans and deposits | 187.1 | 146.4 | ||||||||||||||||||||||
Adjust for: fair value loans, loan loss reserves, accrued interest and other | (2.5) | 0.8 | ||||||||||||||||||||||
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Statutory loans and advances to customers/deposits by customers(1) | 184.6 | 147.2 | ||||||||||||||||||||||
Less: repurchase agreements and reverse repurchase agreements | – | (0.9) | ||||||||||||||||||||||
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Total(2) | 184.6 | 146.3 | 126 | |||||||||||||||||||||
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(1) Customer loans and deposits as disclosed in Notes 18 and 29
| (1) | The customer loans and customer deposits numbers are the balances disclosed in Notes 16 and 27 to the Consolidated Financial Statements respectively. The customer deposits balance above excludes downstreamed funding from our immediate parent, Santander UK Group Holdings plc, of £0.8bn (2014: £nil). |
| (2) | We calculate the total loan-to-deposit ratio as loans and advances to customers (excluding reverse repurchase agreements) divided by deposits by customers (excluding repurchase agreements). |
(2) Total loan-to-deposit ratio calculated as loans and advances to customers (excluding reverse repurchase agreements) divided by deposits by customers (excluding repurchase agreements).
Annual Report 2015
Risk review
Wholesale funding
Wholesale funding and issuance model
The Banco Santander group is a multiple point of entry resolution group. This means that should it fail, it would be split up into parts. Healthy parts might be sold or be maintained as a residual group without their distressed sister companies. The resolution of the distressed parts might be effected via ‘bail in’ of bonds that had been issued to the market by a regional intermediate holding company.
Santander UK Group Holdings plc is a single point of entry resolution group. This means that resolution would work downwards from the group’s holding company (i.e. Santander UK Group Holdings plc). Losses in subsidiaries would first be transferred up to Santander UK Group Holdings plc. If the holding company is bankrupt as a result, the group needs resolving. The ‘bail in’ tool is applied to the holding company, with the equity being written off and bonds converted as necessary into equity to recapitalise the group. Those bondholders would become the new owners. The group would stay together.
Santander UK Group Holdings plc is the immediate holding company of Santander UK plc, which in turn is the immediate parent company of Abbey National Treasury Services plc. This structure, as set out below, is a Bank of England recommended configuration which aims to resolve banks without disrupting the activities of their operating companies, thereby maintaining continuity of services for customers.
Our current structure is:
The cross guarantees have the effect of aligning the interests of the class of creditors covered by the cross guarantees across the operating companies.
The PRA regulates our capital (including dividends and AT1 coupon payments) and large exposures. We are also required to satisfy the PRA that we can withstand capital and liquidity stresses on a standalone basis.
Santander UK Group Holdings plc issues:
| – | ||
| – | Subordinated debt. |
Santander UK plc and ANTS plc issuance includes:
| – | Covered bonds |
| – | Mortgages for RMBS vehicles |
| – | Senior unsecured |
| – | Short-term funding, such as commercial paper and certificates of deposit. |
During 2015, we received further clarity regarding the TLAC and MREL requirements. We believe the most efficient way of meeting the majority of our requirements will be through the issuance of senior unsecured debt from Santander UK Group Holdings plc, downstreamed to our operating companies transparently in a compliant form.
Composition of wholesale funding
We are active in the wholesale markets and we have direct access to both money market and long-term investors through our funding programmes. This makes our wholesale funding well diversified by product, maturity, geography and currency. This includes currencies available across a range of channels from:
| – | Money markets |
| – | Repo markets |
| – | Senior unsecured, secured, medium-term and subordinated debt. |
122 Santander UK plc
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Wholesale funding
Composition of wholesale funding
Santander UK continues to have access to a variety of sources of wholesale funding in a range of currencies, including those available from money markets, repo markets, medium term and subordinated debt investors, across a variety of distribution channels. Santander UK is an active participant in the wholesale markets and has direct access to both money market and long-term investors through its range of funding programmes. As a result, wholesale funding is well diversified by product, maturity, geography and currency.
Maturity profile of wholesale funding
TheThis table below shows Santander UK’s primaryour main sources of wholesale funding sources, excludingfunding. It does not include securities financing repurchase and reverse repurchaserespurchase agreements. The tables are prepared taking into account foreigntable is based on exchange rates at issue and scheduled repayments, and dorepayments. It does not reflect the final contractual maturity of the funding.
| Not more | Over 1 | Over 3 | Over 6 | Over 9 | Sub-total | Over 1 | Over 2 | Over 5 | Total | Not more than 1 month | Over 1 but not more than 3 months | Over 3 but not more than 6 months | Over 6 but not more than 9 months | Over 9 but not more than 12 months | Sub-total less than 1 year | Over 1 but not more than 2 years | Over 2 but not more than 5 years | Over 5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| than | but not | but not | but not | but not | less than | but not | but not | years | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 month | more than | more than | more than | more than | 1 year | more than | more than | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3 months | 6 months | 9 months | 12 months | 2 years | 5 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits by banks | 0.2 | 0.8 | – | – | – | 1.0 | – | – | – | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (non-customer deposits) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CDs and Commercial Paper | 1.6 | 3.2 | 1.7 | 0.6 | 0.1 | 7.2 | – | – | – | 7.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – public benchmark(1) | – | – | 0.7 | – | – | 0.7 | 1.8 | 7.9 | 3.0 | 13.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – privately placed | 0.5 | – | 0.2 | 0.7 | 0.6 | 2.0 | 1.8 | 2.0 | 0.2 | 6.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Covered bonds | – | – | – | 0.9 | 1.6 | 2.5 | 3.2 | 3.7 | 6.9 | 16.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securitisation and Structured Issuance | 1.8 | 0.7 | 1.4 | 2.1 | 1.7 | 7.7 | 4.8 | 2.3 | 0.7 | 15.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated liabilities and equity (including AT1 issuances)(2) | – | – | – | – | – | – | 0.1 | 1.2 | 4.0 | 5.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total at 2015 | 4.1 | 4.7 | 4.0 | 4.3 | 4.0 | 21.1 | 11.7 | 17.1 | 14.8 | 64.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Of which: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – secured | 1.8 | 0.7 | 1.4 | 3.0 | 3.3 | 10.2 | 8.0 | 6.0 | 7.6 | 31.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– unsecured | 2.3 | 4.0 | 2.6 | 1.3 | 0.7 | 10.9 | 3.7 | 11.1 | 7.2 | 32.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks | 0.9 | 0.9 | 0.1 | – | – | 1.9 | – | – | – | 1.9 | 0.9 | 0.9 | 0.1 | – | – | 1.9 | – | – | – | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(non-customer deposits) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CDs and Commercial Paper | 2.0 | 4.4 | 1.2 | 0.4 | 0.1 | 8.1 | 0.2 | – | – | 8.3 | 2.0 | 4.4 | 1.2 | 0.4 | 0.1 | 8.1 | 0.2 | – | – | 8.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Senior unsecured | – | – | 0.2 | – | 0.9 | 1.1 | 0.6 | 4.7 | 2.5 | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– public benchmark | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured: | – | – | 0.2 | – | 0.9 | 1.1 | 0.6 | 4.7 | 2.5 | 8.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – public benchmark(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– privately placed | – | 0.1 | 0.1 | 0.3 | 0.1 | 0.6 | 2 | 1.7 | 0.7 | 5 | – | 0.1 | 0.1 | 0.3 | 0.1 | 0.6 | 2.0 | 1.7 | 0.7 | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Covered bonds | – | 0.7 | 2.1 | – | – | 2.8 | 2.5 | 5.2 | 7.2 | 17.7 | – | 0.7 | 2.1 | – | – | 2.8 | 2.5 | 5.2 | 7.2 | 17.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securitisation and Structured | 2.5 | 0.1 | 2.9 | 1.1 | 1.1 | 7.7 | 6.6 | 4.6 | 0.7 | 19.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | 0.1 | – | – | 0.8 | – | 0.9 | – | 1.3 | 2.6 | 4.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total at 31 December 2014 | 5.5 | 6.2 | 6.6 | 2.6 | 2.2 | 23.1 | 11.9 | 17.5 | 13.7 | 66.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securitisation and Structured Issuance | 2.5 | 0.1 | 2.9 | 1.1 | 1.1 | 7.7 | 6.6 | 4.6 | 0.7 | 19.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated liabilities and equity (including AT1 issuances)(2) | 0.1 | – | – | 0.8 | – | 0.9 | – | 1.3 | 2.6 | 4.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total at 2014 | 5.5 | 6.2 | 6.6 | 2.6 | 2.2 | 23.1 | 11.9 | 17.5 | 13.7 | 66.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– secured | 2.5 | 0.8 | 5 | 1.1 | 1.1 | 10.5 | 9.1 | 9.8 | 7.9 | 37.3 | 2.5 | 0.8 | 5.0 | 1.1 | 1.1 | 10.5 | 9.1 | 9.8 | 7.9 | 37.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– unsecured | 3.0 | 5.4 | 1.6 | 1.5 | 1.1 | 12.6 | 2.8 | 7.7 | 5.8 | 28.9 | 3.0 | 5.4 | 1.6 | 1.5 | 1.1 | 12.6 | 2.8 | 7.7 | 5.8 | 28.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks | 0.1 | 1.2 | – | – | – | 1.3 | – | – | – | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(non-customer deposits) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CDs and Commercial Paper | 1.9 | 2.2 | 1.6 | 0.4 | 0.5 | 6.6 | – | – | – | 6.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Senior unsecured | – | 0.8 | 1.5 | – | 1.0 | 3.3 | 1.1 | 2.4 | 0.7 | 7.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– public benchmark | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– privately placed | 0.1 | 0.2 | 0.2 | 0.1 | 0.3 | 0.9 | 0.6 | 0.7 | 0.7 | 2.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Covered bonds | – | – | 1.3 | 0.1 | – | 1.4 | 2.8 | 6.0 | 6.8 | 17.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securitisation and Structured | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance | 1.2 | 0.3 | 1.7 | 3.2 | 1.3 | 7.7 | 7.1 | 9.7 | 1.4 | 25.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | – | – | – | – | – | – | – | 0.1 | 4.4 | 4.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total at 31 December 2013 | 3.3 | 4.7 | 6.3 | 3.8 | 3.1 | 21.2 | 11.6 | 18.9 | 14.0 | 65.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– secured | 1.2 | 0.3 | 3.0 | 3.3 | 1.3 | 9.1 | 9.9 | 15.7 | 8.2 | 42.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– unsecured | 2.1 | 4.4 | 3.3 | 0.5 | 1.8 | 12.1 | 1.7 | 3.2 | 5.8 | 22.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| (1) | This includes downstream funding from our immediate parent company, Santander UK Group Holdings plc. £168m (2014: £nil) was in respect of the issuance of a ¥30bn senior unsecured probond in two tranches (3 and 5 year), and £675m (2014: £nil) was in respect of the issuance of a $1bn 5 year senior unsecured SEC registered benchmark issuance. For more details see Note 30 to the Consolidated Financial Statements. |
| (2) | This includes downstream funding from our immediate parent company, Santander UK Group Holdings plc. £1,016m (2014: £nil) was in respect of the issuance of Tier 2 Dated Subordinated Notes and £1,550m (2014: £800m) was in respect of the issuance of Perpetual Capital Securities. See Notes 31 and 36 to the Consolidated Financial Statements. |
Annual Report 2015
Risk review
Balance sheet management risk
continued
Currency composition of wholesale funds
WhereWhen we raise term funding is raised in foreign currencies, we use cross currency matched swaps are used to convert the foreign currencyit into sterling. WhereWhen we raise short-term deposits are raised in US dollars or Euros, these are usedeuros, we either swap them into sterling, use them to purchasebuy eligible liquidity pool assets or place funds at the US Federal Reserve or swapped into sterling. At 31 December 2014 and 2013, the proportion ofReserve. This table shows our wholesale funding by major currencies was as follows:currency at 31 December 2015 and 2014.
| Sterling % | US Dollar % | Euro % | Other currencies % | Sterling % | US Dollar % | Euro % | Other currencies % | |||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
Deposits by banks (non-customer deposits) | 7 | 77 | 16 | – | 18 | 82 | – | – | ||||||||||||||||||||||||
CDs and Commercial Paper | 19 | 64 | 17 | – | 36 | 47 | 17 | – | ||||||||||||||||||||||||
Senior unsecured – public benchmark | 10 | 43 | 45 | 2 | 12 | 44 | 43 | 1 | ||||||||||||||||||||||||
– privately placed | 18 | 13 | 66 | 3 | 9 | 9 | 79 | 3 | ||||||||||||||||||||||||
Covered bonds | 32 | – | 67 | 1 | 35 | – | 64 | 1 | ||||||||||||||||||||||||
Securitisation and Structured Issuance | 40 | 30 | 29 | 1 | 52 | 28 | 20 | – | ||||||||||||||||||||||||
Subordinated liabilities | 71 | 26 | – | 3 | ||||||||||||||||||||||||||||
Subordinated liabilities and equity (including AT1 issuance) | 58 | 41 | – | 1 | ||||||||||||||||||||||||||||
| 33 | 26 | 40 | 1 | ||||||||||||||||||||||||||||
| 31 | 27 | 41 | 1 | |||||||||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||
Deposits by banks (non-customer deposits) | 9 | 90 | 1 | – | 7 | 77 | 16 | – | ||||||||||||||||||||||||
CDs and Commercial Paper | 17 | 65 | 16 | 2 | 19 | 64 | 17 | – | ||||||||||||||||||||||||
Senior unsecured – public benchmark | 13 | 41 | 43 | 3 | 10 | 43 | 45 | 2 | ||||||||||||||||||||||||
– privately placed | 40 | 16 | 34 | 10 | 18 | 13 | 66 | 3 | ||||||||||||||||||||||||
Covered bonds | 29 | – | 70 | 1 | 32 | – | 67 | 1 | ||||||||||||||||||||||||
Securitisation and Structured Issuance | 35 | 33 | 31 | 1 | 40 | 30 | 29 | 1 | ||||||||||||||||||||||||
Subordinated liabilities | 62 | 27 | 8 | 3 | ||||||||||||||||||||||||||||
Subordinated liabilities and equity (including AT1 issuance) | 71 | 26 | – | 3 | ||||||||||||||||||||||||||||
| 31 | 27 | 41 | 1 | |||||||||||||||||||||||||||||
| 31 | 28 | 39 | 2 | |||||||||||||||||||||||||||||
Reconciliation of wholesale funding to the balance sheet
TheThis table below presents a reconciliation ofreconciles our wholesale funding to theour balance sheet at 31 December 20142015 and 2013.2014.
| Balance sheet line item | Balance sheet line item | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | Funding analysis | | | Deposits by banks | | | Deposits by customers | (2) | | Debt securities | | | Financial liabilities at fair value | | | Trading liabilities | | | Subordinated liabilities | | | Share capital and other equity instruments | (4) | Funding | Deposits | Deposits by | Debt | Financial | Trading | Subordinated | Share capital and | |||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | analysis | by banks | customers | (2) | securities | liabilities at | liabilities | liabilities | other equity | ||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| in issue | fair value | instruments(4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks (non-customer deposits) | 1.9 | – | – | – | – | 1.9 | – | – | 1.0 | – | – | – | – | 1.0 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
CDs and Commercial Paper | 8.3 | – | – | 8.0 | 0.3 | – | – | – | 7.2 | – | – | 7.2 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior unsecured – public benchmark | 8.9 | – | – | 8.9 | – | – | – | – | 13.4 | – | 0.8 | 12.6 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
– privately placed | 5.0 | – | – | 2.5 | 2.5 | – | – | – | 6.0 | – | – | 4.0 | 2.0 | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Covered bonds | 17.7 | – | – | 17.7 | – | – | – | – | 16.3 | – | – | 16.3 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Securitisation and Structured Issuance | 19.6 | 4.8 | 0.5 | 14.1 | – | 0.2 | – | – | 15.5 | 4.2 | 0.5 | 9.7 | – | 1.1 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | 4.8 | – | – | – | – | – | 3.7 | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities and equity | 5.3 | – | – | – | – | – | 3.5 | 1.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total wholesale funding | 66.2 | 4.8 | 0.5 | 51.2 | 2.8 | 2.1 | 3.7 | 1.1 | 64.7 | 4.2 | 1.3 | 49.8 | 2.0 | 2.1 | 3.5 | 1.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repos | 8.4 | – | – | – | – | 8.4 | – | – | 6.6 | – | – | – | – | 6.6 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange and hedge accounting | 0.7 | – | – | 0.6 | – | – | 0.1 | – | 0.3 | – | – | (0.1 | ) | – | – | 0.4 | – | |||||||||||||||||||||||||||||||||||||||||||||||
Other | 8.4 | 3.4 | (1) | – | – | – | 4.8 | (3) | 0.2 | – | 8.1 | 4.1 | (1) | – | – | – | 4.0 | (3) | – | – | ||||||||||||||||||||||||||||||||||||||||||||
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Balance sheet total | 83.7 | 8.2 | 0.5 | 51.8 | 2.8 | 15.3 | 4.0 | 1.1 | 79.7 | 8.3 | 1.3 | 49.7 | 2.0 | 12.7 | 3.9 | 1.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
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31 December 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks (non-customer deposits) | 1.3 | – | – | – | – | 1.3 | – | – | 1.9 | – | – | – | – | 1.9 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
CDs and Commercial Paper | 6.6 | – | – | 5.8 | 0.8 | – | – | – | 8.3 | – | – | 8.0 | 0.3 | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Senior unsecured – public benchmark | 7.5 | – | – | 7.5 | – | – | – | – | 8.9 | – | – | 8.9 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
– privately placed | 2.9 | – | – | 0.3 | 2.6 | – | – | – | 5.0 | – | – | 2.5 | 2.5 | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Covered bonds | 17.0 | – | – | 17.0 | – | – | – | – | 17.7 | – | – | 17.7 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Securitisation and Structured Issuance | 25.9 | 5.5 | 0.9 | 19.5 | – | – | – | – | 19.6 | 4.8 | 0.5 | 14.1 | – | 0.2 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | 4.5 | – | – | – | – | – | 3.9 | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities and equity | 4.8 | – | – | – | – | – | 3.7 | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total wholesale funding | 65.7 | 5.5 | 0.9 | 50.1 | 3.4 | 1.3 | 3.9 | 0.6 | 66.2 | 4.8 | 0.5 | 51.2 | 2.8 | 2.1 | 3.7 | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repos | 12.8 | – | – | – | – | 12.8 | – | – | 8.4 | – | – | – | – | 8.4 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange and hedge accounting | 0.9 | – | – | 0.8 | – | – | 0.1 | – | 0.7 | – | – | 0.6 | – | – | 0.1 | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | 10.7 | 3.2 | (1) | – | – | – | 7.2 | (3) | 0.3 | – | 8.4 | 3.4 | (1) | – | – | – | 4.8 | (3) | 0.2 | – | ||||||||||||||||||||||||||||||||||||||||||||
Balance sheet total | 90.1 | 8.7 | 0.9 | 50.9 | 3.4 | 21.3 | 4.3 | 0.6 | 83.7 | 8.2 | 0.5 | 51.8 | 2.8 | 15.3 | 4.0 | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
124 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk
| Other key risks | ||||||||||||||||||
In addition to
As well as deposit and wholesale funding, Santander UK haswe have access to the followingthese UK Government schemes:
i) Funding for Lending Scheme (‘FLS’)(FLS)
This Bank of England and HM Treasury schemeThe FLS is designed to boost lending to UK households and non-financial companies,companies. It does this by providinggiving funding to banks and building societies for an extended period with– it links both the price and quantity of funding provided linked to the net lending to the UK non-financial sector lending over a specified period. The FLS allowslets participants to borrow UK Treasury bills in exchange for eligible collateral duringin a drawdown window. Eligible collateral consists of all collateral eligible in the Bank of England’s Discount Window Facility.
ii) Contingent Term Repo Facility (‘CTRF’)(CTRF)
The CTRF providesgives short-term liquidity to the market through monthly auctions and using eligible collateral as security. Eligible collateral consists of all collateral eligible in the Bank of England’s Discount Window Facility.
iii) Indexed Long-Term Repo (‘ILTR’)(ILTR)
These Bank of England operations areThe ILTR is aimed at banks, building societies and broker-dealers with a predictable need for liquid assets. The Bank of England offers funds via an ILTR operation once each calendar month, normally with a six-month maturity. Participants are able tocan borrow using eligible collateral as security. Eligible
For each of these schemes, eligible collateral consists ofincludes all collateral that is eligible in the Bank of England’s Discount Window Facility.
Term issuance
In 2015, our term issuance (sterling equivalent) was:
| Sterling | US Dollar | Euro | Yen | Total | Total | |||||||||||||||||||
| 2015 | 2014 | |||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||
Securitisations | 0.9 | 0.8 | – | – | 1.7 | 1.8 | ||||||||||||||||||
Covered bonds – public benchmark | 0.7 | – | 0.7 | – | 1.4 | 2.2 | ||||||||||||||||||
– privately placed | – | – | – | – | – | – | ||||||||||||||||||
Structured notes | 0.1 | – | – | – | 0.1 | 0.4 | ||||||||||||||||||
Senior unsecured – public benchmark | 0.8 | 1.9 | 2.5 | 0.2 | 5.4 | 4.7 | ||||||||||||||||||
– privately placed | – | – | 1.7 | – | 1.7 | 3.0 | ||||||||||||||||||
Subordinated debt and equity (including AT1 issuance) | 0.8 | 1.0 | – | – | 1.8 | 0.8 | ||||||||||||||||||
Total gross issuances | 3.3 | 3.7 | 4.9 | 0.2 | 12.1 | 12.9 | ||||||||||||||||||
Funding developments in2015 compared to 2014(unaudited)
OurTogether with our immediate parent, Santander UK Group Holdings plc, our overall funding strategy isremains to develop and maintainsustain a diversified funding base, which allows us accessbase. We also need to a varietyfulfil regulatory requirements as well as to support our credit ratings. As in 2014, the majority of funding sources. As part of this strategy, Santander UK raises funding in a number of currencies, including US dollars and euro, and converts these back into sterling to fund its commercial assets which are largely sterling denominated.
In keeping with the pattern ofour new issuance in 2013, the focus of new issuance in 2014 was in the unsecured markets.
2015 provided, on the whole, stable market conditions. Mid-year was dominated by market instability caused by uncertainty over Greece’s membership of the eurozone. In total,the second half of the year, we issued six public US dollar unsecured securities and one public euro unsecured security. In additionsaw increased volatility due to the unsecured issuance, we issued residential mortgage-backed securitieseconomic situation in China and two benchmark Sterling covered bonds, forms of financing that permit us to benefit from our prime UK mortgage assets. The improvementcertain markets, and price pressures in market sentiment over the medium term continued in 2014. The wholesalecommodities market. However, the funding markets that we operate in whilst subject to some limited short term volatility, continued to be stable, offeringoffer us economically viable sources of funding. This stable market backdrop allowed us to continue to have a more balanced mix of wholesale unsecured and secured new issuance than in recent years. Overall, theOur cost of wholesale funding continued to fall due to the replacement ofreplacing more expensive MTF maturities with lower cost new issuance in the now more stable capital marketslower spread environment.
In 2014, our MTF issuance was £12.9bn (2013: £6.6bn). In June and December 2014, respectively, £500m and £300m However, the cost of Perpetual Capital Securities were issued tofunding associated with issuances downstreamed from our immediate parent holding company,is likely to offset this reduction in the future.
In 2015, our term issuance was £12.1bn (2014: £12.9bn), of which issued similar securities to Banco Santander, S.A. In addition, £2.2bn of Treasury bills were drawn under the FLS.our medium term issuance was £10.3bn (2014: £12.1bn):
| – | We issued seven public senior unsecured securities and received downstreamed funding, in the form of loans that rank pari passu with our existing senior unsecured liabilities, from three public issuances by our immediate parent. These three issuances included an inaugural $1bn 5 year senior unsecured SEC registered benchmark transaction in October as well as the issuance of our first senior unsecured probond in the Japanese markets in December – ¥30bn in two tranches (3 and 5 year) |
| – | In June 2015, the Company issued £750m Perpetual Capital Securities and in September, the Company issued $1.5bn of Tier 2 Dated Subordinated Notes in two tranches (10 and 30 year). In each instance these were issued to our immediate parent, Santander UK Group Holdings plc |
| – | We also issued residential mortgage-backed securities and two covered bonds. These forms of financing permit us to benefit from our prime UK mortgage assets. |
Maturities in 20142015 were approximately £14.4bn (2013: £15.4bn)£12.3bn (2014: £14.4bn). At 31 December 2014,2015, 67% (2014: 65% (2013: 68%) of wholesale funding had a maturity of greater than one year, with an overall residual duration for wholesale funding of 4043 months (2013:(2014: 40 months).
During 2014,In 2015, our continuing strategy of building closer customer relationships through the 1I2I3 World retail offering created additional current account liabilities that further strengthened this stable funding source. At
We made no additional drawings of Treasury Bills under the same time, the level of less stable retail and corporate instant access accounts reduced as a constituent of the funding mix.
Term issuance(audited)
In 2014, the majority of Santander UK’s term issuance wasFLS in unsecured format, consistent with the issuance strategy in 2013. During the year, term issuance (sterling equivalent) comprised:
| Sterling | US Dollar | Euro | Total | Total | ||||||||||||||||
| £bn | £bn | £bn | 2014 £bn | 2013 £bn | ||||||||||||||||
Securitisations | 0.9 | 0.9 | – | 1.8 | 1.7 | |||||||||||||||
Covered bonds – privately placed | – | – | – | – | 0.8 | |||||||||||||||
– publicly placed | 1.0 | – | 1.2 | 2.2 | 0.5 | |||||||||||||||
Structured notes | 0.1 | 0.2 | 0.1 | 0.4 | 0.4 | |||||||||||||||
Senior unsecured – privately placed | – | 0.2 | 2.8 | 3.0 | 0.2 | |||||||||||||||
– public benchmark | 0.5 | 2.6 | 1.6 | 4.7 | 2.1 | |||||||||||||||
Subordinated debt | 0.8 | – | – | 0.8 | 0.9 | |||||||||||||||
Total gross issuances | 3.3 | 3.9 | 5.7 | 12.9 | 6.6 | |||||||||||||||
Annual Report 2015
Risk review
Balance sheet management risk
continued
Encumbrance
The abilityBeing able to pledge assets as collateral is an integral part of a financial institution’s operations, and includes asset securitisation or related structured funding, the pledging of collateral to support the use of payment/settlement systems, and entering into derivatives, securities repurchase agreements and securities borrowing arrangements. operations. It includes:
| – | Asset securitisation or related structured funding |
| – | Pledging collateral to support using payment or settlement systems |
| – | Entering into derivatives, securities repurchase agreements and securities borrowing arrangements. |
An asset is encumbered if it has been pledged as collateral against an existing liability, and as a resultliability. This means it is no longer available to secure funding, satisfymeet collateral needs or be sold to reduce potential future funding requirements.needs.
Santander UK carries out a number of activities whichWe do various things that lead to asset encumbrance, including:
encumbrance. These include where we:
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Santander UK monitors theWe monitor our mix of secured and unsecured funding sources within itsin our funding plan and seeksplan. We aim to efficiently utiliseuse our available collateral efficiently to raise secured funding and to meet our other collateralised obligations. Santander UK’s most significant
Our biggest source of encumbrance is thewhere we use of itsour mortgage portfolio to raise funds via securitisation, covered bonds or other structured borrowing. Santander UK ensures that it controls the levelWe control our levels of encumbrance arising from these activities by establishingsetting a minimum acceptable level of unencumbered assets that must be available after taking account of future funding plans, whether assets can be used for future collateral needs, the impact of potential stress conditions and the current level of encumbrance. Santander UK also ensures that its secured funding activities are not structurally subordinating its liabilities.factoring in:
| – | Our future funding plans |
| – | Whether we can use our assets for our future collateral needs |
| – | The impact of possible stress conditions |
| – | Our current level of encumbrance. |
On-balance sheet encumbered and unencumbered assets
| 2014 | 2013 | Assets encumbered as a result of transactions | Other assets (comprising assets encumbered at the central bank | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unencumbered assets | Unencumbered assets | with counterparties other than central banks | and unencumbered assets) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Encumbered | Readily | Other | Total | Encumbered | Readily | Other | Total | Assets not positioned at the central bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| assets | realisable | assets | assets | realisable | assets | As a result | As a result | Other | Total | Assets positioned | Readily | Other assets | Cannot be | Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | of covered | of securitis- | at the central bank | available for | that are | encumbered | assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| bonds | ations | (i.e. pre-positioned | encumbrance | capable of | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| plus encumbered) | being | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| encumbered | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks(1)(2) | 318 | 22,244 | – | 22,562 | 315 | 26,059 | – | 26,374 | – | – | – | – | 340 | 16,502 | – | – | 16,842 | 16,842 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading assets | 15,086 | 802 | 5,812 | 21,700 | 12,123 | 1,548 | 8,623 | 22,294 | – | – | 14,305 | 14,305 | – | 2,298 | 7,358 | – | 9,656 | 23,961 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | – | – | 23,021 | 23,021 | – | – | 20,049 | 20,049 | – | – | – | – | – | – | – | 20,911 | 20,911 | 20,911 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets designated at fair value | 8 | 2,100 | 773 | 2,881 | – | 2407 | 340 | 2,747 | – | – | – | – | – | 1,721 | 677 | – | 2,398 | 2,398 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to banks | 122 | – | 1,935 | 2,057 | 129 | – | 2,218 | 2,347 | – | – | 91 | 91 | – | 462 | 2,995 | – | 3,457 | 3,548 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers | 56,851 | 106,683 | 25,157 | 188,691 | 58,960 | 106,767 | 18,860 | 184,587 | 23,390 | 24,111 | 13 | 47,514 | 27,648 | 96,872 | 5,640 | 20,371 | 150,531 | 198,045 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and receivables securities | – | 118 | – | 118 | 160 | 931 | 10 | 1101 | – | – | – | – | – | 52 | – | – | 52 | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities | 1,527 | 7,417 | – | 8,944 | 897 | 4,108 | – | 5,005 | – | – | 1,716 | 1,716 | – | 7,296 | – | – | 7,296 | 9,012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Macro hedge of interest rate risk | – | – | 963 | 963 | – | – | 769 | 769 | – | – | – | – | – | – | – | 781 | 781 | 781 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interests in other entities | – | – | 38 | 38 | – | – | 27 | 27 | – | – | – | – | – | – | – | 48 | 48 | 48 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets | – | – | 2,187 | 2,187 | – | – | 2,335 | 2,335 | – | – | – | – | – | – | – | 2,231 | 2,231 | 2,231 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | – | – | 1,624 | 1,624 | – | – | 1521 | 1521 | – | – | – | – | – | – | 1,597 | – | 1,597 | 1,597 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current tax assets | – | – | – | – | – | – | 114 | 114 | – | – | – | – | – | – | – | 49 | 49 | 49 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred tax | – | – | – | – | – | – | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax assets | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retirement benefit assets | – | – | 315 | 315 | – | – | 118 | 118 | – | – | – | – | – | – | – | 556 | 556 | 556 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | – | – | 876 | 876 | – | – | 882 | 882 | – | – | – | – | – | – | – | 1,375 | 1,375 | 1,375 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 73,912 | 139,364 | 62,701 | 275,977 | 72,584 | 141,820 | 55,882 | 270,286 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 23,390 | 24,111 | 16,125 | 63,626 | 27,988 | 125,203 | 18,267 | 46,322 | 217,780 | 281,406 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Encumbered cash and balances at central banks |
| (2) | Readily realisable cash and balances at central banks |
At 31 December 2014, only £73.9bn (2013: £72.6bn) of Santander UK’s assets were encumbered which primarily related to funding secured against loans and advances to customers, and cash collateral included within trading assets, posted to satisfy margin requirements on derivatives.
Unencumbered assets classified as readily realisable include cash and securities held in the eligible liquidity pool as well as additional unencumbered assets which provide a source of contingent liquidity. Whilst these additional unencumbered assets are not relied upon in Santander UK’s Liquidity Risk Appetite, in stress conditions a portion may be utilised to generate liquidity through use as collateral for secured funding or through outright sale.
Unencumbered assets not classified as readily realisable consist primarily of derivatives and loans and advances to customers. Loans and advances to customers are only classified as readily realisable if they are already in a form such that they can be used to raise funding without further management actions. This includes excess collateral already in secured funding vehicles and collateral pre-positioned at central banks and available for use in secured financing transactions. All other loans and advances are conservatively classified as not readily realisable; however a proportion would be suitable for use in secured funding structures.
126 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk
| Other key risks | ||||||||||||||||||
| Assets encumbered as a result of transactions | Other assets (comprising assets encumbered at the central bank | |||||||||||||||||||||||||||||||||||||||||
| with counterparties other than central banks | and unencumbered assets) | |||||||||||||||||||||||||||||||||||||||||
| Assets not positioned at the central bank | ||||||||||||||||||||||||||||||||||||||||||
| As a result | As a result | Other | Total | Assets positioned | Readily | Other assets | Cannot be | Total | Total | |||||||||||||||||||||||||||||||||
| of covered | of securitis- | at the central bank | available for | that are | encumbered | assets | ||||||||||||||||||||||||||||||||||||
| bonds | ations | (i.e. pre-positioned | encumbrance | capable of | ||||||||||||||||||||||||||||||||||||||
| plus encumbered) | being | |||||||||||||||||||||||||||||||||||||||||
| encumbered | ||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||
| Cash and balances at central banks(1)(2) | – | – | – | – | 318 | 22,244 | – | – | 22,562 | 22,562 | ||||||||||||||||||||||||||||||||
| Trading assets | – | – | 15,086 | 15,086 | – | 802 | 5,812 | – | 6,614 | 21,700 | ||||||||||||||||||||||||||||||||
| Derivative financial instruments | – | – | – | – | – | – | – | 23,021 | 23,021 | 23,021 | ||||||||||||||||||||||||||||||||
| Financial assets designated at fair value | – | – | 8 | 8 | – | 2,100 | 773 | – | 2,873 | 2,881 | ||||||||||||||||||||||||||||||||
| Loans and advances to banks | – | – | 122 | 122 | – | – | 1,935 | – | 1,935 | 2,057 | ||||||||||||||||||||||||||||||||
| Loans and advances to customers | 25,468 | 27,902 | – | 53,370 | 32,461 | 77,703 | 8,581 | 16,576 | 135,321 | 188,691 | ||||||||||||||||||||||||||||||||
| Loans and receivables securities | – | – | – | – | – | 118 | – | – | 118 | 118 | ||||||||||||||||||||||||||||||||
| Available-for-sale securities | – | – | 1,527 | 1,527 | – | 7,417 | – | – | 7,417 | 8,944 | ||||||||||||||||||||||||||||||||
| Macro hedge of interest rate risk | – | – | – | – | – | – | – | 963 | 963 | 963 | ||||||||||||||||||||||||||||||||
| Interests in other entities | – | – | – | – | – | – | – | 38 | 38 | 38 | ||||||||||||||||||||||||||||||||
| Intangible assets | – | – | – | – | – | – | – | 2,187 | 2,187 | 2,187 | ||||||||||||||||||||||||||||||||
| Property, plant and equipment | – | – | – | – | – | – | 1,624 | – | 1,624 | 1,624 | ||||||||||||||||||||||||||||||||
| Current tax assets | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
| Deferred tax assets | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
| Retirement benefit assets | – | – | – | – | – | – | – | 315 | 315 | 315 | ||||||||||||||||||||||||||||||||
| Other assets | – | – | – | – | – | – | – | 876 | 876 | 876 | ||||||||||||||||||||||||||||||||
Total assets | 25,468 | 27,902 | 16,743 | 70,113 | 32,779 | 110,384 | 18,725 | 43,976 | 205,864 | 275,977 | ||||||||||||||||||||||||||||||||
| (1) | Encumbered cash and balances at central banks are minimum cash balances we are required to hold at central banks for regulatory purposes. |
| (2) | Readily realisable cash and balances at central banks are amounts held at central banks as part of our liquidity management activities. |
Encumbered assets mainly related to funding we had secured against loans and advances to customers, and cash collateral in trading assets that we posted to meet margin needs on derivatives.
Unencumbered assets classified as readily realisable include cash and securities we hold in our eligible liquidity pool. They also include other unencumbered assets that give us a source of contingent liquidity. We do not rely on these extra unencumbered assets in our liquidity risk appetite, but we might use some of them in a time of stress. We can create liquidity by using them as collateral for secured funding or through outright sale.
Unencumbered assets that are not classified as readily realisable are mainly derivatives and customer loans and advances.
Customer loans and advances are only classified as readily realisable if they are already in a form we can use to raise funding without any other actions on our part. This includes excess collateral that is already in a secured funding structure. It also includes collateral that is pre-positioned at central banks and is available for use in secured financing.
All other loans and advances are classified as not readily realisable, but some would still be suitable for use in secured funding structures.
Encumbrance of customer loans and advances
Santander UK has providedWe have issued prime retail mortgage-backed and other asset-backed securitised products to a diverse investor base through itsour mortgage-backed and other asset-backed funding programmes, as described inprogrammes. For more on this, see Note 1917 to the Consolidated Financial Statements. Funding has historically been
We have raised via 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, Swiss National Bank, and US Federal Reserve facilities) and other asset-backed notes. Santander UKwith:
| – | 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, Swiss National Bank, and US Federal Reserve facilities |
| – | Other asset-backed notes. |
We also has an establishedhave a covered bond programme, wherebyprogramme. Under this, we issue securities are issued to investors and are guaranteed by a pool of ring-fenced residential mortgages.
At 31 December 2014,2015, our total notes issued externally from secured programmes (securitisations and covered bonds) decreased to £32,373m (2013: £37,247m), including£25,885m (2014: £32,373m). This included gross issuance of £4,023m (2013: £2,962m)£3,068m (2014: £4,023m) and redemptions of £8,440m (2013: £9,917m)£9,840m (2014: £8,440m). At 31 December 2014,We retained a total of £14,373m (2013: £14,599m)£11,110m (2014: £14,373m) of notes issued under securitisation and covered bond programmes had also been retained internally, a proportionprogrammes. We used some of which had been used as collateral for raising funds via third party bilateral secured funding transactions, which totalled £6,444m at 31 December 2014 (2013: £7,559m), or for creating collateral which could in the future be used for liquidity purposes.these:
| – | As collateral for raising funds via third-party bilateral secured funding transactions, which totalled £5,393m at 31 December 2015 (2014: £6,444m) |
| – | To create collateral that we could use in future for liquidity purposes. |
20142015 compared with 20132014(unaudited)
TheOur level of encumbrance arising from external issuance of securitisations and covered bonds decreased in 20142015 as planned, reflecting both the overall reduction in wholesale funding and theplanned. This reflected our desire to shift new wholesale funding issuance away from the secured markets where possible. It is expected that theWe expect our overall level of encumbrance willto continue to decrease in 2015, albeit at a slower pace than in 2014.
Annual Report 2015
Risk review
Balance sheet management risk
continued
CREDIT RATINGS(unaudited)
Contractual credit rating downgrade exposure (cumulative cash flow)
| Cumulative cash outflow | ||||||||
| At 31 December 2014 | One-notch downgrade £bn | Two-notch downgrade £bn | ||||||
Securitisation derivatives | 3.3 | 4.1 | ||||||
Contingent liabilities and derivatives margining | 2.6 | 3.0 | ||||||
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Total contractual funding or margin requirements | 5.9 | 7.1 | ||||||
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| Cumulative cash outflow | ||||||||
| At 31 December 2013 | One-notch downgrade £bn | Two-notch downgrade £bn | ||||||
Securitisation derivatives | 4.1 | 5.6 | ||||||
Contingent liabilities and derivatives margining | 3.5 | 3.9 | ||||||
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Total contractual funding or margin requirements | 7.6 | 9.5 | ||||||
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On 3 February 2015, the ratings agency Standard & Poor’s (‘S&P’) placed on CreditWatch with negative implications the long-term ratings of Santander UK and many other banks in the UK, Germany and Austria, including those of our main UK peers. CreditWatch with negative implications highlights S&P’s opinion regarding the potential direction of a rating. These rating actions followed S&P’s review of government support in countries which had fully implemented the EU’s Bank Recovery and Resolution Directive. S&P’s view is that there is a reduced likelihood of extraordinary government support being made available to UK banks in the future.
Given the rating action by S&P is part of a wider review of the banking sector it is not expected to have a material impact on our business.
| Cumulative cash outflow | ||||||
| One-notch | Two-notch | |||||
| downgrade | downgrade | |||||
| £bn | £bn | |||||
2015 | ||||||
Securitisation derivatives | 2.6 | 2.6 | ||||
Contingent liabilities and derivatives margining | 2.0 | 2.3 | ||||
Total contractual funding or margin requirements | 4.6 | 4.9 | ||||
2014 | ||||||
Securitisation derivatives | 3.3 | 4.1 | ||||
Contingent liabilities and derivatives margining | 2.6 | 3.0 | ||||
Total contractual funding or margin requirements | 5.9 | 7.1 | ||||
128 Santander UK plc
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| Capital risk is the risk that we do not have an adequate amount or quality of capital to meet our internal business objectives, regulatory requirements, market expectations and dividend payments, including AT1 coupons. In this section, we set out how we are regulated by the PRA (as a UK authorised banking group) and the ECB (as a member of the wider Banco Santander group). We explain how we manage capital on a standalone basis as an autonomous subsidiary within the wider Banco Santander group. We then analyse our capital resources and key ratios including our leverage and risk weighted assets (RWAs). Key metrics Strong CET 1 capital ratio of 11.6% Our CET 1 capital ratio reduced from 11.9% in 2014 adversely impacted by the PPI provision charge of £450m. Improved PRA end point Tier 1 leverage ratio of 4.0% Our ratio increased from 3.8% in 2014 driven by £750m AT1 issuance in June 2015. Total capital resources increased to £15.6bn In addition to the £750m AT1 issuance above, our total capital resources increased due to US$1.5bn of Tier 2 issuances. |
Annual Report 2015
Risk review
THE SCOPE OF OUR CAPITAL ADEQUACY
Regulatory supervision
Santander UK plc is incorporated in the UK. For capital purposes, we are subject to prudential supervision by the following regulators:
| – | PRA: as we are a UK authorised banking group |
| – | ECB: as we are a member of the Banco Santander group. The ECB started to supervise the Banco Santander group in 2014 as part of the Single Supervisory Mechanism (SSM). |
Although we are part of the Banco Santander group, we do not have any guarantees from our parent and we operate as an autonomous subsidiary. As we are regulated by the PRA, we have to meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the support of our parent. Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior management appointments.
Santander UK Group Holdings plc became the holding company of Santander UK plc in January 2014. From this date, Santander UK Group Holdings plc became 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.
Our approach to CRD IV
We apply Banco Santander SA’s approach to capital measurement and risk management for CRD IV. As a result, Santander UK plc is classified as a significant subsidiary of Banco Santander SA.
For more on the CRD IV risk measurement of our exposures, see Banco Santander SA’s Pillar 3 report.
2015 compared to 2014(unaudited)
The Basel Committee on Banking Supervision produced revised standards for minimum capital requirements for market risk in January 2016. These standards, with other proposed revisions to the capital treatment of interest rate risk in the banking book, operational risk, credit risk standardised approaches and capital floors, have the potential to significantly impact the measurement of RWAs over the medium term. This could have a negative impact on our capital ratios.
Other negative impacts to our capital position are possible from EBA Regulatory Technical Standards, which continue to be produced to extend the CRD IV rules, and from changes to the UK Pillar 2 regime to be implemented by the PRA in 2016.
In addition, the Financial Stability Board (FSB) finalised proposals on TLAC and MREL requirements which define minimum levels of loss absorbency required for globally significant banking groups from 2019. These will apply to us as we are a subsidiary of the globally significant Banco Santander group. They will also be a factor in the Bank of England determination of the level of loss absorbing capacity we will need to have under the EU Bank Recovery and Resolution Directive (BRRD). We will need to ensure that we have enough capital and loss absorbing eligible liabilities to meet this level.
130 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk
| Other key risks | ||||||||||||||||||
Santander UK adopts a centralised
CAPITAL RISK MANAGEMENT
Our approach to capital management approach, basedis centralised. We base it on anour assessment of both regulatory requirementswhat the regulators ask of us, and the economic capital impacts of our businesses. This approach operatesbusiness. We operate within the Board-approved Risk Appetite,capital risk framework and appetite approved by our Board. This takes into accountaccount:
| – | The commercial environment we operate in |
| – | Our strategy for each of our material risks |
| – | The potential impact of any adverse scenarios or stresses on our capital position. |
As we do not benefit from any guarantees from our parent and we are an autonomous subsidiary, the commercial environment in which Board (and some subsidiary boards) are responsible for managing, controlling and assuring capital risk.
Santander UK operates, management’s strategy for each of its material risksplc, Abbey National Treasury Services plc, and Cater Allen Limited, which are the potential impact of adverse scenarios and stresses onthree PRA-regulated entities within the Santander UK group, are party to a capital position. Details of Santander UK’s objectives, policies and processes for managing capital can be found in Note 46 to the Consolidated Financial Statements.
support deed dated 23 December 2015 (the Capital risk is the riskSupport Deed) with certain other non-regulated subsidiaries of Santander UK not having an adequate amount or quality of capital to meet its internal business objectives, regulatory requirementsplc and market expectations.
Whilst Santander UK is part of the wider Banco Santander group, Santander UK plc is incorporated in the UK, regulated by the PRA and does not benefit from parental guarantees and operates as an autonomous subsidiary. As such, responsibility for the management, control and assurance of capital risk lies with the Board and, when applicable, certain subsidiary boards. The Board delegates day-to-day responsibility for capital risk to the CEO.
The Capital Risk Framework, reviewed by the Board annually, describes the high level arrangements for identifying, assessing, managing and reporting capital risk.
Scope of Santander UK’s capital adequacy
Santander UK is a UK banking group effectively subject to two tiers of supervision. Santander UK is subject to prudential supervision by both the PRA (as a UK authorised bank) and the Banco de España (as a member of the Banco Santander group). The ECB commenced supervision of the Banco Santander group in November 2014 as part of the Single Supervisory Mechanism (‘SSM’).
As a PRA regulated entity, Santander UK is expected to satisfy the PRA capital requirements on a standalone basis. Similarly, Santander UK must demonstrate to the PRA that it can withstand capital stress tests without parental support. Reinforcing the corporate governance framework adopted by Santander UK, the PRA exercises oversight through its rules and regulations on the Santander UK plc Board and senior management appointments.
Santander UK has applied Banco Santander, S.A.’s approach to capital measurement and risk management in its implementation of CRD IV. As a result, Santander UK has been classified as a significant subsidiary of Banco Santander, S.A. at 31 December 2014. Further information on the CRD IV risk measurement of Santander UK’s exposures is included in Banco Santander, S.A.’s Pillar 3 report.
Santander UK Group Holdings Limited becameplc. The parties to the holding companyCapital Support Deed constitute a core UK group as defined in the PRA Rulebook. Exposures of Santander UK plc with effect from 10 January 2014. From this date, Santander UK Group Holdings Limited became the headeach of the Santanderthree regulated entities to other members of the core UK group for regulatory capital and leverage purposes.are exempt from large exposure limits that would otherwise apply. The basis of consolidation used for capital-related disclosures in this document reflects the Santander UK plc group, which corresponds to the basis of consolidationpurpose of the financial statements.
Capital transferability between Santander UK’s subsidiariesSupport Deed is managed in accordance with Santander UK’s corporate purpose and strategy, its risk and capital management policies and with regard to UK legal and regulatory requirements. There are no other current or foreseen material practical or legal impediments tofacilitate the prompt transfer of available capital resources from, or repayment of liabilities when due betweenby, the Companynon-regulated parties to any of the regulated parties in the event that one of the regulated parties has breached or is at risk of breaching its capital resources requirements or risk concentrations requirements. The core UK group permission expires on 31 December 2018.
We quantify regulatory capital demand for credit, market, operational, pension obligation and its subsidiaries.
securitisation risk in line with what the PRA requires of us.
Risk review
Balance sheet management risk
continued
CAPITAL RISK MANAGEMENT
The key elements of Santander UK’s capital management are:
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Santander UK manages its capital based on an assessment of both regulatory requirements and the economic capital impacts ofWe share our businesses. The regulatory capital position at 31 December 2014 is based on the CRD IV rules, which implement Basel III in the EU and came into force on 1 January 2014. Regulatory capital demand is quantified for credit, trading market, banking market, operational, pension obligation and securitisation risk in accordance with PRA requirements. Santander UK produces and sharesICAAP document with the PRA. The PRA its ICAAP document, which can result in the PRA advising the firmthen informs us of an amount and quality ofhow much capital (Pillar 2A), and of what quality, it considers the firmthinks we should hold in addition to Pillar 1 to meet the overall financial adequacy rule. At 31 December 2014,2015, the PRA’s Pillar 2A guidance to Santander UKus was 3.6% of RWAs (2014: 3.6%), of which 2.0% (56%(2014: 2.0%), or 56% (2014: 56%) of Pillar 2A)2A, should be met by CET 1 capital.
We manage capital transferability between our subsidiaries in line with our business strategy, our risk and capital management policies, and UK laws and regulations. Nothing from 1 January 2015.a practical or legal point of view stops us moving capital resources promptly, or repaying liabilities, between the Company and its subsidiaries.
Capital regulation developments in 2014(unaudited)
The Bank of England, acting through the FPC, undertook a review of the leverage ratio during 2014, the results of which were publishedFor more on 31 October 2014. It recommended that a minimum leverage ratio requirement should be set at 3%, with additional supplementary leverageour objectives, policies and countercyclical leverage ratio buffers to be held. These buffers would be set equal to 35% of the risk-weighted systemic buffer and countercyclical buffer respectively. This framework will supersede the current supervisory expectation that a 3% leverage ratio is maintained.
The Basel Committee on Banking Supervision also produced a range of proposalsprocesses for revisionsmanaging capital, see Note 45 to the capital treatment of trading book market risk, operational risk, credit risk standardised approaches and capital floors. These proposals have the potential to significantly impact the measurement of RWAs for these risk types. In addition, the European Banking Authority is continuing to develop and finalise a range of Regulatory Technical Standards which extend the CRD IV rules.Consolidated Financial Statements.
Annual Report 2015
Risk review
CAPITAL MANAGEMENT AND RESOURCES
Key capital ratios
The calculations of capitalbelow are prepared on a basis consistent with Santander UK’sour regulatory filings at 31 December 2014, following the adoption of CRD IV with effect from 1 Januaryfor 2015 and 2014. The amounts presented for 31 December 2013 have been prepared on a consistent basis, to aid comparability, as described above. Ratios are calculated by taking the relevant capital resources as a percentage of RWAs.
The table below summarises Santander UK’sOur key capital ratios under CRD IV:are:
| | 2014 % | |
| 2013 % | (1)
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CET 1 capital ratio | 11.9 | 11.6 | ||||||
Total capital ratio | 17.9 | 17.1 | ||||||
2015 % | 2014 % | |||||||
CET 1 capital ratio | 11.6 | 11.9 | ||||||
Total capital ratio | 18.2 | 17.9 | ||||||
132 Santander UK plc
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Regulatory capital resources
The tablecalculations below analyses the composition of Santander UK’s regulatory capital resources. The calculations reflect the amounts prepared on a basisare consistent with Santander UK’sour regulatory filings at 31 December 2014, following the adoption of CRD IV with effect from 1 Januaryfor 2015 and 2014. The amounts presented for 31 December 2013 have been prepared on a consistent basis, to aid comparability. The amounts presented for 2013 have not been adjusted to reflect the adoption of IFRIC 21, as set out in Note 1 to the Consolidated Financial Statements. The adjustment would not have had a material effect on Santander UK’s
This table shows our regulatory position.capital.
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| 2015 | 2014 | |||||||||
Common Equity Tier 1 (‘CET 1’) capital instruments and reserves: | ||||||||||||||||
| £m | £m | |||||||||||||||
Common Equity Tier 1 (CET 1) capital instruments and reserves: | ||||||||||||||||
– Capital instruments and related share premium accounts | 8,725 | 8,725 | 8,725 | 8,725 | ||||||||||||
– Retained earnings | 4,056 | 3,307 | 4,679 | 4,056 | ||||||||||||
– Accumulated other comprehensive income and other reserves | 273 | (116 | ) | |||||||||||||
– Accumulated other comprehensive income, other reserves and non-controlling interest | 449 | 273 | ||||||||||||||
CET 1 capital before regulatory adjustments | 13,054 | 11,916 | 13,853 | 13,054 | ||||||||||||
CET 1 regulatory adjustments: | ||||||||||||||||
– Additional value adjustments | (101 | ) | (75 | ) | (98) | (101) | ||||||||||
– Intangible assets (net of tax) | (2,174 | ) | (2,319 | ) | (2,199) | (2,174) | ||||||||||
– Fair value reserves related to gains or losses on cash flow hedges | (262 | ) | 110 | (254) | (262) | |||||||||||
– Negative amounts resulting from the calculation of regulatory expected loss amounts | (484 | ) | (544 | ) | (670) | (484) | ||||||||||
– Gains or losses on liabilities valued at fair value resulting from changes in own credit standing | (17 | ) | (25 | ) | (72) | (17) | ||||||||||
– Deferred tax assets that rely on future profitability excluding temporary differences | (11 | ) | – | |||||||||||||
– Deferred tax assets that rely on future profitability excluding timing differences | (8) | (11) | ||||||||||||||
– Defined benefit pension fund assets | (249 | ) | (94 | ) | (416) | (249) | ||||||||||
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– Dividend accrual | (18) | – | ||||||||||||||
– Deduction for minority interests | (135) | – | ||||||||||||||
Total regulatory adjustments to CET 1 | (3,298 | ) | (2,947 | ) | (3,870) | (3,298) | ||||||||||
CET 1 capital | 9,756 | 8,969 | 9,983 | 9,756 | ||||||||||||
Additional Tier 1 (‘AT1’) capital instruments: | ||||||||||||||||
– Capital instruments and the related share premium accounts | 800 | – | ||||||||||||||
– Amounts of qualifying items and related share premium accounts subject to phase out from AT1 | 1,066 | 1,298 | ||||||||||||||
Additional Tier 1 (AT1) capital instruments: | ||||||||||||||||
– Capital instruments | 1,550 | 800 | ||||||||||||||
– Amounts of qualifying items subject to phase out from AT1 | 708 | 1,066 | ||||||||||||||
AT1 capital before regulatory adjustments | 1,866 | 1,298 | 2,258 | 1,866 | ||||||||||||
Total regulatory adjustments to AT1 | – | – | – | – | ||||||||||||
AT1 capital | 1,866 | 1,298 | 2,258 | 1,866 | ||||||||||||
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Tier 1 capital | 11,622 | 10,267 | 12,241 | 11,622 | ||||||||||||
Tier 2 capital instruments: | ||||||||||||||||
– Capital instruments and related share premium accounts | 1,819 | 1,767 | ||||||||||||||
– Amounts of qualifying items and related share premium accounts subject to phase out from Tier 2 | 1,253 | 1,253 | ||||||||||||||
– Capital instruments | 2,547 | 1,819 | ||||||||||||||
– Amounts of qualifying items subject to phase out from Tier 2 | 834 | 1,253 | ||||||||||||||
Tier 2 capital before regulatory adjustments | 3,072 | 3,020 | 3,381 | 3,072 | ||||||||||||
Total regulatory adjustments to Tier 2 | – | – | – | – | ||||||||||||
Tier 2 capital | 3,072 | 3,020 | 3,381 | 3,072 | ||||||||||||
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Total capital | 14,694 | 13,287 | 15,622 | 14,694 | ||||||||||||
Total regulatoryOur total capital consists of:
CET 1 capital instruments and reserves
Capital instruments and related share premium accounts compriseconsist of ordinary share capital of £3,105m (2013:(2014: £3,105m) and share premium of £5,620m (2013:(2014: £5,620m). Also included within CET 1 capital before regulatory adjustments are
We also include retained earnings of £4,056m (2013: £3,307m)£4,679 (2014: £4,056m) and accumulated other comprehensive income, other reserves and non-controlling interests of £273m (2013: deduction of £116m), as£449m (2014: £273m). These are per theour Consolidated Balance Sheet.
Annual Report 2015
Risk review
Balance sheet management risk
continued
CET 1 regulatory adjustments
These are adjustments to CET 1 regulatory adjustments represent adjustments to capital and reserves attributable to ordinary shareholders required underby CRD IV. The adjustments applicable to Santander UK are as follows:They are:
| – | Additional value adjustments:Prudent valuation adjustments of |
| – | Intangible assets:Goodwill and intangible assets of |
| – | Fair value reserves relating to gains or losses on cash flow hedges: Gains |
| – | Negative amounts resulting from the calculation of regulatory expected loss amounts: Excess expected losses deduction of |
| – | Gains or losses on liabilities valued at fair value resulting from changes in our own credit standing: |
| – | A debit valuation adjustment of |
| – | Changes in liabilities designated at fair value through profit and loss of |
| – | Deferred tax assets that rely on future |
| – | Defined benefit pension fund |
| – | Dividend accrual:Our foreseeable future dividends from current year profits of £18m (2014: £nil) |
| – | Deduction for minority interests:The non-controlling interest of £135m (2014: £nil) on the PSA cooperation. |
AT1 capital instruments
AT1 capital consists of preference shares and innovative/hybrid Tier 1 securities. All suchNone of the instruments we issued by the Santander UK group prior tobefore 1 January 2014 do not fully meet the CRD IV requirements for AT1 capital rules, which became effective onapply from that date. These instruments are subject to transitional phasewill be phased out provisions underby CRD IV rules which restrict their recognition as capital. The £750m and £800m Perpetual Capital Securities we issued in 2014since then fully meet the CRD IV AT1 rules and are fully recognised as AT1 capital.capital rules.
Tier 2 capital
Tier 2 capital consists of fully CRD IV eligible Tier 2 instruments and ‘grandfathered’grandfathered Tier 2 instruments whose recognition as capital recognition is subject tobeing phased out under CRD IV transitional phase out provisions.
A reconciliation of Core Tier 1 capital at 31 December 2013, calculated in accordance with the PRA rules in force at that date, and CET 1 capital calculated in accordance with the CRD IV rules which came into force on 1 January 2014 is set out below:
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk
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Movements in regulatory capital
The calculations below are consistent with our regulatory filings for 2015 and 2014.
Movements in regulatoryour capital during the years ended 31 December 2014 and 2013 are set out below. The calculations are prepared on a basis consistent with Santander UK’s regulatory filings at 31 December 2014, following the adoption of CRD IV with effect from 1 January 2014. The amounts presented for 2013 have been prepared on a consistent basis, to aid comparability, as described above.were:
| | 2014 £m | |
| 2013 £m | (1)
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CET 1 capital | ||||||||
Opening amount | 8,969 | 9,302 | ||||||
Contribution to CET 1 for the year: | ||||||||
– Increase in retained earnings | 679 | (5 | ) | |||||
– Increase in opening reserves due to prior period restatement | 70 | – | ||||||
– Increase/(decrease) in comprehensive income | 389 | (134 | ) | |||||
– Decrease in additional value adjustments | (26 | ) | – | |||||
– (Increase)/decrease in intangible assets (net of tax) | 145 | (10 | ) | |||||
– (Increase)/decrease in fair value reserves related to gains and losses on cash flow hedges | (372 | ) | 110 | |||||
– Decrease in negative amounts resulting from the calculation of regulatory expected loss amounts | 60 | 15 | ||||||
– Gain on liabilities valued at fair value resulting from changes in own credit standing | 8 | (19 | ) | |||||
– (Increase)/decrease in defined benefit pension fund assets | (155 | ) | 382 | |||||
– (Increase)/decrease in deferred tax assets that rely on future profitability excluding timing differences | (11 | ) | – | |||||
Regulatory adjustments applied to CET 1 in respect of amounts subject to pre-CRR treatment | ||||||||
– Amounts to be deducted from or added to CET 1 capital with regard to additional filters and deductions required pre-CRR | – | 39 | ||||||
Basel II to CRD IV impact | – | (711 | ) | |||||
Closing amount | 9,756 | 8,969 | ||||||
AT1 capital | ||||||||
Opening amount | 1,298 | 1,901 | ||||||
– Increase/(decrease) in capital instruments and related share premium accounts | 800 | (512 | ) | |||||
–Decrease in amount of qualifying items and related share premium amounts subject to phase out from AT1 | (232 | ) | (10 | ) | ||||
Basel II to CRD IV impact | – | (81 | ) | |||||
Closing amount | 1,866 | 1,298 | ||||||
Tier 2 capital | ||||||||
Opening amount | 3,020 | 2,756 | ||||||
– Decrease/(increase) in capital instruments | 52 | 735 | ||||||
– Increase in qualifying items subject to phase out from Tier 2 | – | 22 | ||||||
Basel II to CRD IV impact | – | (493 | ) | |||||
Closing amount | 3,072 | 3,020 | ||||||
Total regulatory capital | 14,694 | 13,287 | ||||||
| 2015 | 2014 | |||||||
| £m | £m | |||||||
CET 1 capital | ||||||||
Opening amount | 9,756 | 8,969 | ||||||
– Increase in retained earnings | 623 | 679 | ||||||
– Increase in opening reserves due to the adoption of IFRIC 21 | – | 70 | ||||||
– Increase in comprehensive income and other reserves | 176 | 389 | ||||||
– Increase/(decrease) in additional value adjustments | 3 | (26) | ||||||
– (Increase)/decrease in intangible assets (net of tax) | (25) | 145 | ||||||
– Decrease/(increase) in fair value reserves related to gains and losses on cash flow hedges | 8 | (372) | ||||||
– (Increase)/decrease in negative amounts resulting from the calculation of regulatory expected loss amounts | (186) | 60 | ||||||
– (Loss)/gain on liabilities valued at fair value resulting from changes in own credit standing | (55) | 8 | ||||||
– Increase in defined benefit pension fund assets | (167) | (155) | ||||||
– Increase in dividend accrual | (18) | – | ||||||
– Increase in deductions for minority interests | (135) | – | ||||||
– Decrease/(increase) in deferred tax assets that rely on future profitability excluding timing difference | 3 | (11) | ||||||
Closing amount | 9,983 | 9,756 | ||||||
AT1 capital | ||||||||
Opening amount | 1,866 | 1,298 | ||||||
– Increase in capital instruments and related share premium accounts | 750 | 800 | ||||||
– Decrease in amount of qualifying items and related share premium amounts subject to phase out from AT1 | (358) | (232) | ||||||
Closing amount | 2,258 | 1,866 | ||||||
Tier 2 capital | ||||||||
Opening amount | 3,072 | 3,020 | ||||||
– Increase in capital instruments | 728 | 52 | ||||||
– Decrease in qualifying items subject to phase out from Tier 2 | (419) | – | ||||||
– Increase in minority interest deductions | – | – | ||||||
Closing amount | 3,381 | 3,072 | ||||||
Total regulatory capital | 15,622 | 14,694 | ||||||
20142015 compared to 20132014(unaudited)
We complied with the PRA’s capital adequacy rules throughout 2015 and 2014. The changes in our CET 1 capital reflectreflected movements in our ordinary share capital share premium, and profits for the years ended 31 December2015 and 2014 and 2013 after adjustmentwe adjusted them to comply with the PRA’s rules. Santander UK complied with the PRA’s
In 2015, our CET 1 capital adequacy requirements during the years ended 31 December 2014 and 2013.
Duringincreased by £227m to £9,983m. This was largely due to profits for the year ended 31 Decemberattributable to equity holders of the parent of £939m, less interim ordinary dividends declared of £427m. In 2015, the increase in our AT1 capital was due to the issuance of £750m Perpetual Capital Securities to our immediate parent company.
In 2014, our CET 1 capital increased by £787m to £9,756m. This was largely due to profits for the year attributable to equity holders of the parent of £1,110m, less an interim ordinary dividend approveddeclared of £487m. DuringIn 2014, the increase in our AT1 capital was due to the issuance of £800m of Perpetual Capital Securities to our immediate parent company.
The latest PRA stress test results were released on 1 December 2015. The Santander UK plc’s immediate parent company as set out in Note 38 toGroup Holdings plc group (including the Consolidated Financial Statements.
DuringSantander UK group) significantly exceeded the year ended 31 December 2013,PRA’s stress test CET 1 capital decreased by £333m to £8,969m, comprising an increase in Core Tierratio threshold requirement of 4.5%, with a stressed CET 1 capital ratio of £378m combined9.5%. Additionally, it exceeded the leverage threshold requirement of 3.0%, with a decreasestressed leverage ratio of £711m from3.3%.
The PRA stress test focused on vulnerabilities in UK banks to increased global financial risks and lower global economic growth, particularly in developing markets. It also included a severe stress scenario for the impactUK property market, coupled with rising unemployment and the Base Rate remaining lower for longer. The outcome of moving from Basel II Core Tier 1 to CRD IV CET 1.
(1) Non-IFRS measure. See page 355.
Annual Report 2015
Risk review
Balance sheet management risk
continued
Regulatory Leverage – using PRA definition
The Basel III and CRD IV rules include proposals for theto use of a leverage ratio as a backstop measure to complement risk-based capital ratios. The methodology for calculation ofrules to calculate the leverage ratio has continued to evolve, with the Basel Committee in January 2014 producing a revised definition of the exposure measurehave now been set in the ‘Basel IIIEU by European Commission Delegated Regulation. We also have to meet a minimum level for the end-point Tier 1 leverage ratio framework and disclosure requirements’ document.
The PRA has requested that UK banking groups disclose leverage ratios using a methodology based onunder rules set by the January 2014 Basel Committee framework for exposure measurement, and an end-point definition of Tier 1 capital at 31 December 2014.PRA.
The table below presents the Santander UK groupshows our leverage ratio, which we calculated using the approach requestedrules set by the PRA. This is the same as the leverage ratio for the Santander UK Group Holdings Limitedplc prudential consolidation group. The positionOur ratio was greater than the minimum of 3% at 31 December 2013 below has been restated to reflect the same basis as that used for the presentation of the position at 31 December2015 and 2014. Santander UK exceeded the proposed minimum 3% leverage ratio at 31 December 2014 and 2013.
| 2014 £m | 2013 £m | |||||||||||||||
2015 £m | 2014 £m | |||||||||||||||
Regulatory exposure | 276,296 | 272,084 | 284,950 | 276,296 | ||||||||||||
End-point Tier 1 capital | 10,556 | 9,037 | 11,533 | 10,556 | ||||||||||||
PRA end-point Tier 1 leverage ratio | 3.8% | 3.3% | 4.0% | 3.8% | ||||||||||||
The Basel leverage ratio framework requires certain adjustments to be made toUnder the CRD IV rules, we adjust our total assets per the consolidated balance sheetConsolidated Balance Sheet to arrive atcalculate our regulatory exposure for leverage purposes. A reconciliation of total assets per the consolidated balance sheet to the regulatory exposure for leverage purposes at 31 December 2014 and 2013 isWe do this as follows:
| 2014 £m | 2013 £m | 2015 £m | 2014 £m | |||||||||||||
Total assets per consolidated balance sheet | 275,977 | 270,286 | ||||||||||||||
Derivatives netting adjustment and potential future exposure | (14,385 | ) | (11,367 | ) | ||||||||||||
Total assets per the Consolidated Balance Sheet | 281,406 | 275,977 | ||||||||||||||
Derivatives netting and potential future exposure | (12,214) | (14,385) | ||||||||||||||
Securities financing current exposure add-on | 2,275 | 1,963 | 3,356 | 2,275 | ||||||||||||
Removal of IFRS netting | 2,036 | 2,085 | 1,718 | 2,036 | ||||||||||||
Commitments calculated in accordance with Basel Committee Leverage Framework | 13,299 | 12,114 | 13,285 | 13,299 | ||||||||||||
CET 1 regulatory adjustments | (2,906 | ) | (2,997 | ) | (2,601) | (2,906) | ||||||||||
| 284,950 | 276,296 | |||||||||||||||
| 276,296 | 272,084 | |||||||||||||||
The adjustments are as follows:are:
| – | Derivatives netting and potential future exposure: |
| – | Securities financing current exposure add-on: |
| – | Removal of IFRS netting: |
| – | Commitments calculated in accordance with Basel Committee Leverage Framework: |
| – | CET 1 regulatory adjustments: |
136 Santander UK plc
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Risk-weighted assets (‘RWAs’)(RWAs)
The tablescalculations below analyse the composition of Santander UK’s RWAs. The calculations reflect the amounts prepared on a basisare consistent with Santander UK’sour regulatory filings at 31 Decemberfor 2015 and 2014.
| RWAs by risk | 2015 £bn | 2014 £bn | ||||||
Credit risk | 71.0 | 66.3 | ||||||
Counterparty risk | 5.1 | 5.1 | ||||||
Market risk | 2.8 | 4.3 | ||||||
Operational risk | 6.9 | 6.6 | ||||||
| 85.8 | 82.3 | |||||||
| RWAs by segment | 2015 £bn | 2014 £bn | ||||||
Retail Banking | 42.4 | 38.4 | ||||||
Commercial Banking | 20.9 | 19.9 | ||||||
Global Corporate Banking | 15.4 | 16.8 | ||||||
Corporate Centre | 7.1 | 7.2 | ||||||
| 85.8 | 82.3 | |||||||
2015 compared to 2014(unaudited)
RWAs increased by £3.5bn to £85.8bn (2014: £82.3bn), broadly in line with asset growth and reflecting the £2.5bn RWAs from the PSA cooperation we consolidate. This was partially offset by decreases in market and counterparty credit risk in Global Corporate Banking.
Credit risk RWAs increased by £4.7bn to £71.0bn (2014: £66.3bn), primarily driven by an increase in unsecured consumer and vehicle finance lending, following the adoptionstart of CRD IVthe PSA cooperation, growth in commercial banking customer loans, and growth in mortgage lending. Counterparty risk RWAs remained stable at £5.1bn (2014: £5.1bn) in line with effect from 1 January 2014. The amounts presented for 2013 have been prepared on a consistent basisbalance sheet and off balance sheet exposures in securities financing transactions and derivatives. Market risk RWAs decreased by £1.5bn to aid comparability. The amounts presented for 31 December 2013 have not been adjusted£2.8bn (2014: £4.3bn) due to reflectposition changes and market movements. Operational risk RWAs increased by £0.3bn to £6.9bn (2014: £6.6bn) driven by increased operating income over an average 3 year period.
Retail Banking RWAs increased by £4.0bn to £42.4bn (2014: £38.4bn) mostly reflecting the adoptionstart of IFRIC 21, as set outthe PSA cooperation and growth in Note 1mortgages. Commercial Banking RWAs increased by £1.0bn to the Consolidated Financial Statements. The adjustment would not have had a material effect on Santander UK’s regulatory position.
| RWAs by risk | 2014 £bn | 2013 £bn | ||||||
Credit risk | 66.3 | 61.1 | ||||||
Counterparty risk | 5.1 | 4.8 | ||||||
Market risk | 4.3 | 4.8 | ||||||
Operational risk | 6.6 | 7.0 | ||||||
| 82.3 | 77.7 | |||||||
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| RWAs by division | 2014 £bn | 2013 £bn | ||||||
Retail Banking | 38.4 | 36.3 | ||||||
Commercial Banking | 19.9 | 17.0 | ||||||
Corporate & Institutional Banking | 16.8 | 16.5 | ||||||
Corporate Centre | 7.2 | 7.9 | ||||||
| 82.3 | 77.7 | |||||||
A reconciliation of£20.9bn (2014: £19.9bn) driven by growth in customer loans. Global Corporate Banking RWAs decreased by £1.4bn to £15.4 (2014: £16.8bn) primarily due to decreases in market risk RWAs. Corporate Centre RWAs remained broadly flat at 31 December 2013, calculated in accordance£7.1bn (2014: £7.2bn) with the PRA rulesreduction in force at that date,non-core customer loan exposures offset by a small increase in operational risk RWAs.
Exposure and calculated in accordance with the CRD IV rules which came into force on 1 January 2014 is set out below:
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RWAs by division may be further analysed intoand risk
In the next tables, we analyse RWAs by division and risk. We show the balance sheet amount, the equivalent regulatory exposure, measured under the standardised and IRB approaches, the risk-weighting appliedwe apply to those regulatory exposures, and the resulting RWAs calculated, as follows:RWAs.
The main differences between Santander UK’sour balance sheet amounts and itsour regulatory exposures are as follows:are:
| – | For secured lending in Retail Banking, and for Commercial Banking and Corporate Centre customer assets, the |
| – | For counterparty risk, the |
| – | For liquid assets, the |
| – | For other assets, the |
| – | Intangible assets are deducted from capital resources, |
Santander UK applies Basel IIIWe use CRD IV to the calculation of its capital requirement. In addition, Santander UK appliescalculate our capital. We also use the Retail IRB and AIRB approaches to itsfor our credit portfolios. Residential lending capital resources requirements include securitised residential mortgages.
Retail Banking RWAs increased by £2.1bn to £38.4bn reflecting growth in both mortgages and unsecured lending, as well as a small increase in the average mortgage We calculate operational risk weight. Commercial Banking RWAs increased by £2.9bn to £19.9bn (2013: £17.0bn) reflecting growth in customer loans and a recalibration of risk models. RWAs in Corporate & Institutional Banking increased £0.3bn to £16.8bn (2013: £16.5bn) in line with customer loan growth and RWAs in Corporate Centre declined by £0.7bn to £7.2bn (2013: £7.9bn) reflecting the reduction in customer loans.
Operational Risk RWAs are calculated using the standardised approach basedapproach. We base it on three yearthree-year average income, with the reduction in RWAs of £0.4bn to £6.6bn (2013: £7.0bn) due to a reduction in the average during the period. Market Risk RWAs reduced £0.5bn to £4.3bn (2013: £4.8bn) in the year due to position changes, market movements and updates to risk models. Counterparty Risk RWAs have increased by £0.3bn to £5.1bn (2013: £4.8bn) in line with balance sheet exposures in derivatives and securities financing transactions.
Annual Report 2015
Risk review
Balance sheet management risk
continued
In the following table below, regulatory exposure representsis the EAD calculated in accordance with CRRCRD IV and related PRA supervisory statements. EAD for customer loans includes unutilisedundrawn credit facilities and iswe have adjusted it for a credit conversion factor. We have calculated EAD for repurchase,repo, reverse repurchase,repo, securities financing and derivative transactions are calculated net of any associated collateral and are adjusted forcollateral. We include regulatory changesadjustments and potential future exposure adjustments (‘PFE’) where applicable.(PFE) elements if it is appropriate.
| Regulatory exposure | Risk-weighting applied | RWAs | Regulatory exposure | Risk-weighting applied | RWAs | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance | Standardised | IRB | Total | Standardised | IRB | Total | Standardised | IRB | Total | Balance | Standardised | IRB | Total | Standardised | IRB | Total | Standardised | IRB | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| sheet | approach | approach | approach | approach | approach | approach | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | % | % | % | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Secured lending | 152.8 | 0.1 | 162.7 | 162.8 | 83.6 | 15.5 | 15.6 | 0.1 | 25.3 | 25.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Unsecured lending | 12.0 | 9.4 | 7.9 | 17.3 | 79.1 | 56.8 | 68.9 | 7.4 | 4.5 | 11.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 5.1 | – | 5.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Customer assets | 20.9 | 10.6 | 12.9 | 23.5 | 111.7 | 63.8 | 85.4 | 11.8 | 8.2 | 20.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 0.9 | – | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Corporate Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Credit risk | 5.5 | 5.1 | 4.9 | 10.0 | 96.1 | 53.1 | 75.0 | 4.9 | 2.6 | 7.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Counterparty risk | 26.3 | 3.9 | 5.6 | 9.5 | 41.0 | 50.0 | 46.3 | 1.6 | 2.8 | 4.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Market risk(1) | – | – | – | – | – | – | – | 2.7 | – | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 0.8 | – | 0.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Customer assets(2) | 7.4 | 1.2 | 7.5 | 8.7 | 66.1 | 8.0 | 16.3 | 0.8 | 0.6 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Counterparty risk | 2.3 | – | 0.6 | 0.6 | – | – | – | – | 0.5 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Eligible liquid assets(3) | 34.2 | 22.4 | – | 22.4 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Market risk(1) | – | – | – | – | – | – | – | 0.1 | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 0.1 | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible assets and securitisation deductions | 2.2 | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets(4) | 17.8 | 10.2 | 2.8 | 13.0 | 45.3 | 14.1 | 38.6 | 4.6 | 0.4 | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| sheet | approach | approach | approach | approach | approach | approach | 281.4 | 62.9 | 204.9 | 267.8 | 40.9 | 44.9 | 85.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | % | % | % | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Secured lending | 150.1 | 0.2 | 159.2 | 159.4 | 50.0 | 15.3 | 15.3 | 0.1 | 24.3 | 24.4 | 150.1 | 0.2 | 159.2 | 159.4 | 50.0 | 15.3 | 15.3 | 0.1 | 24.3 | 24.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Unsecured lending | 8.4 | 5.8 | 7.1 | 12.9 | 77.6 | 63.4 | 69.8 | 4.5 | 4.5 | 9.0 | 8.4 | 5.8 | 7.1 | 12.9 | 77.6 | 63.4 | 69.8 | 4.5 | 4.5 | 9.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 5.0 | – | 5.0 | – | – | – | – | – | – | – | 5.0 | – | 5.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Customer assets | 18.7 | 11.7 | 11.4 | 23.1 | 95.7 | 71.1 | 83.5 | 11.2 | 8.1 | 19.3 | 18.7 | 11.7 | 11.4 | 23.1 | 95.7 | 71.1 | 83.5 | 11.2 | 8.1 | 19.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 0.6 | – | 0.6 | – | – | – | – | – | – | – | 0.6 | – | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate & Institutional Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Global Corporate Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Credit risk | 5.2 | 4.9 | 4.4 | 9.3 | 93.9 | 56.8 | 76.3 | 4.6 | 2.5 | 7.1 | 5.2 | 4.9 | 4.4 | 9.3 | 93.9 | 56.8 | 76.3 | 4.6 | 2.5 | 7.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Counterparty risk | 29.9 | 2.8 | 5.7 | 8.5 | 57.1 | 52.6 | 54.1 | 1.6 | 3.0 | 4.6 | 29.9 | 2.8 | 5.7 | 8.5 | 57.1 | 52.6 | 54.1 | 1.6 | 3.0 | 4.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Market risk(1) | – | – | – | – | – | – | – | 4.1 | – | 4.1 | – | – | – | – | – | – | – | 4.1 | – | 4.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 1.0 | – | 1.0 | – | – | – | – | – | – | – | 1.0 | – | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Customer assets(2) | 8.3 | 1.4 | 8.5 | 9.9 | 64.3 | 11.8 | 19.2 | 0.9 | 1.0 | 1.9 | 8.3 | 1.4 | 8.5 | 9.9 | 64.3 | 11.8 | 19.2 | 0.9 | 1.0 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Counterparty risk | – | – | – | – | – | – | – | – | 0.2 | 0.2 | – | – | – | – | – | – | – | – | 0.2 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Eligible liquid assets(3) | 30.9 | 29.0 | – | 29.0 | – | – | – | – | – | – | 30.9 | 29.0 | – | 29.0 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Market risk(1) | – | – | – | – | – | – | – | 0.2 | – | 0.2 | – | – | – | – | – | – | – | 0.2 | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets and securitisation deductions | 2.2 | – | – | – | – | – | – | – | – | – | 2.2 | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets(4) | 22.3 | 8.8 | 2.8 | 11.6 | 42.0 | 42.9 | 42.2 | 3.7 | 1.2 | 4.9 | 22.3 | 8.8 | 2.8 | 11.6 | 42.0 | 42.9 | 42.2 | 3.7 | 1.2 | 4.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 276.0 | 64.6 | 199.1 | 263.7 | 37.5 | 44.8 | 82.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 276.0 | 64.6 | 199.1 | 263.7 | 37.5 | 44.8 | 82.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Secured lending | 148.1 | 0.2 | 157.3 | 157.5 | 77.1 | 14.5 | 14.5 | 0.1 | 22.8 | 22.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Unsecured lending | 7.5 | 4.8 | 6.5 | 11.3 | 78.2 | 65.1 | 70.8 | 3.8 | 4.2 | 8.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 5.4 | – | 5.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Customer assets | 17.0 | 9.3 | 10.6 | 19.9 | 86.0 | 78.3 | 81.9 | 8.0 | 8.3 | 16.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 0.7 | – | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate & Institutional Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Credit risk | 5.1 | 4.1 | 4.2 | 8.3 | 100 | 54.8 | 77.4 | 4.1 | 2.3 | 6.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Counterparty risk | 27.6 | 3.5 | 4.6 | 8.1 | 52.2 | 56.5 | 54.7 | 1.8 | 2.6 | 4.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Market risk(1) | – | – | – | – | – | – | – | 4.8 | – | 4.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Operational risk | – | – | – | – | – | – | – | 0.9 | – | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Customer assets(2) | 9.4 | 2.0 | 9.1 | 11.1 | 77.2 | 21.5 | 31.5 | 1.5 | 2.0 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Eligible liquid assets(3) | 31.5 | 28.1 | – | 28.1 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Counterparty risk | – | – | – | – | – | – | – | 0.5 | – | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets & securitisation deductions | 2.3 | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets(4) | 21.8 | 7.0 | 3.6 | 10.6 | 42.2 | 26.4 | 36.8 | 3.0 | 0.9 | 3.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 270.3 | 59 | 195.9 | 254.9 | 34.6 | 43.1 | 77.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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138 Santander UK plc
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| Risk | ||||||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk
| Other key risks | ||||||||||||
Pension risk is the risk caused by our contractual or other liabilities with respect to a pension scheme (whether established for our employees or those of a related company or otherwise). It also refers to the risk that we will make payments or other contributions with respect to a pension scheme due to a moral obligation or for some other reason. | ||||||
| In this section, we explain how we manage pension risk, including how we mitigate the risk. We also give some insight into our pension investment strategy. | ||||||
Key metrics | ||||||
Pension VaR decreased to £1,260m | ||||||
The pension VaR decreased by £80m to £1,260m at 31 December in 2015 (2014: £1,340m) due to a slightly higher real interest rate reducing the size of the discounted liability. | ||||||
Defined benefit scheme accounting surplus increased to £483m | ||||||
The improvement in the position was mainly driven by gains of £319m from adjustments in actuarial assumptions in the year. | ||||||
Pension risk is the risk to Santander UK caused by its contractual or other liabilities to, or with respect to, a pension scheme (whether established for its employees, those of a related company or otherwise). It is also the risk that a company will make payments or other contributions to, or with respect to, a pension scheme because of a moral obligation or because the company considers that it should do so for some other reason.
Annual Report 2015
Risk review
Pension risk is one of theour key financial risks thatand arises mainly because Santander UK faces. It arises principally from Santander UK’s role as aplc is the sponsor of the Santander (UK) Group Pension Scheme (the ‘Scheme’)Scheme), a defined benefit scheme. Pension scheme toliabilities mainly vary with changes in long-term interest rates and inflation, the extentlongevity of scheme members, and legislation. Pension scheme assets mainly vary with changes in interest rates, inflation expectations, credit spreads, exchange rates and equity and property prices.
Our risk is that the Scheme’s assets, do not fully match the timing and amount of the Scheme’s liabilities due to the uncertainty oftogether with future investment returns and any additional future contributions, might not be sufficient to meet liabilities as they fall due. In circumstances where the projected value of the Scheme’s liabilities. assets is lower than the Scheme’s liabilities, we could have to (or might choose to) make extra contributions to the Scheme. We might also need to hold more capital to mitigate this risk.
Our key pension risk factors are:
| – | Investment risk |
| – | Interest rate risk |
| – | Longevity risk |
| – | Salary risk |
| – | Inflation risk. |
For instance, deterioration inmore on these risks, see Note 34 to the funding valuation position canConsolidated Financial Statements.
Our defined contribution plans result in a requirementfar less market risk exposure for us as they place the responsibility for choosing investments directly with employees. However, we remain exposed to make material contributionsoperational and reputational risks. To manage these risks, we monitor the performance of defined contribution investment funds and we engage with our people to eliminate deficits, as mentioned above. Alternatively, changes inensure they are given enough information about the accounting position can impact on capital ratios.
Key risk factors that affect pension risk include interest rates, inflation, credit spreads, investment performance, longevity of Scheme members and other demographic risks as well as changes in the regulatory environment. Santander UK manages its risk as a sponsor of the Scheme using a framework covering risk appetite articulation, risk reporting, monitoring and stress testing within the agreed governance structure.options available to them.
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| — | Risk framework– Our pension risk framework explains the way we manage risks in relation to our pension obligations. | |||
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— | Scheme assets– We hold the Scheme assets separately from our assets. The
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The Common Fund
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Pension developments in 2014(unaudited)
During 2014, the risk profile of the Scheme remained stable with the focus on positive performance of the assets relative to liabilities, whilst managing volatility through hedging a proportion of the liabilities with bond assets and derivatives. Santander UK seeks the right balance of the reward for the risk undertaken and manage the impact of the pension risk arising from market movements via portfolio management and hedging. Consistent with previous years, the Scheme was managed within the risk triggers and limits.
During 2014, the accounting position of the Scheme improved by £670m to a surplus of £156m, attributable to positive asset returns as well as a net gain of £218m that arose from scheme changes that limit future defined benefit pension entitlements and provide for the longer term sustainability of our staff pension arrangements. In addition, the latest triennial Trustee funding valuation at 31 March 2013 was agreed. Following this, an updated schedule of deficit funding contributions was agreed with the Scheme Trustee. The new funding valuation and contribution schedule did not have a significant impact on VaR and stress loss metrics.
Further information on Santander UK’s pension obligations, including the current asset allocation and sensitivity to key risk factors can be found in ‘Critical Accounting Policies’ in Note 1 and in Note 36 to the Consolidated Financial Statements.
Risk review
Operational risk is the risk of direct, or indirect, loss to Santander UK resulting from inadequate or failed internal processes, people and systems, or from external events. As operational risk is inherent in the processes Santander UK operates, in order to provide services to customers and generate profit for investors, an objective of operational risk management is not to eliminate operational risk altogether, but to manage the risk within an acceptable level, taking into account the cost/benefits of risk optimisation. When operational risks materialise, they can have not only immediate financial consequences for Santander UK, but also an effect on its business objectives, customer service and regulatory responsibilities. Examples of operational risks include fraud, process failures, system downtime or damage to assets due to fire or flood.
Operational Risk Framework
The Operational Risk Framework represents the operating model and explains how Santander UK controls and manages its operational risks within the appetite agreed by the Board and helps everyone understand their responsibilities. It is a core component of the overall Risk Framework and facilitates the ongoing identification, assessment, management and reporting of operational risk, to ensure that Santander UK manages its risks at all times in line with its business objectives and within its risk appetite. Santander UK’s priority is to identify and optimise the risk of loss wherever appropriate, irrespective of whether losses have materialised. Measurement of the risk contributes to the establishment of priorities in operational risk management.
Operational risk management and tools
The following table sets out the key operational risk management tools:
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| VaR: We model the assets and liabilities of the Scheme using a VaR framework to show the volatility of the pension positions on a total portfolio level. This ensures that we adequately capture the risks, diversification benefits and liability matching characteristics of the obligations and investments of the Scheme. We use a time period of 1 year and a 95% confidence interval in our VaR model. | |||||||
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| Stress testing: We also take account of the impact of pension risk as part of our stress testing process. The tests are designed to examine the behaviour of the assets and liabilities of the Scheme under a range of deterministic financial and demographic shocks. We incorporate the results of the stress tests and their impact on our balance sheet, income statement and capital position into our overall enterprise wide stress test results. | |||||||
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| We perform internal forward-looking stress testing on a monthly basis and historic stress testing on a quarterly basis. We also perform stress tests to satisfy the requests of regulators such as the PRA, including for ICAAPs and PRA stress tests. | |||||||
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Where appropriate, insurance products are utilised to complement existing risk mitigation measures.
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||
Risk mitigation
The Trustee has taken measures to mitigate inflation and interest rate risks. It has done this by investing in suitable fixed income and inflation linked assets and by entering into inflation and interest rate swaps. The assets of the Scheme are invested in a diversified portfolio of UK and overseas equities, corporate and government bonds, property, infrastructure and other assets.
We have also mitigated risk in other ways:
| – | In 2002, the Scheme was closed to new employees |
| – | In 2008, the Santander UK Common Fund Trustee Board was created to make investment and |
| – | In 2010, the cap applied to future pension increases for active members was lowered |
| – | In 2014, following a review of the Scheme, pension arrangements for colleagues in the Scheme were amended through a new cap on pensionable pay increases of 1% each year from 1 March 2015. |
The next funding valuation of the Scheme will be undertaken in March 2016. There remains a risk that if long-term interest rates fall, the contribution schedule required might be higher than we previously anticipated.
2015 compared to 2014(unaudited)
In 2015, as in previous years, the Scheme was managed within the pension risk appetite triggers and limits. The risk profile of the Scheme also remained stable. For example, the Scheme continued to be 50% hedged to interest rate risk and 65% hedged to inflation risk.
We also continued to seek the right balance between risk and reward. In 2015, portfolio management yielded positive performance mainly from properties and index-link gilts. Our long-term objective is to reduce the risk of the Scheme and eliminate the deficit on a funding valuation basis within ten years.
In 2015, VaR (1 year, 95% confidence interval) decreased slightly to £1,260m (2014: £1,340m). This was mainly due to the slightly higher real interest rate reducing the size of the discounted liability.
During 2015, the accounting position of the Scheme and other funded arrangements improved, with sections in surplus (retirement benefit assets) of £556m at 31 December 2015 (2014: £315m) and sections in deficit (retirement benefit obligations) of £73m at 31 December 2015 (2014: £159m). The overall position was a £483m surplus at 31 December 2015 (2014: £156m surplus). In addition there were unfunded defined benefit scheme liabilities of £37m at 31 December 2015 (2014: £40m). The improvement in the position was mainly driven by gains of £319m from adjustments in actuarial assumptions in the year.
Further information
For more on our pension obligations, including the current asset allocation and sensitivity to key risk factors, see Note 34 to the Consolidated Financial Statements.
Pension investment strategy | ||||||
| Since 2013, the Scheme (through the Common Fund Trustee) has started to make significant investments in UK property and infrastructure. The aim has been to seek better risk-adjusted returns by choosing properties with strong underlying fundamentals, though often needing active management to achieve this. Although the independent Board of the Common Fund Trustee makes the final decision on each investment, they consider the independent reviews carried out each time by our Real Estate Risk team – part of our independent Risk division. The real estate asset portfolio began by acquiring a £430m property portfolio from the Government’s sale of former Royal Mail pension scheme assets. A further property portfolio with inflation-linked rent increases was acquired, allowing us to partly mitigate inflation risk. Recognising the strength of the commercial property market, we have begun to sell real estate acquired in the last two years where the proceeds were ahead of business plan. | However, we also continued to increase our real estate exposure through the initial and add-on acquisitions of a number of different portfolios. These included retail/ leisure, office, residential and industrial real estate propositions. Our longer time horizon for returns means we can take on more complex projects and find embedded value needing true active management. This does not mean just buying higher yielding and higher risk investments – each asset acquired has a clear and detailed business plan and exit strategy pre-purchase. At its December meeting, Santander UK’s Board reviewed the property portfolio of the Scheme. In particular, our Board challenged whether the current buoyant property conditions meant that it was appropriate to consider further disposals of the portfolio. In response the likely pipeline of transactions in 2016 has been outlined, including the reasons behind them. Enhanced monitoring and managerial oversight that had been introduced for the remaining assets were also highlighted. | ||||
Annual Report 2015
Risk review
Operational risk is the risk of direct, or indirect, loss due to inadequate or failed internal processes, people and systems, or external events. | ||||||
| In this section, we explain how we manage operational risk and the key tools we use to do this. This includes how our Operational Risk Transformation Programme progressed in the year. | ||||||
| We discuss our top operational risks in the year, and we give some insight into cyber security developments. | ||||||
| We also report our operational losses in the year under CRD IV. However, we manage some of these risks in our Risk Framework within other risk types. These include conduct, regulatory and financial crime risk. | ||||||
Key metrics | ||||||
Operational losses increased to £609m | ||||||
Most of our operational risk losses related to charges for conduct remediation, mainly relating to historic sales of PPI. Our operational risk losses increased mainly due to an additional conduct remediation provision of £450m in the fourth quarter of 2015. | ||||||
142 Santander UK plc
Key risks
Santander UK manages its key operational risks in the interests of all its stakeholders, responding to critical developments both within Santander UK and in the environment in which it operates. Risk events and any required changes to management controls are reported through the governance structure. These key risks are set out in the table below:
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk |
| Other key risks | ||||||||
OPERATIONAL RISK MANAGEMENT
Operational risk is inherent in our business. As a result, we aim to manage it down to as low a level as possible, rather than eliminate it entirely. Operational risk events can have a financial impact and can also affect our business objectives, customer service and regulatory obligations. Examples of operational risk events include:
| – | Product mis-selling |
| – | Fraud |
| – | Process failures |
| – | System downtime |
| – | Damage to assets. |
Our approach to operational risk | |||
| — | Our operational risk framework helps us to manage risk in line with our business objectives. It also: | ||
| – Describes our operational risk model | |||
| – Sets out how we control and manage our operational risks within the Risk Appetite agreed by the Board | |||
| – Helps our people understand their responsibilities | |||
– Supports the identification, assessment, management and reporting of operational risk. | |||
| — | Our priority is to identify and reduce the risk of customer impact, financial loss or damage to reputation. We measure risk exposures and monitor risk events to help us set strategic and operational priorities. | ||
| | — | We manage key risks in the interests of all our stakeholders. We respond to key developments in our business and in the environments in which we operate. We report risk events, and any required changes to controls, through our governance structure. | |
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The key tools we use to manage operational risk are:
Key tools | Description | |
Operational risk and control assessments | Our business units identify and assess their operational risks | |
New products and | Every area identifies their risks and assesses their controls for adequacy, and formulates a plan to address any deficiencies noted. | |
Scenario analysis | We review the | |
| – Identify the events that would cause us the most financial, regulatory or reputational damage | ||
| – Take corrective action where the controls and assurance around a scenario were insufficient | ||
– Assess capital adequacy needs. | ||
Key risk indicators and key control indicators | We monitor key performance indicators against limits and triggers. This gives us early warning of potential risk exposures. It also allows us to create mitigation strategies. We use risk indicators to give us insight into our changing risk profile and to assess the performance of our key controls. | |
Loss data management | We have processes to capture and analyse loss events. We use data from these processes to identify and correct control weaknesses. We also use root cause analysis to: | |
| – Identify emerging themes | ||
– Prevent or | ||
– Support risk and control assessments, scenario analysis and risk reporting. | ||
We escalate events to senior management and committees based on the impact on our finances, reputation or customers. | ||
Reporting | Reporting is an integral part of how we manage risk. It ensures we identify, escalate and manage issues on a timely basis. We report exposures for each business area through monthly risk and control reports. These include details on risk exposures and how we plan to mitigate them. We prioritise events that have a material impact on our finances, reputation, or customers by reporting them to key executives. | |
Where appropriate, we use insurance products along with existing risk mitigation measures.
Annual Report 2015
Risk review
OPERATIONAL RISK REVIEW
Operational Risk Transformation Programme (ORTP)
Our Board approved a new Operational Risk Framework in 2014. We developed an ORTP to help us deliver it, which we are rolling out, including new technology, in phases to the end of 2016. This will enable us to achieve market best practice in our operational risk management. In 2015 we worked to:
| – | Specify and support the needs for a new Group Operational Risk Management system |
| – | Manage our Operational Risk Self-Assessment programme. This included recording and reporting through the new system |
| – | Complete our Scenario Analysis programme |
| – | Complete and embed our Operational Risk Assurance plan |
| – | Update the operational risk appetite approach for Board review and approval |
| – | Enhance our policies. These included operational resiliency, change management, and cyber risk. |
Top operational risks
Our top operational risks at 31 December 2015 were:
Key risks | Description | |||||
| Cyber risk | In recent years, we have seen an industry-wide increase in the risks from organised crime. Cyber fraud and deception scams are a major threat to us and our customers. The risk is high due to sustained threats and industry incidents, as well as rapid changes in the methods, targets and In common with other financial institutions with a large customer base, we manage and hold confidential personal customer data, as well as a large number of assets. We are We continually monitor our systems for attempted cyber attacks and undertake a comprehensive range of cyber security tests designed to replicate real attacks. This approach allows us to assess the effectiveness of our technical and non- technical controls in We have established a response and recovery plan and we conduct exercises to ensure our employees are aware of how to respond before an attack occurs. Our incident escalation framework ensures timely reporting and escalation of incidents to senior leadership and the Board. We work closely with other financial In 2015, we continued to improve our systems, processes, controls and
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In order to manage this risk
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Process change management | ||||||
A key part of our business strategy is to develop and deliver new banking channels and products. These include mobile banking and third party payment products. The scale and pace of our plans increases our operational risk. In addition, we face a large number of regulatory and legal changes, impacting all areas of our business. There is more on this in the Regulatory risk | section. Our business units are reporting operational issues due to the volume and complexity of these changes.
These changes could have financial, customer, reputational and regulatory impacts if we do not manage them properly. To address this in 2015, we: – Appointed a Chief Transformation Officer to lead and coordinate our change programmes. Part of their role is to make sure that the risks are identified, assessed, managed and reported – Required all major change programmes to assess operational risk
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Risk review
Operational risk(unaudited)
continued
Capital and modelling
144 Santander UK applies the standardised approach for Pillar 1 operational risk capital requirements. In addition, an internal model has been developed to assess the Pillar 2 capital requirements. In 2014, we further enhanced our approach to the statistical modelling of operational risk losses developing an improved engine which is now aligned with the CRD IV advanced measurement approach.
Operational loss profile
The following table sets out the major categories of Santander UK’s operational risk loss profile in 2014 and 2013. The operational loss categories in the chart reflect the CRD IV loss event type classification, although within the Santander UK Risk Framework the responsibility for management of some of these risks may fall within other risk types (for example, conduct, regulatory and legal risk). The figures and volumes quoted reflect the loss data collection and categorisation policies in place at 31 December 2014.
| 2014 | 2013 | |||||||||||||||||
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Internal Fraud | 1 | 788 | 3 | 1,318 | ||||||||||||||
External Fraud | 20 | 121,976 | 24 | 163,272 | ||||||||||||||
Employment Practices and Workplace Safety | 1 | 118 | 1 | 183 | ||||||||||||||
Clients, Products, and Business Practices | 127 | 113,496 | 170 | 121,363 | ||||||||||||||
Damage to Physical Assets | – | 8 | 1 | 66 | ||||||||||||||
Business Disruption and Systems Failures | – | 155 | – | 1,892 | ||||||||||||||
Execution, Delivery, and Process Management | 22 | 544,434 | 22 | 614,610 | ||||||||||||||
| 171 | 780,975 | 221 | 902,704 | |||||||||||||||
Operational risk developments in 2014(unaudited)plc
During 2014, the majority of Santander UK’s £171m (2013: £221m) of operational risk losses arose within the clients, products and business practices category. These principally represented redress payouts (excluding related costs) on the sales of PPI products. Additional conduct provisions were made in 2014 as the number of PPI claims have not reduced in line with previous expectations. See Note 35 to the Consolidated Financial Statements for more information. As a consequence, the operational risk losses were greater than we had originally anticipated in setting our 2014 forecasts and associated risk limits.
A revised Operational Risk Framework was approved in January 2014. To support the delivery of this revised framework a phased Operational Risk Transformation Programme (‘ORTP’) running through to 2016 has been developed. Included within the ORTP are significant developments in the key components of Operational Risk Assessments, scenario analysis, key risk indicator monitoring, change assessments and loss/incident data collection, all of which build on the work undertaken during the Santander UK-wide cultural risk change initiative programmes to strengthen and further embed a risk management culture. The key operational risk indicators, defined as part of Operational Risk Appetite, are monitored on a monthly basis and escalated to the Board Risk Committee when they exceed certain pre-agreed thresholds.
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Operational losses
In the table below, we show our losses in 2015 and 2014 by major category. The categories reflect the CRD IV loss event types. However, we manage some of these risks in our Risk Framework within other risk types. These include conduct, regulatory and financial crime risk.
| 2015 | 2014(1) | |||||||||||||||||
| £m | Volume | £m | Volume | |||||||||||||||
Internal fraud | – | 134 | 1 | 788 | ||||||||||||||
External fraud | 16 | 96,754 | 20 | 121,976 | ||||||||||||||
Employment practices and workplace safety | 1 | 57 | 1 | 118 | ||||||||||||||
Clients, products, and business practices | 514 | 4 | 154 | 8 | ||||||||||||||
Damage to physical assets | – | 15 | – | 8 | ||||||||||||||
Business disruption and systems failures | – | 19 | – | 155 | ||||||||||||||
Execution, delivery, and process management | 78 | 421,122 | 26 | 544,435 | ||||||||||||||
| 609 | 518,105 | 202 | 667,488 | |||||||||||||||
| (1) | We have changed the basis of the data in this table to reflect losses charged in the year. In the past, we showed amounts paid in the year, regardless of when they had been charged. The data for 2014 has been restated accordingly. |
2015 compared to 2014(unaudited)
ConductIn 2015 and 2014, most of our operational risk islosses were in the risk that‘Clients, products and business practices’ category. These mainly represented conduct provision charges relating to past sales of PPI products. For more on PPI, see the Santander UK’s decisions‘Conduct risk’ section and behaviours leadNote 33 to a detriment or poor outcomes for our customersthe Consolidated Financial Statements.
Losses relating to ‘Execution, delivery, and that the Santander UK group failsprocess management’ increased due to hold tohistoric systems functionality and maintain high standards of market integrity. As part of this risk definition, the following sub-types have been identified:process issues.
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Santander UK also aligns these sub-types under the operational risk category ‘Clients, Product & Business Practices’.
Santander UK considers conduct risk to be a primary risk type and takes a forward-looking approach to managing the risk in alignment with the Conduct Risk Framework. This framework has been developed through Santander UK’s overall Risk Framework and Operational Risk Framework, which include the core principles of risk management and control activities.
The Conduct Risk Framework defines the overriding principles and responsibilities for the identification, assessment, management, and reporting of conduct risk. It is the operation of, and outputs from, these risk management activities that enable Santander UK to manage conduct risk exposures. Business units are required to manage their activities in accordance with the principles and guidelines set out in the Conduct Risk Framework, together with those detailed in the Santander UK Risk and Operational Risk Frameworks.
Key business decisions, including product approval, business strategy developments and conduct related remediation programmes are monitored and reported through formal governance committees.
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Cyber security
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It is critically important that we give our customers a secure environment in which to deal with us. We also have obligations to our regulators to make sure our use of these technologies is safe. If we do not effectively manage and control our activities, it can give rise to significant risks. As part of this, it is critically important that we protect our data. In 2015, we improved our cyber risk management capability through the implementation of controls to enhance our ability to detect, prevent, respond to and recover from cyber attacks. And we continually review the effectiveness of our controls against globally recognised security standards and both internal and external threat analysis. Cyber resilience We took part in the Bank of England sponsored CBEST cyber resilience exercise, designed to test our effectiveness in response to a real-life cyber attack. The results of the exercise were shared with us and we included the lessons learnt in our ongoing activities. |
Our Cyber Security team also created a series of | ||||
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our business. These interactive workshops discussed: – The – Types of cyber crimes in – How phishing emails work, incidents against us and how we are dealing with them – How we can protect the data we process – Steps each of our staff can take to – Types of mobile attacks made by criminals and how to
– Mandatory cyber security training and assessment in addition to – Bespoke cyber security briefings for senior staff, including Executive Committee members and Non-Executive Directors – Simulated phishing exercises to improve staff awareness and response capability. | |||||
Annual Report 2015
Risk review
Conduct risk developments in 2014(unaudited)
During 2014, the Conduct Risk Strategy programme strengthened the Conduct Risk Management Framework through enhanced reporting and monitoring, and clearer consideration of conduct risk in material business decisions. Work continues to embed this fully within Retail Banking, as well as to adapt and fully align the framework to the market integrity objective and to apply it within Commercial Banking, and Corporate & Institutional Banking businesses.
With respect to the provisions for conduct remediation, the remaining provision for PPI redress and related costs amounted to £129m at 31 December 2014, which included £95m of additional provisions made in 2014. The additional provisions were taken following a recent review of claims activity, which indicated that claims are expected to continue for longer than originally anticipated. Monthly redress costs, including pro-active customer contact, decreased to an average of £11m per month, compared to a monthly average of £18m in 2013. Excluding pro-active customer contact, the average redress costs in the fourth quarter of 2014 were £7m per month. The high proportion of invalid complaints also continued.
Non-PPI related conduct provisions amounted to £162m at 31 December 2014, which included a net £45m of additional provisions taken in 2014, relating to existing remediation activities and an additional provision taken principally for wealth and investment products. The Card Protection Plan (‘CPP’) conduct issue (relating to the industry remediation exercise for the identity and card protection products sold by Card Protection Plan Ltd, of which Santander was one of a number of partners) has been closed, with only exceptional claims remaining. The interest hedging products conduct issue (relating to the sale of interest hedging products primarily to SME customers) continues to be managed down and a modest provision has been released in the period.
Details of Santander UK’s provision for conduct remediation, including sensitivities, are set out in Note 35 to the Consolidated Financial Statements. Further information on conduct remediation provision sensitivities is set out in ‘Critical accounting policies and Areas of Significant Management Judgement’ in Note 1 to the Consolidated Financial Statements.
Conduct risk is the risk that our decisions and behaviours lead to a detriment or poor outcomes for our customers and that we fail to maintain high standards of market integrity. | ||||||
| In this section, we explain how we manage conduct risk, including details of the improvements we made in 2015 as part of our Conduct Risk Strategy Programme. | ||||||
| We also describe our main conduct remediation provisions, with a focus on PPI, and give some insight into how we support vulnerable customers. | ||||||
Key metrics | ||||||
PPI provision increased to £465m | ||||||
| In November 2015, the FCA published a consultation paper relating to the introduction of a deadline for customer PPI complaints. It also proposed rules and guidance on the application of the Plevin case. | ||||||
| Following our review of the consultation paper and its potential impact, we made a conduct remediation charge of £450m for the fourth quarter of 2015. This charge represents our best estimate of redress and costs, notwithstanding the ongoing nature of the consultation. | ||||||
The total provision for PPI redress and related costs amounted to £465m. We will continue to review our provision levels in respect of recent claims experiences and the observed impact of the proposal to introduce a two year deadline for claims. | ||||||
Other conduct provisions increased to £172m | ||||||
Other conduct provisions amounted to £172m, which included £43m of additional provisions taken in the third quarter of 2015 relating to wealth and investment products. | ||||||
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Regulatory
CONDUCT RISK MANAGEMENT
Conduct risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with applicable codes and regulatory rules. Santander UK seeks to ensure it fully meets all its regulatory obligations.
Regulatory risk arises principally from the potential non-adherence to specific regulations and the requirements of the following regulators and their rules and guidance:can be viewed as four key underlying risks:
Key risks | Description | |
| Product risk | We offer products and | |
We sell unsuitable products and services to customers, give them the wrong advice or do not give them enough information to make an informed decision. |
servicing risk | Failures of our controls and operations result in risk to customers: – We do not provide appropriate after-sale communications to customers, making it difficult for them to contact us – We fail to treat customers in financial difficulties fairly. |
Culture risk |
We do not maintain a culture where the customer is at the centre of what we do. |
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| — | We consider conduct risk as part of the governance around our key business decisions. To support this, our conduct risk framework sets out how we manage the risk. It includes: | ||||||
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| — | We have embedded the key principles for managing conduct risk within The Santander Way in our strategy of being Simple, Personal and Fair to our customers. | ||||||
Regulatory risk developments in 2014(unaudited)
There are a number of legislative and regulatory developments both in the UK and abroad going through consultation and implementation processes, which may impact Santander UK’s approach to regulatory risk. Key developments at varying stages of the UK regulatory consultation process which are expected to have a significant impact include the implementation of ring-fencing and new accountability regimes (senior managers and certification regimes) following the passing of the Banking Reform Act in 2013.
In addition, there were a number of UK regulatory developments in 2014. The most significant were the implementation of the Mortgage Market Review and the transfer of consumer credit regulation from the OFT to the FCA, both of which became effective in April 2014. Santander UK managed these changes and has in a place a robust approach to identifying, assessing, managing and reporting any additional risks emerging from the new requirements. As reported at the half year, Santander UK was fined £12m by the FCA in March 2014 in relation to historic investment advice failings. The fine was covered by an existing provision. Whilst no material levels of mis-selling were identified, Santander UK agreed to undertake a customer contact and redress exercise to relevant customers.
Further information on regulatory developments is set out in ‘Risk Factors’ section.
All colleagues are made aware of their responsibilities for conduct risk. They are made accountable through objective setting, performance management and remuneration.
| — | We aim to secure the best outcome for our customers. This means we have minimal tolerance for residual conduct risk. This allows us to pursue our business strategy without leading to poor customer outcomes. | |||
| — | We ensure ongoing assessment and management of conduct risks through our governance model: | |||
| – | Product approval and ongoing oversight is a crucial control in the first line of defence | |||
| – | Residual risks are managed through the conduct lifecycle and monitored by the second line | |||
| – | Risk Appetite and policies are cascaded through the business after approval. | |||
| — | We have continued to enhance conduct risk identification, assessment, management and reporting across: | |||
| – | Strategy: we use risk assessments in business planning to proactively identify conduct risks in our strategy | |||
| – | Risk framework and policy: we have improved our documentation to give clearer guidance to the business | |||
| – | Management information: we use this to help proactively identify and manage conduct risks | |||
| – | Products: we have implemented a new product initiation process that gives early sight and acceptance, where appropriate, of conduct risks. We have also enhanced our ongoing monitoring through post-implementation and long-term reviews | |||
| – | Culture: we have carried out training and communications in line with The Santander Way and I AM Risk programmes to support cultural change and conduct risk awareness. | |||
Annual Report 2015
Risk review
2015 compared to 2014(unaudited)
LegalOur Conduct Risk Strategy Programme has delivered substantial improvements since it was set up in 2013. In 2015, we continued to enhance the way we report and monitor conduct risk. We also improved how we assess conduct risk isin our business decisions. The Programme worked closely with, and input into, our wider cultural change initiatives. These included Simple, Personal and Fair, I AM Risk and the riskSantander behaviours, a new set of an impact arising from legal deficiencies inorganisational behaviours that help us live The Santander UK’s contracts, its failureWay.
We also carried out related initiatives to take appropriate measurescontinue to protect its assets, its failure to manage legal disputes appropriately or its failure to assess or implementimprove the requirements of a change in law.
Legal risk arises from the following main sources:
outcomes for our customers. We:
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Our key areas of focus for 2016 are:
| – | Continuing to embed the conduct risk framework into our Commercial Banking and Global Corporate Banking businesses |
| – | Continuing to roll out our cultural change programme. This will also support embedding the framework across the business |
| – | Monitoring areas of |
PPI provisions
When assessing the adequacy of our provision, we have applied the November 2015 FCA consultation paper, including the Plevin case, to our current assumptions. This application has resulted in an additional £450m provision charge for the fourth quarter of 2015, which represents our best estimate of the remaining redress and costs. The additional provision is predicated on the probable two-year deadline by which customers would need to make their PPI complaints and the anticipated increase in claim volumes as a result of the finite claim period.
The total provision for PPI redress and related costs amounted to £465m at 31 December 2015, which included £450m of additional provisions made for the fourth quarter of 2015. While we saw a reduction in PPI redress costs in the first half of the year, we have seen an increase in the third quarter in line with industry trends, with the fourth quarter remaining flat. Although we are comfortable with our current position, we will continue to review our provision levels in respect of recent claims experiences and the observed impact of the two-year deadline.
Other conduct provisions
Other conduct provisions amounted to £172m, which included £43m of additional provisions taken in the third quarter of 2015 relating to wealth and investment products. The additional provisions were taken following the agreement of the revised approach to redressing portfolio and structured investment customers with the FCA. Outstanding non-PPI provisions relate predominantly to wealth and investment products.
For more on our provision for conduct remediation, including sensitivities, see Note 33 to the Consolidated 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.
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Vulnerable customers may be impacted both financially or personally as a result of their circumstances. They may be vulnerable due to a physical or mental condition or become vulnerable due to their surroundings – for example if their town is flooded. This broad range of issues is likely to impact financial behaviour or decisions, and may require us to take a tailored and flexible approach to
| Supporting/understanding vulnerability We have already set up a number of guidelines to help us develop our approach: | ||||
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– Launched mandatory training for all our people – Became an official ‘Dementia Friend’ – Further refined our fraud and – Piloted a scheme to centralise our probate and bereavement process and improve the
| We are working with key charities and specialist third parties to develop our understanding of vulnerability. Leveraging expertise We estimate that almost 35,000 of our customers are British Sign Language users. To help broaden the channels of communication available to them, we are an early adopter of new technology that allows them to contact us direct using secure video links with fully qualified interpreters. | ||||
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Santander UK continues to monitor, assess and respond to developments concerning legal requirements intended to prevent future financial crises or otherwise assure the stability of financial institutions.
Legal risk developments in 2014(unaudited)
Effective management of legal risk continued and was expanded throughout 2014 as it remained a key area of focus. The scale and pace of regulatory change continued to be a challenge together with other related changes in the law. As noted under regulatory risk, key regulatory developments were regularly identified, assessed, managed and reported in line with Santander UK’s Risk Framework. The key risk indicator of ‘aggregated value at risk of all managed legal claims’ remained stable during the year, at a level well below the threshold triggers and represented a significant reduction on the average 2013 levels.
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk
| Other key risks | ||||||||||||||||||
Strategic risk is the risk of not achieving the strategic business plan due to strategic decisions taken or the inability to respond to changes in the business environment.
Strategic risk can conceptually arise from the following main sources:
Effective management of strategic risk is central to Santander UK maintaining its market share, revenues and returns to our shareholders.
Strategic risk developments in 2014(unaudited)
Risks to banks’ strategies continued in 2014, as factors such as regulatory, economic and to some degree political uncertainty, technological change and the emergence of new bank business models challenged the industry. Regulatory initiatives including the implementation of UK bank ‘ring-fencing’ legislation, the recently announced market investigation by the Competition and Markets Authority, and other macro-prudential, micro-prudential and conduct-related announcements continued to affect banks’ operating environment.
During 2014, we made continued progress towards achieving our strategic objectives (see the Strategy
Annual Report 2014). Our strategic model, with its customer focus and low risk approach, helps us respond to the above challenges and meet our strategic goals.2015
Risk review
FINANCIAL CRIME RISK(unaudited)
Financial crime risk can arise in four key areas:
Risk review
Reputational risk is the risk of brand damage and potential financial loss if Santander UK fails to meet stakeholders’ expectations of its conduct and performance. Stakeholders include colleagues, customers, clients, shareholders, investors, rating agencies, regulators, media, special interest and consumer groups, and the general public. Reputational risk encompasses negative reaction not only to activities which may be illegal or against regulations, but also to activities that may not be fully aligned to society’s standards, values and expectations.
Reputational risk arises from a wide variety of causes, including:
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| We are used by terrorists to deposit, distribute or collect funds that are used to fund their activity. | ||
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| We do not identify payments, customers or entities that are subject to economic or international sanctions. | ||
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| We fail to put in place effective controls to prevent or detect bribery and corruption. | ||
Santander UK regularly reviews its policies and procedures for safeguarding against reputational risk.In 2015, financial crime was added as a key risk in our Risk Framework. This is an evolutionary process which takes account of industry guidance, best practice and society’s expectations.
Reputational risk developments in 2014(unaudited)
During 2014, Santander UK undertook a range of initiatives to strengthen governance and drive positive cultural change throughdemonstrates the organisation. Governance around the management of reputational risk was enhanced to promote such a consistent approach and a risk-aware culture across Santander UK, including a substantial increase in resources and investment allocated to the Compliance Division, as well as an increase in dedicated resources in the Risk Division. This was supported more widely across Santander UK by the continued roll-out of Simple, Personal, Fair – The Santander Way.
importance we place on it.
Our approach to financial crime risk | ||
We recognise the critical importance of ensuring we are not used for the purposes of financial crime. We manage our financial crime risks in line with the financial crime risk framework and the financial crime risk appetite statement. | ||
| — | Our financial crime function strives to be world-class in predicting, detecting, preventing and, where possible, disrupting financial crime. We manage the risk through internal controls, policies, standards and procedures. We also monitor key risk indicators and management information. These are designed to ensure we comply with anti-money laundering (AML), counter terrorist financing, sanctions, and anti-bribery and corruption (ABC) laws, regulations and industry guidance. | |
| — | We expect all our business units to manage their activities in line with the principles and guidance in our financial crime risk framework and to comply with our AML, sanctions and ABC policies and standards. | |
— | We monitor key regulatory developments and enhance our controls to comply with new or amended laws, regulations or industry guidance. | |
2015 compared to 2014(unaudited)
In 2015, we continued to improve our financial crime controls, culture and awareness. As part of our Financial Crime Transformation Programme, we:
| – | Enhanced our financial crime governance, oversight, training and awareness strategy |
| – | Upgraded our financial crime policies and standards |
| – | Established a revised governance structure which holds senior management to account |
| – | Strengthened our financial crime leadership team and staff |
| – | Introduced accountability statements for senior management |
| – | Improved our management data |
| – | Rolled out mandatory training to all staff, and introduced financial crime training tailored by role |
| – | Undertook financial crime business unit risk assessments to identify and prioritise risks |
| – | Enhanced our systems, controls and processes, including our automated controls. |
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Model riskSTRATEGIC RISK(unaudited)
ModelSimilar to other risks, strategic risk iscan affect the risklong-term success and value of loss arising from decisions mainly based on results of models, due to errors in the design, application or usage of such models. Model risk arises from the following main sources:
our business. It can arise from:
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| – | Misunderstanding our own capabilities, position in the market, or ability to implement our strategy |
| – | Pursuing initiatives like acquisitions that might not fit with our business model, or ignoring opportunities that could boost it. |
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| — | Good governance– strategic risks are determined by Board and management decisions about our objectives and direction. We make sure our Board and management decision-making processes are very thorough. As such, our Board and senior management regularly review key issues we face and potential risks. | |||
— | Clear strategy– we try to reduce risk by having a clear and consistent strategy. Our strategy takes account of our main stakeholders, sets out our vision and priorities, and how we achieve progress towards our goal of becoming the best bank. Importantly, our strategy is supported by strong values – what we call ‘The Santander
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| — | Sound planning– we like to be prepared, so we try to plan well. We have simple and effective planning processes and regularly review our performance, products/services and strategy. Our planning helps us identify key risks and opportunities. It also helps us use our resources efficiently and find the best way to serve our customers. We closely track our business environment – such as changes in the economy, customer expectations, technology, regulatory and government policies. We also look at long-term trends and how they might affect us. Finally, our planning processes involve stakeholders both inside our business and outside Santander UK (customers, shareholders, communities) to make sure we capture a wide range of views. | |||
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| — | Robust risk management– we have a strong risk management framework. We also have a prudent risk appetite, which limits the risks we take and the services we are willing to provide. This is aligned with our balanced and customer-centric business model. So we provide straight-forward banking services aimed at helping our customers. | |||
Model risk developments in2015 compared to 2014(unaudited)
During 2014, Santander UK reviewedOur business environment is always changing, and strengthened its approach and governance of model risk management acrossthis affects the way we do business. In 2015, the key changes were:
| – | The post-financial crisis regulatory agenda has led to significant change and with it high costs of regulatory compliance. One notable change involves Banking Reform, with major UK banks separating their wholesale and retail operations. Here, we have analysed the required changes and begun the work to structure ourselves to comply |
| – | The Competition and Markets Authority launched a market investigation into current accounts and lending to SMEs to decide if barriers to competition exist and, if so, how to address them. As a full-service scale challenger with a strong customer focus, we welcome steps to combat inertia in personal and SME banking and promote competition |
| – | Competitive pressures have increased both from established players and new entrants. Our business model and strategy are customer-focused, adaptable and innovative, so we believe we can thrive in this environment. Indeed, we are embracing these opportunities as shown by our partnerships with Funding Circle and our FinTech fund |
| – | We are seeing rapid changes in customer expectations – adopting new technology and moving to digital channels. We are embracing these changes that offer benefits to our customers. For example, we were in the first wave of UK banks to introduce Apple Pay. We also introduced mobile tools like the highly-rated customer apps Spendlytics, KiTTi and SmartBank |
| – | Overall, we embrace change and continue to make strong progress towards our strategic priorities. For more on this, see the ‘Strategic report’ section. |
Annual Report 2015
Risk division. This is planned to be extended into other divisions during 2015.review
Reputational risk is inherent in our business. It can arise from decisions and behaviour which may be against laws or regulations, or out of line with society’s standards, values and expectations. Examples of the sources of this risk are:
| – | Failures in corporate governance or management |
| – | The actual or perceived way we do business |
| – | How our clients and those who represent us conduct themselves |
| – | How business is conducted in our industry. |
Sustained damage to our reputation could have a material impact on our ability to operate fully. In turn, this could affect our financial performance and prospects.
Reputational risk is not static; today’s decisions may be judged by different standards tomorrow. We build this into our risk culture, evaluation and sanction procedures.
Our approach to reputational risk | ||
We set out the principles and responsibilities for identifying, assessing, managing and reporting this risk in our reputational risk framework. | ||
| — | We expect all our business units to manage their operations in line with this framework. We also expect our people to manage this risk in their own work by complying with our policies and guidelines. | |
| — | We regularly review our policies and procedures to protect our reputation. We focus on developments across our industry, guidance from our regulators, best practice and the expectations of society. | |
| — | We measure this risk through regular surveys of how we are perceived by our stakeholders. These include the media, government, regulators, customers and staff. | |
| — | Formal committees oversee and direct our assessment: | |
– Board Risk Committee and Executive Risk Committee oversee reputation issues as part of our overall Risk Appetite | ||
– Our Corporate Affairs and Marketing team, reporting to the CEO, are challenged with monitoring, building and protecting our reputation and brand | ||
– Corporate Affairs and Marketing report regularly to our Executive Committee on Corporate Social Responsibility, Sustainability and Public Affairs policies. They do this from an environment, community and sector point of view. | ||
Risk review2015 compared to 2014(unaudited)
Areas of focusIn 2015, we further strengthened governance and other itemsculture across the business. We have:
continued
| – | Built on the substantial increase in resources and investment in the Compliance and Risk divisions in 2014 |
| – | Continued to simplify our business to make it easier to manage. This included reducing the number of products and services we offered, identifying improved ways of working, simplifying complex processes as well as developing technology to improve our customers’ experience |
| – | Introduced The Santander Way Committee to further embed Simple, Personal and Fair |
| – | Developed a set of behaviours we expect all colleagues to embrace. |
Areas of focus and other items
Santander UK manages its country risk exposure under its global limits framework. Within this framework, Santander UK sets its individual risk appetite for each country, taking into account any factors that may influence the risk profile of each country, including political events, the macro-economic situation and the nature of the risk incurred. Exposures are actively managed if it is considered appropriate. Accordingly, and over recent years, Santander UK has intensified its monitoring of exposures to sovereigns and counterparties in eurozone countries, and has proceeded to selectively divest assets directly or indirectly affected by events in those countries.Banco Santander group-related risk is considered separately.plc
The country risk tables below show Santander UK’s exposures to central and local governments, government guaranteed counterparties, banks, other financial institutions, retail customers and corporate customers at 31 December 2014 and 2013. Total exposures consist of the total of balance sheet values and off-balance sheet values. Balance sheet values are calculated in accordance with IFRS (i.e. after the effect of netting agreements recognised in accordance with the requirements of IFRS) except for credit provisions which have been added back. Off balance sheet values consist of undrawn facilities and letters of credit.
The country of exposure has been assigned based on the counterparty’s country of incorporation except where Santander UK is aware that a guarantee is in place, in which case the country of incorporation of the guarantor has been used. The exposures are presented by type of counterparty other than where the specific exposures have been guaranteed by a sovereign counterparty in which case they are presented within the ‘Government guaranteed’ category.
Given the ongoing interest in eurozone economies, disclosures relating to those economies are presented first and highlighted separately.
The tables exclude credit risk exposures to Banco Santander and other Banco Santander group companies, which are presented separately in the ‘Balances with other Santander UK group companies’ section.
| Central | Government | Banks | (2) | Other | Retail | Corporate | Total | (1) | ||||||||||||||||||||
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Eurozone: | ||||||||||||||||||||||||||||
Peripheral eurozone countries: | ||||||||||||||||||||||||||||
Ireland | – | – | – | – | – | 0.3 | 0.3 | |||||||||||||||||||||
Spain (excluding Banco Santander) | – | – | 0.3 | – | – | 0.1 | 0.4 | |||||||||||||||||||||
Italy | 0.9 | – | 0.1 | – | – | 0.2 | 1.2 | |||||||||||||||||||||
Portugal | – | – | – | – | – | – | – | |||||||||||||||||||||
Greece(3) | – | – | – | – | – | – | – | |||||||||||||||||||||
Other eurozone countries: | ||||||||||||||||||||||||||||
Germany | 0.2 | – | 1.9 | – | – | 0.3 | 2.4 | |||||||||||||||||||||
France | – | 0.4 | 2.2 | – | – | 0.1 | 2.7 | |||||||||||||||||||||
All other eurozone(4) | – | – | 1.3 | 0.1 | – | 1.5 | 2.9 | |||||||||||||||||||||
| 1.1 | 0.4 | 5.8 | 0.1 | – | 2.5 | 9.9 | ||||||||||||||||||||||
All other countries: | ||||||||||||||||||||||||||||
UK | 20.2 | 0.4 | 11.2 | 5.4 | 176.9 | 48.1 | 262.2 | |||||||||||||||||||||
US | 4.7 | 0.2 | 10.1 | 1.0 | – | 0.2 | 16.2 | |||||||||||||||||||||
Switzerland | 0.7 | – | 0.5 | – | – | 0.3 | 1.5 | |||||||||||||||||||||
Denmark | 0.3 | – | 0.2 | – | – | 0.3 | 0.8 | |||||||||||||||||||||
Japan | 3.8 | – | 0.1 | 0.1 | – | 1.1 | 5.1 | |||||||||||||||||||||
Russia | – | – | – | – | – | 0.2 | 0.2 | |||||||||||||||||||||
All others(5) | – | – | 1.4 | 0.3 | – | 3.6 | 5.3 | |||||||||||||||||||||
| 29.7 | 0.6 | 23.5 | 6.8 | 176.9 | 53.8 | 291.3 | ||||||||||||||||||||||
Total | 30.8 | 1.0 | 29.3 | 6.9 | 176.9 | 56.3 | 301.2 | |||||||||||||||||||||
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Regulatory risk arises mainly from failing to comply with relevant regulations and codes.
Our approach to regulatory risk | ||
| — | We categorise regulatory risk into financial (i.e. financial prudence) and non-financial (i.e. conduct risk, described previously). This is in line with the regulatory model in the UK, where financial institutions have two key supervisors: one focusing on prudential regulation (the PRA) and one focusing on conduct (the FCA). | |
| — | We have no appetite for regulatory risk. To achieve this we set out the principles and responsibilities for identifying, assessing, managing and reporting this risk in our regulatory risk framework. | |
| — | Our framework is supported by policies, processes and standards which provide the structure for us to operate in accordance with laws, regulations and voluntary codes which apply to our activities. | |
| — | We monitor and report regulatory developments through formal governance committees. Our reporting captures all material regulatory reviews, investigations and developments. It also tracks the status of, and trends in, our key relationships with regulators. | |
2015 compared to 2014(unaudited)
The level of regulatory risk remained high during 2015 as a result of regulatory and governmental bodies’ efforts to further enhance protection of consumers and market integrity through heightened supervision and regulatory change.
In common with much of the financial services industry, we continue to experience significant levels of regulatory scrutiny. Over the course of the year this included supervisory reviews, meetings and requests for information across business lines and customer sectors.
We carried out a number of regulatory-driven activities in 2015 in response to the evolving regulatory environment. We:
| – | Made changes to comply with regulations that came into force during the year, including the recast Client Asset FCA Rulebook and Deposit Protection Rules. We also made changes to comply with the Volcker Rule (derived from the US Dodd-Frank Wall Street Reform and Consumer Protection Act) |
| – | Started activities to ensure compliance with future regulatory regime and rule changes. These included Banking Reform, ring-fencing, the new Accountability Regime and the Markets in Financial Instruments Directive II |
| – | Applied for full FCA Consumer Credit permissions following the transfer of consumer credit regulation from the OFT to the FCA in 2014. |
For more on regulatory developments, see the ‘Risk factors’ section.
Model risk can arise from flaws in our modelling techniques, or the incorrect use of a model.
Our approach to model risk | |||||||||
| — | We manage model risk through a set of controls over the use of models throughout their lifecycle. We: | ||||||||
| – Maintain a central model inventory. This includes data on owners, uses and key dates | |||||||||
| – Assess how important each model is to our business | |||||||||
| – Identify key model owners, developers and independent reviewers and agree their responsibilities | |||||||||
| – Maintain a single approval body for model developments, updates and performance tracking | |||||||||
| – Report updates to risk forums and committees. This includes risk appetite metrics | |||||||||
– Escalate to our senior management and committees if the predictive capability of a model deteriorates. | |||||||||
| — | Our independent model validation unit helps mitigate model risk. It checks how a model is built and documented, and reviews the reasons for its construction. It also checks the external environment in which a model is released, giving as full a review as possible. The output of the review is presented with the model in the approval process. | ||||||||
2015 compared to 2014(unaudited)
| Central | Government | Banks | (2) | Other | Retail | Corporate | Total | (1) | ||||||||||||||||||||
| and local | guaranteed | financial | ||||||||||||||||||||||||||
| governments | institutions | |||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||||
Eurozone: | ||||||||||||||||||||||||||||
Peripheral eurozone countries: | ||||||||||||||||||||||||||||
Ireland | – | – | – | – | – | 0.1 | 0.1 | |||||||||||||||||||||
Spain (excluding Banco Santander) | – | – | 0.2 | – | – | 0.1 | 0.3 | |||||||||||||||||||||
Italy | 0.8 | – | 0.1 | – | – | 0.1 | 1.0 | |||||||||||||||||||||
Portugal | – | – | – | – | – | 0.1 | 0.1 | |||||||||||||||||||||
Greece(3) | – | – | – | – | – | – | – | |||||||||||||||||||||
Other eurozone countries: | ||||||||||||||||||||||||||||
Germany | – | – | 1.6 | – | – | 0.2 | 1.8 | |||||||||||||||||||||
France | – | 0.4 | 1.9 | – | – | 0.1 | 2.4 | |||||||||||||||||||||
All other eurozone(4) | – | 0.2 | 1.4 | – | – | 1.3 | 2.9 | |||||||||||||||||||||
| 0.8 | 0.6 | 5.2 | – | – | 2.0 | 8.6 | ||||||||||||||||||||||
All other countries: | ||||||||||||||||||||||||||||
UK | 24.2 | 0.4 | 12.4 | 5.1 | 172.7 | 41.6 | 256.4 | |||||||||||||||||||||
US | 5.3 | – | 8.2 | 0.1 | 0.1 | 0.5 | 14.2 | |||||||||||||||||||||
Switzerland | 0.5 | – | 1.3 | – | – | 0.5 | 2.3 | |||||||||||||||||||||
Denmark | – | – | 1.4 | – | – | 0.1 | 1.5 | |||||||||||||||||||||
Japan | 3.8 | – | 0.1 | – | – | 0.1 | 4.0 | |||||||||||||||||||||
Russia | – | – | – | – | – | 0.2 | 0.2 | |||||||||||||||||||||
All others(5) | – | – | 0.8 | 0.1 | 0.5 | 2.8 | 4.2 | |||||||||||||||||||||
| 33.8 | 0.4 | 24.2 | 5.3 | 173.3 | 45.8 | 282.8 | ||||||||||||||||||||||
Total | 34.6 | 1.0 | 29.4 | 5.3 | 173.3 | 47.8 | 291.4 | |||||||||||||||||||||
We have developed a framework to help improve the way we manage risks associated with the various models we use to make risk-based decisions. In 2015, we began to extend our model risk management practices into Retail Banking and Commercial Banking, as well as our Finance division. We identified the models we use in these areas and determined their importance to us. This will help us to compare our most important models across and within divisions.
Annual Report 2015
Risk review
We manage our country risk exposure under our global limits framework. Within this framework, we set our Risk Appetite for each country, taking into account factors that may influence its risk profile. These can include political events, macroeconomics and the nature of the risk. We actively manage exposures if we think we need to. As an example, in recent years, we have increased our monitoring of exposures to eurozone counterparties. As part of this, we have selectively divested assets affected by events in those countries. We consider Banco Santander group-related risk separately.
The tables below show our exposures at 31 December 2015 and 2014. Total exposures are the total of balance sheet and off-balance sheet values. We calculate balance sheet values in accordance with IFRS (i.e. after netting allowed under IFRS) except for credit provisions which have been added back. Off balance sheet values are undrawn facilities and letters of credit.
We classify geographical location according to country of risk – in other words, the country where each counterparty has its main business activity or assets. That is unless there is a full risk transfer guarantee in place, in which case we use the guarantor’s country of domicile instead. If our clients have operations in many countries, we use their country of incorporation.
We show the exposures by type of counterparty. The only exception is where exposures have been guaranteed by a sovereign. In that case we show them in the ‘Government guaranteed’ category. Due to the interest in the eurozone, we show those disclosures first and highlight them separately.
The tables exclude exposures to other Banco Santander group companies. We show them separately in the ‘Balances with other Banco Santander group companies’ section.
| Central | Government | Banks | (2) | Other | Retail | Corporate | Total | (1) | ||||||||||||||||||
| and local | guaranteed | financial | ||||||||||||||||||||||||
| governments | institutions | |||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||
2015 | ||||||||||||||||||||||||||
Eurozone: | ||||||||||||||||||||||||||
Peripheral eurozone countries: | ||||||||||||||||||||||||||
Italy | 0.8 | – | 0.1 | – | – | 0.1 | 1.0 | |||||||||||||||||||
Ireland | – | – | – | 0.1 | – | 0.6 | 0.7 | |||||||||||||||||||
Spain (excluding Banco Santander) | – | – | 0.2 | – | – | 0.2 | 0.4 | |||||||||||||||||||
Portugal | – | – | 0.1 | – | – | – | 0.1 | |||||||||||||||||||
Greece | – | – | – | – | – | – | – | |||||||||||||||||||
Other eurozone countries: | ||||||||||||||||||||||||||
France | 0.1 | 0.3 | 2.1 | 0.1 | – | 1.6 | 4.2 | |||||||||||||||||||
Germany | 0.1 | – | 2.2 | – | – | 0.5 | 2.8 | |||||||||||||||||||
All other eurozone(3) | 0.5 | – | 1.1 | 0.3 | – | 1.4 | 3.3 | |||||||||||||||||||
| 1.5 | 0.3 | 5.8 | 0.5 | – | 4.4 | 12.5 | ||||||||||||||||||||
All other countries: | ||||||||||||||||||||||||||
UK | 17.0 | 0.4 | 9.6 | 6.8 | 184.1 | 52.5 | 270.4 | |||||||||||||||||||
US | 2.5 | 0.2 | 9.0 | 3.2 | – | 0.1 | 15.0 | |||||||||||||||||||
Japan | 2.7 | – | 1.0 | 0.1 | – | 1.7 | 5.5 | |||||||||||||||||||
Switzerland | 0.1 | – | 0.2 | – | – | 0.4 | 0.7 | |||||||||||||||||||
Denmark | – | – | 0.1 | – | – | 0.4 | 0.5 | |||||||||||||||||||
Russia | – | – | – | 0.2 | – | – | 0.2 | |||||||||||||||||||
All others(4) | – | – | 1.5 | 0.4 | – | 1.9 | 3.8 | |||||||||||||||||||
| 22.3 | 0.6 | 21.4 | 10.7 | 184.1 | 57.0 | 296.1 | ||||||||||||||||||||
Total | 23.8 | 0.9 | 27.2 | 11.2 | 184.1 | 61.4 | 308.6 | |||||||||||||||||||
| (1) | Credit exposures exclude cash at hand, the macro hedge of interest rate risk, intangible assets, property, plant and equipment, current and deferred tax assets, retirement benefit assets and other assets. Loans and advances to customers are included gross of loan loss allowances. |
| (2) | Excludes balances with central banks. |
| (3) |
| (4) | Includes |
154 Santander UK plc
| Risk | ||||||||||||||||
| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||
| Central | Government | Banks | (2) | Other | Retail | Corporate | Total | (1) | ||||||||||||||||||
| and local | guaranteed | financial | ||||||||||||||||||||||||
| governments | institutions | |||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | ||||||||||||||||||||
2014 | ||||||||||||||||||||||||||
Eurozone: | ||||||||||||||||||||||||||
Peripheral eurozone countries: | ||||||||||||||||||||||||||
Italy | 0.9 | – | 0.1 | – | – | 0.2 | 1.2 | |||||||||||||||||||
Ireland | – | – | – | – | – | 0.3 | 0.3 | |||||||||||||||||||
Spain (excluding Banco Santander) | – | – | 0.3 | – | – | 0.1 | 0.4 | |||||||||||||||||||
Portugal | – | – | – | – | – | – | – | |||||||||||||||||||
Greece | – | – | – | – | – | – | – | |||||||||||||||||||
Other eurozone countries: | ||||||||||||||||||||||||||
France | – | 0.4 | 2.2 | – | – | 0.1 | 2.7 | |||||||||||||||||||
Germany | 0.2 | – | 1.9 | – | – | 0.3 | 2.4 | |||||||||||||||||||
All other eurozone(3) | – | – | 1.3 | 0.1 | – | 1.5 | 2.9 | |||||||||||||||||||
| 1.1 | 0.4 | 5.8 | 0.1 | – | 2.5 | 9.9 | ||||||||||||||||||||
All other countries: | ||||||||||||||||||||||||||
UK | 20.2 | 0.4 | 11.2 | 5.4 | 176.9 | 48.1 | 262.2 | |||||||||||||||||||
US | 4.7 | 0.2 | 10.1 | 1.0 | – | 0.2 | 16.2 | |||||||||||||||||||
Japan | 3.8 | – | 0.1 | 0.1 | – | 1.1 | 5.1 | |||||||||||||||||||
Switzerland | 0.7 | – | 0.5 | – | – | 0.3 | 1.5 | |||||||||||||||||||
Denmark | 0.3 | – | 0.2 | – | – | 0.3 | 0.8 | |||||||||||||||||||
Russia | – | – | – | 0.2 | – | – | 0.2 | |||||||||||||||||||
All others(4) | – | – | 1.4 | 0.3 | – | 3.6 | 5.3 | |||||||||||||||||||
| 29.7 | 0.6 | 23.5 | 7.0 | 176.9 | 53.6 | 291.3 | ||||||||||||||||||||
Total | 30.8 | 1.0 | 29.3 | 7.1 | 176.9 | 56.1 | 301.2 | |||||||||||||||||||
| (1) | Credit exposures exclude cash at hand, the macro hedge of interest rate risk, intangible assets, property, plant and equipment, current and deferred tax assets, retirement benefit assets and other assets. Loans and advances to customers are included gross of loan loss allowances. |
| (2) | Excludes balances with central banks. |
| (3) | Includes The Netherlands of £1.0bn, Luxembourg of £0.9bn, Belgium, Finland and |
| Includes Ukraine of |
20142015 compared to 20132014(unaudited)
Key changes in sovereign and other country risk exposures during the year ended 31 December 2014 were as follows:in 2015 were:
| – | An increase of |
| – | An increase of |
| – | A decrease of £1.2bn in exposure to the US to |
| – | A decrease of £0.8bn in exposure to Switzerland to |
| – | An increase of |
| – | An increase of |
| – | An increase of |
| – | Movements in the |
Annual Report 2015
Risk review
Areas of focus and other items
continued
Further analysis of sovereign debt and other country risk exposures including peripheral eurozone exposures
PresentedThe tables below foranalyse our sovereign debt and other country risk exposures is additional analysis offurther. We show which exposures into those that are accounted for on-balance sheet (further analysed(analysed into those measured at amortised cost and those measured at fair value) and those thatwhich are off-balance sheet.
TheWe mainly classify our assets held at amortised cost are principally classified as loans and advances to banks, loans and advances to customers, and loans and receivables securities. Santander UK hasWe have no held-to-maturity securities. TheWe classify our assets held at fair value are classified as either trading assets or have been designated as held at fair value through profit or loss, with the exception ofloss. The only exceptions are government debt held for liquidity purposes, which are classifiedwe classify as available-for-sale securities. Santander UK has made no reclassifications to/from theWe have not reclassified any assets which are held at fair value from/to any other category.value.
Sovereign debt
| Assets held at amortised cost | Assets held at fair value | Assets held at amortised cost | Assets held at fair value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Central | Government | Total | Central | Government | Total | Total | Commitments | Total | Central | Government | Total | Central | Government | Total | Total | Commitments | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| and local | guaranteed | and local | guaranteed | balance | and undrawn | and local | guaranteed | and local | guaranteed | balance | and undrawn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| governments | governments | sheet asset | facilities | governments | governments | sheet asset | facilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Eurozone countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | – | – | – | 0.8 | – | 0.8 | 0.8 | – | 0.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
France | – | – | – | – | 0.4 | 0.4 | 0.4 | – | 0.4 | – | – | – | 0.1 | 0.3 | 0.4 | 0.4 | – | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | – | – | – | 0.9 | – | 0.9 | 0.9 | – | 0.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Germany | – | – | – | 0.2 | – | 0.2 | 0.2 | – | 0.2 | – | – | – | 0.1 | – | 0.1 | 0.1 | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
All other eurozone | – | – | – | – | – | – | – | – | – | – | – | – | 0.5 | – | 0.5 | 0.5 | – | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | – | – | 1.1 | 0.4 | 1.5 | 1.5 | – | 1.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | – | – | 1.5 | 0.3 | 1.8 | 1.8 | – | 1.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All other countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK | 16.9 | – | 16.9 | 3.3 | 0.4 | 3.7 | 20.6 | – | 20.6 | 13.5 | – | 13.5 | 3.5 | 0.4 | 3.9 | 17.4 | – | 17.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
US | 4.4 | – | 4.4 | 0.3 | 0.2 | 0.5 | 4.9 | – | 4.9 | 2.2 | – | 2.2 | 0.3 | 0.2 | 0.5 | 2.7 | – | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan | – | – | – | 3.8 | – | 3.8 | 3.8 | – | 3.8 | – | – | – | 2.7 | – | 2.7 | 2.7 | – | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Switzerland | – | – | – | 0.7 | – | 0.7 | 0.7 | – | 0.7 | – | – | – | 0.1 | – | 0.1 | 0.1 | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Denmark | 0.3 | – | 0.3 | 0.3 | – | 0.3 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 15.7 | – | 15.7 | 6.6 | 0.6 | 7.2 | 22.9 | – | 22.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 21.3 | – | 21.3 | 8.4 | 0.6 | 9.0 | 30.3 | – | 30.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Eurozone countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | – | – | – | 0.9 | – | 0.9 | 0.9 | – | 0.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
France | – | – | – | – | 0.4 | 0.4 | 0.4 | – | 0.4 | �� | – | – | – | – | 0.4 | 0.4 | 0.4 | – | 0.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | – | – | – | 0.8 | – | 0.8 | 0.8 | – | 0.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Germany | – | – | – | – | – | – | – | – | – | – | – | – | 0.2 | – | 0.2 | 0.2 | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
All other eurozone | – | – | – | – | 0.2 | 0.2 | 0.2 | – | 0.2 | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | – | – | 0.8 | 0.6 | 1.4 | 1.4 | – | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | – | – | 1.1 | 0.4 | 1.5 | 1.5 | – | 1.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All other countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK | 20.3 | – | 20.3 | 3.9 | 0.4 | 4.3 | 24.6 | – | 24.6 | 16.9 | – | 16.9 | 3.3 | 0.4 | 3.7 | 20.6 | – | 20.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
US | 4.9 | – | 4.9 | 0.4 | – | 0.4 | 5.3 | – | 5.3 | 4.4 | – | 4.4 | 0.3 | 0.2 | 0.5 | 4.9 | – | 4.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan | – | – | – | 3.8 | – | 3.8 | 3.8 | – | 3.8 | – | – | – | 3.8 | – | 3.8 | 3.8 | – | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Switzerland | – | – | – | 0.5 | – | 0.5 | 0.5 | – | 0.5 | – | – | – | 0.7 | – | 0.7 | 0.7 | – | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Denmark | – | – | – | – | – | – | – | – | – | – | – | – | 0.3 | – | 0.3 | 0.3 | – | 0.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 21.3 | – | 21.3 | 8.4 | 0.6 | 9.0 | 30.3 | – | 30.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 25.2 | – | 25.2 | 8.6 | 0.4 | 9.0 | 34.2 | – | 34.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Santander UK hasWe have no direct sovereign exposures to any other countries. Santander UK hasWe have not recognised any impairment losses againstfor sovereign debt which is held at amortised cost. Santander UK has
We have no exposures to credit default swaps (either written or purchased) which are directly referenced to sovereign debt or other instruments that are directly referenced to sovereign debt.
156 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||||||||||
Other country risk exposures(1)
| Assets held at amortised cost | Assets held at fair value(2) | Assets held at amortised cost | Assets held at fair value(2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Banks | Other | Retail | Corporate | Total | Banks | Other | Corporate | Total | Total | Commitments | Total | Banks | Other | Retail | Corporate | Total | Banks | Other | Corporate | Total | Total | Commitments | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| financial | financial | balance | and | financial | financial | balance | and | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| institutions | institutions | sheet | undrawn | institutions | institutions | sheet | undrawn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| asset | facilities | (3) | asset | facilities | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 31 December 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eurozone: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Peripheral eurozone countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ireland | – | – | – | 0.1 | 0.1 | – | – | 0.1 | 0.1 | 0.2 | 0.1 | 0.3 | – | 0.1 | – | 0.2 | 0.3 | – | – | 0.2 | 0.2 | 0.5 | 0.2 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Spain | – | – | – | – | – | 0.2 | – | – | 0.2 | 0.2 | 0.2 | 0.4 | – | – | – | – | – | 0.2 | – | – | 0.2 | 0.2 | 0.2 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Italy | – | – | – | – | – | 0.1 | – | – | 0.1 | 0.1 | 0.2 | 0.3 | – | – | – | – | – | 0.1 | – | – | 0.1 | 0.1 | 0.1 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portugal | – | – | – | – | – | – | – | – | – | – | – | – | 0.1 | – | – | – | 0.1 | – | – | – | – | 0.1 | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other eurozone countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
France | – | – | – | – | – | 2.1 | 0.1 | 1.6 | 3.8 | 3.8 | – | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Germany | – | – | – | 0.1 | 0.1 | 1.9 | – | 0.2 | 2.1 | 2.2 | – | 2.2 | – | – | – | 0.1 | 0.1 | 2.2 | – | 0.4 | 2.6 | 2.7 | – | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| France | – | – | – | 0.1 | 0.1 | 2.2 | – | – | 2.2 | 2.3 | – | 2.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | – | – | – | 0.5 | 0.5 | 1.3 | 0.1 | 0.3 | 1.7 | 2.2 | 0.7 | 2.9 | – | 0.1 | – | 0.5 | 0.6 | 1.1 | 0.2 | 0.1 | 1.4 | 2.0 | 0.8 | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | – | – | 0.8 | 0.8 | 5.7 | 0.1 | 0.6 | 6.4 | 7.2 | 1.2 | 8.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.1 | 0.2 | – | 0.8 | 1.1 | 5.7 | 0.3 | 2.3 | 8.3 | 9.4 | 1.3 | 10.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All other countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UK | 1.3 | 0.6 | 158.9 | 26.0 | 186.8 | 9.9 | 4.4 | 8.6 | 22.9 | 209.7 | 31.9 | 241.6 | 2.2 | 0.9 | 164.6 | 29.3 | 197.0 | 7.4 | 5.9 | 8.2 | 21.5 | 218.5 | 34.5 | 253.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| US | 0.6 | – | – | 0.1 | 0.7 | 9.5 | 1.0 | – | 10.5 | 11.2 | 0.1 | 11.3 | 0.3 | 0.3 | – | – | 0.6 | 8.7 | 2.9 | – | 11.6 | 12.2 | 0.1 | 12.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan | 0.9 | – | – | – | 0.9 | 0.1 | 0.1 | 1.7 | 1.9 | 2.8 | – | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Switzerland | – | – | – | 0.3 | 0.3 | 0.5 | – | – | 0.5 | 0.8 | – | 0.8 | – | – | – | 0.3 | 0.3 | 0.2 | – | – | 0.2 | 0.5 | 0.1 | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Denmark | – | – | – | – | – | 0.2 | – | – | 0.2 | 0.2 | 0.3 | 0.5 | – | – | – | – | – | 0.1 | – | – | 0.1 | 0.1 | 0.4 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Japan | – | – | – | – | – | 0.1 | 0.1 | 1.1 | 1.3 | 1.3 | – | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Russia | – | – | – | 0.2 | 0.2 | – | – | – | – | 0.2 | – | 0.2 | – | 0.2 | – | – | 0.2 | – | – | – | – | 0.2 | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 0.1 | 0.1 | – | 2.3 | 2.5 | 1.3 | 0.1 | 0.2 | 1.6 | 4.1 | 1.2 | 5.3 | – | 0.2 | – | 1.1 | 1.3 | 1.5 | 0.2 | 0.1 | 1.8 | 3.1 | 0.7 | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3.4 | 1.6 | 164.6 | 30.7 | 200.3 | 18.0 | 9.1 | 10.0 | 37.1 | 237.4 | 35.8 | 273.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2.0 | 0.7 | 158.9 | 28.9 | 190.5 | 21.5 | 5.6 | 9.9 | 37.0 | 227.5 | 33.5 | 261.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 31 December 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eurozone: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Peripheral eurozone countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ireland | – | – | – | 0.1 | 0.1 | – | – | – | – | 0.1 | – | 0.1 | – | – | – | 0.1 | 0.1 | – | – | 0.1 | 0.1 | 0.2 | 0.1 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Spain | 0.1 | – | – | – | 0.1 | 0.1 | – | – | 0.1 | 0.2 | 0.1 | 0.3 | – | – | – | – | – | 0.2 | – | – | 0.2 | 0.2 | 0.2 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Italy | 0.1 | – | – | 0.1 | 0.2 | – | – | – | – | 0.2 | – | 0.2 | – | – | – | – | – | 0.1 | – | – | 0.1 | 0.1 | 0.2 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portugal | – | – | – | 0.1 | 0.1 | – | – | – | – | 0.1 | – | 0.1 | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other eurozone countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
France | – | – | – | 0.1 | 0.1 | 2.2 | – | – | 2.2 | 2.3 | – | 2.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Germany | 0.1 | – | – | 0.2 | 0.3 | 1.5 | – | – | 1.5 | 1.8 | – | 1.8 | – | – | – | 0.1 | 0.1 | 1.9 | – | 0.2 | 2.1 | 2.2 | – | 2.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| France | 0.1 | – | – | 0.1 | 0.2 | 1.8 | – | – | 1.8 | 2.0 | – | 2.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | – | – | – | 0.6 | 0.6 | 1.4 | – | – | 1.4 | 2.0 | 0.7 | 2.7 | – | – | – | 0.5 | 0.5 | 1.3 | 0.1 | 0.3 | 1.7 | 2.2 | 0.7 | 2.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.4 | – | – | 1.2 | 1.6 | 4.8 | – | – | 4.8 | 6.4 | 0.8 | 7.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | – | – | 0.8 | 0.8 | 5.7 | 0.1 | 0.6 | 6.4 | 7.2 | 1.2 | 8.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All other countries: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UK | 1.5 | – | 155.5 | 26.1 | 183.1 | 10.8 | 4.9 | 4.9 | 20.6 | 203.7 | 28.1 | 231.8 | 1.3 | 0.6 | 158.9 | 26.0 | 186.8 | 9.9 | 4.4 | 8.6 | 22.9 | 209.7 | 31.9 | 241.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| US | 0.5 | – | 0.1 | 0.4 | 1.0 | 7.7 | 0.1 | 0.1 | 7.9 | 8.9 | – | 8.9 | 0.6 | – | – | 0.1 | 0.7 | 9.5 | 1.0 | – | 10.5 | 11.2 | 0.1 | 11.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan | – | – | – | – | – | 0.1 | 0.1 | 1.1 | 1.3 | 1.3 | – | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Switzerland | – | – | – | 0.4 | 0.4 | 1.3 | – | – | 1.3 | 1.7 | 0.1 | 1.8 | – | – | – | 0.3 | 0.3 | 0.5 | – | – | 0.5 | 0.8 | – | 0.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Denmark | – | – | – | – | – | 1.4 | – | – | 1.4 | 1.4 | 0.1 | 1.5 | – | – | – | – | – | 0.2 | – | – | 0.2 | 0.2 | 0.3 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Japan | – | – | – | – | – | 0.1 | – | 0.1 | 0.2 | 0.2 | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Russia | – | – | – | 0.2 | 0.2 | – | – | – | – | 0.2 | – | 0.2 | – | 0.2 | – | – | 0.2 | – | – | – | – | 0.2 | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | – | – | 0.5 | 2.0 | 2.5 | 0.8 | 0.1 | – | 0.9 | 3.4 | 0.8 | 4.2 | 0.1 | 0.1 | – | 2.3 | 2.5 | 1.3 | 0.1 | 0.2 | 1.6 | 4.1 | 1.2 | 5.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2.0 | 0.9 | 158.9 | 28.7 | 190.5 | 21.5 | 5.6 | 9.9 | 37.0 | 227.5 | 33.5 | 261.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2.0 | – | 156.1 | 29.1 | 187.2 | 22.1 | 5.1 | 5.1 | 32.3 | 219.5 | 29.1 | 248.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Excluding Banco Santander and other Banco Santander group companies. |
| (2) | The assets held at fair value were presented as either trading assets or designated as held at fair value through profit or loss. |
| (3) | Of which |
Commitments and undrawn facilities principally consist ofare mainly formal standby facilities and credit lines in Santander UK’slines. In Retail Banking, and Commercial Banking operations. Within Retail Banking, these representthey are credit cards, (excluding co-brand credit cards), mortgagemortgages and overdraft facilities. Withinoverdrafts. In Commercial Banking and Global Corporate & Institutional Banking, these representthey are standby loan facilities. A summary ofFor the key terms and a maturity analysis of formal standby facilities, credit lines and other commitments, are set out insee Note 3735 to the Consolidated Financial Statements.
MaturityFor maturity analyses of Santander UK’sour assets held at amortised cost, are set out insee Note 4443 to the Consolidated Financial Statements.
Annual Report 2015
Risk review
Areas of focus and other items
continued
Peripheral eurozone countries
ThisIn this section discusses Santander UK’swe discuss our direct exposureand indirect exposures to the peripheral eurozone countries at 31 December 20142015 and 20132014 by type of financial instrument.It excludes We exclude balances with other Banco Santander group companies which are presentedwe show separately below. This section also discusses our indirect
Our exposures to peripheral eurozone countries.
Direct and indirect risk exposures to peripheral eurozone countries arise primarilymainly in the large corporate element of the portfolio viawith large multinational companies and financial institutions, which are monitored on a regular basis by the Wholesale Credit Risk Departmentinstitutions. We monitor these regularly as part of theour overall risk management process. The large corporate portfolio is mainly comprised of multinational UK companies which are considered to be geographically well diversified in terms of theirwhose assets, operations and profits.profits are geographically diversified. The remainderrest of the Commercial Banking portfolio is predominantlymainly UK-based with no material peripheral eurozone exposure. In addition,We mitigate the risk is further mitigated by the fact that credit agreements are underpinned by both financial and non-financialusing covenants.
TheWe mitigate the risk arising from indirect exposures from our transactions with financial institutions is mitigated by thetheir short-term tenor, of the transactions,by margin calls and collateral, and by using standard legal agreements that allow offsetting. We mitigate the fact that many such transactions contain margin calls and/or collateral requirements, and are subject to standard ISDA Master Agreements permitting offsetting.
The risk arising from indirect exposures from our transactions with other corporates is mitigated bywith standard financial and non-financial guarantees and the fact that the companiescompanies’ assets, operations and profits are geographically well diversified in terms of their assets, operations and profits.diversified.
Direct exposures to peripheral eurozone countries
Balances with respect to Italy at 31 December 2014 comprised2015 were trading assets issued by central and local governments of £0.9bn (2013: £0.8bn)£0.8bn (2014: £0.9bn); Loans and receivables securities issued by banks of £nil (2013: £0.1bn), commitments and undrawn facilities with corporate customers of £0.2bn (2013: £0.1bn); derivative assets issued by banks of £0.1bn (2013: £0.1bn), net of derivative liabilities held by banks of £nil (2013: £0.1bn).
Balances with respect to Spain at 31 December 2014 comprised loans and receivables securities issued by banks of £nil (2013: £0.1bn), derivative assets issued by banks of £0.2bn (2013: £0.1bn), commitments and undrawn facilities with banks of £0.1bn (2013: £nil) and commitments and undrawn facilities with corporate customers of £0.1bn (2013:(2014: £0.2bn); and derivative assets issued by banks of £0.1bn (2014: £0.1bn).
Balances with respect to Ireland at 31 December 2014 comprised2015 were loans and advances to corporate customers of £0.1bn (2013:£0.3bn (2014: £0.1bn), assets held at fair value with corporate customers of £0.1bn (2013: £nil)£0.2bn (2014: £0.1bn) and commitments and undrawn facilities with corporate customers of £0.1bn (2013: £nil)£0.2bn (2014: £0.1bn).
Balances with respect toSpain at 31 December 2015 were derivative assets issued by banks of £0.2bn (2014: £0.2bn), commitments and undrawn facilities with corporate customers of £0.2bn (2014: £0.1bn) and commitments and undrawn facilities with banks of £nil (2014: £0.1bn).
Balances with Portugal at 31 December 20142015 were £nil (2013: £0.1bn)loans and advances to banks of £0.1bn (2014: £nil).
Indirect exposures to peripheral eurozone countries
IndirectThese exposures to peripheral eurozone countries are considered to exist where our direct counterparties outside the peripheral eurozone countries themselves have a direct exposure to one or morethe peripheral eurozone countries. Indirecteurozone. We identify these exposures are identified as part of our ongoing credit analysis and monitoring of our counterparty basebase. We do this by the review of availablereviewing financial informationdata to determine the countries where the materialmain parts of a counterparty’stheir assets, operations or profits arise.
Our indirect exposures to the peripheral eurozone countries consist ofcome from a small number of corporate loans to large multinational UK companies based in the UK that derive a proportionsome of their profits from one or morethe peripheral eurozone countries;eurozone; trading transactions and hedging transactions with financial institutions based in the UK and Europe that derive a proportionsome of their profits from or have a proportion of their assets in one or morethe peripheral eurozone countries;eurozone; and a small number of loans to other corporate entitiescompanies which have either a proportion of their operations within,in, or profits from, one or morethe peripheral eurozone countries.eurozone. We have no significant indirect exposure to the peripheral eurozone countries in our retail business.
Redenomination risk(unaudited)
We consider the total dissolution of the eurozone to be extremely unlikely. We also believe widespread redenomination of our euro-denominated assets and liabilities is highly improbable. However, we have analysed the redenomination risk that might arise from an exit of a member state from the euro or a total dissolution of the euro and how that would be implemented. It is not possible to predict what the total financial impact on us might be of this.
Determining which balances would be legally redenominated is complex and depends on a number of factors. These factors include the precise exit scenario. This is because the effects on contracts of a disorderly exit or one sanctioned under EU law may differ. We monitor these risks and have taken steps to mitigate them and/or reduce our overall exposure to losses that might arise in the event of a redenomination. We have done this by reducing our balances and funding mismatches. As part of maintaining a diverse funding base, we raise funding in a number of currencies, including euro, and convert it into sterling through currency swaps to fund our commercial assets which are largely sterling denominated.
Our net asset position denominated in euro, reflecting assets, liabilities and related swaps (which are mainly cross-currency derivatives entered into to swap funding raised in euro into sterling for reasons set out above) in connection with contracts denominated in euro, was net assets of £0.5bn at 31 December 2015 (2014: net assets of £0.7bn). This was debt securities (covered bonds and securitisations) of £23.0bn (2014: £20.0bn) we issued as part of our medium term funding activities, medium-term repo liabilities of £1.3bn (2014: £0.8bn), other deposit liabilities of £4.4bn (2014: £1.9bn), other deposits by Banco Santander group companies of £1.1bn (2014: £1.7bn), other loans and securities of £4.9bn (2014: £4.6bn), net trading repo liabilities of £1.3bn (2014: £2.8bn) and related swap assets of £26.7bn (2014: £23.3bn) which swap the euro exposures into sterling to ensure our assets and liabilities are currency matched in sterling.
Our exposures to individual eurozone countries and total exposures to eurozone counterparties, including any euro-denominated contracts, are set out earlier in this section.
158 Santander UK plc
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| governance | Credit risk | Market risk | Liquidity risk | Capital risk | Pension risk | Operational risk | Conduct risk | Other key risks | ||||||||||||||||||
Balances with other Banco Santander group companies
Santander UK enters into transactionsWe deal with other Banco Santander group companies in the ordinary course of business. Such transactions are undertaken in areas of businessWe do this where Santander UK haswe have a particular business advantage or expertise and where other Banco Santander group companiesthey can offer us commercial opportunities,opportunities. This is done substantially on the same terms as for comparablesimilar transactions with third party counterparties.parties. These transactions also arise inwhere we support of the activities of, or with, larger multinational corporate clients and financial institutions which may have relationshipsdeal with a number of entities in theother Banco Santander group. Thesegroup companies. We conduct these activities are conducted in a mannerway that appropriately manages the credit risk arising against such other Banco Santander group companies within limits acceptable to the PRA. At 31 December 2015 and 2014, and 2013, Santander UKwe had gross balances with other Banco Santander group companies as follows:
| Banks | Other financial | Corporate | Total | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||||||||
| institutions | Banks | Other financial | Corporate | Total | Banks | Other financial | Corporate | Total | ||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | institutions | institutions | |||||||||||||||||||||||||||||||||||||||||||
31 December 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
– Spain | 2.1 | 0.1 | – | 2.2 | 1.5 | – | – | 1.5 | 2.1 | 0.1 | – | 2.2 | ||||||||||||||||||||||||||||||||||||
– UK | – | 0.8 | – | 0.8 | – | 1.3 | – | 1.3 | – | 0.8 | – | 0.8 | ||||||||||||||||||||||||||||||||||||
– Chile | 0.2 | – | – | 0.2 | 0.3 | – | – | 0.3 | 0.2 | – | – | 0.2 | ||||||||||||||||||||||||||||||||||||
– Norway | 0.1 | – | – | 0.1 | 0.1 | – | – | 0.1 | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||
– Ireland | 0.1 | – | – | 0.1 | – | – | – | – | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||
–Other <£100m | 0.1 | – | – | 0.1 | 0.1 | 0.1 | – | 0.2 | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||
| 2.0 | 1.4 | – | 3.4 | 2.6 | 0.9 | – | 3.5 | |||||||||||||||||||||||||||||||||||||||||
| 2.6 | 0.9 | – | 3.5 | |||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
– Spain | (5.1 | ) | (0.5 | ) | (0.1 | ) | (5.7 | ) | (3.6 | ) | (0.3 | ) | (0.1 | ) | (4.0 | ) | (5.1 | ) | (0.5 | ) | (0.1 | ) | (5.7 | ) | ||||||||||||||||||||||||
– UK | – | (0.4 | ) | – | (0.4 | ) | – | (2.0 | ) | (0.1 | ) | (2.1 | ) | – | (0.4 | ) | – | (0.4 | ) | |||||||||||||||||||||||||||||
– Chile | (0.3 | ) | – | – | (0.3 | ) | (0.2 | ) | – | – | (0.2 | ) | ||||||||||||||||||||||||||||||||||||
– Norway | (0.1 | ) | – | – | (0.1 | ) | (0.1 | ) | – | – | (0.1 | ) | ||||||||||||||||||||||||||||||||||||
– Ireland | (0.1 | ) | – | – | (0.1 | ) | – | – | – | – | (0.1 | ) | – | – | (0.1 | ) | ||||||||||||||||||||||||||||||||
– Belgium | – | – | – | – | (0.2 | ) | – | – | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||
– Italy | (0.1 | ) | – | – | (0.1 | ) | – | – | – | – | (0.1 | ) | – | – | (0.1 | ) | ||||||||||||||||||||||||||||||||
– Belgium | (0.2 | ) | – | – | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||||||
– Chile | (0.2 | ) | – | – | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||||||
– Germany | – | (0.1 | ) | – | (0.1 | ) | – | – | – | – | – | (0.1 | ) | – | (0.1 | ) | ||||||||||||||||||||||||||||||||
– Norway | (0.1 | ) | – | – | (0.1 | ) | ||||||||||||||||||||||||||||||||||||||||||
– Uruguay | (0.1 | ) | – | – | (0.1 | ) | – | – | – | – | (0.1 | ) | – | – | (0.1 | ) | ||||||||||||||||||||||||||||||||
– Other < £100m | (0.1 | ) | (0.2 | ) | – | (0.3 | ) | |||||||||||||||||||||||||||||||||||||||||
– Other <£100m | (0.2 | ) | (0.1 | ) | – | (0.3 | ) | (0.1 | ) | (0.2 | ) | – | (0.3 | ) | ||||||||||||||||||||||||||||||||||
| (4.2 | ) | (2.4 | ) | (0.2 | ) | (6.8 | ) | (6.0 | ) | (1.2 | ) | (0.1 | ) | (7.3 | ) | |||||||||||||||||||||||||||||||||
| (6.0 | ) | (1.2 | ) | (0.1 | ) | (7.3 | ) | |||||||||||||||||||||||||||||||||||||||||
31 December 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
– Spain | 2.2 | 0.1 | – | 2.3 | ||||||||||||||||||||||||||||||||||||||||||||
– UK | – | 0.7 | 0.2 | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||
– Chile | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||
– Other < £100m | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||
| 2.4 | 0.8 | 0.2 | 3.4 | |||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
– Spain | (3.7 | ) | (0.8 | ) | – | (4.5 | ) | |||||||||||||||||||||||||||||||||||||||||
– UK | – | (1.8 | ) | (0.1 | ) | (1.9 | ) | |||||||||||||||||||||||||||||||||||||||||
– Italy | – | (0.2 | ) | – | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||||||
– Chile | (0.1 | ) | – | – | (0.1 | ) | ||||||||||||||||||||||||||||||||||||||||||
– Germany | – | (0.1 | ) | – | (0.1 | ) | ||||||||||||||||||||||||||||||||||||||||||
– Other < £100m | (0.1 | ) | (0.5 | ) | (0.1 | ) | (0.7 | ) | ||||||||||||||||||||||||||||||||||||||||
| (3.9 | ) | (3.4 | ) | (0.2 | ) | (7.5 | ) | |||||||||||||||||||||||||||||||||||||||||
20142015 compared to 20132014(unaudited)
The above balances with other Banco Santander group companies at 31 December 2014 principally consisted of:2015 mainly included:
| – |
| – | Derivative assets of |
| – | Cash collateral of |
Risk review
Areas of focus and other items
continued
| – | Asset-backed securities of £nil and £nil (2014: £7m and |
| – | Deposits by customers of |
| – | Debt securities in issue of |
| – | Subordinated liabilities of |
| – | Financial |
The next section further analyses the balances with other Banco Santander group companies at 31 December 2014 and 2013 by type of financial instrument and country of the counterparty, including the additional mitigating impact of repo collateral arrangements which are accounted for off-balance sheet.
Spain
| Banks | Other financial | Corporate | Total | |||||||||||||
| institutions | ||||||||||||||||
| £bn | £bn | £bn | £bn | |||||||||||||
31 December 2014 | ||||||||||||||||
Repurchase agreements | ||||||||||||||||
– Asset balance – reverse repo | – | – | – | – | ||||||||||||
Net repurchase agreement position | – | – | – | – | ||||||||||||
Derivatives | ||||||||||||||||
– Derivative assets | 2.1 | – | – | 2.1 | ||||||||||||
– Derivative liabilities | (1.7 | ) | – | – | (1.7 | ) | ||||||||||
Cash collateral in relation to derivatives:– placed | – | – | – | – | ||||||||||||
– held | (1.4 | ) | – | – | (1.4 | ) | ||||||||||
Net derivatives position | (1.0 | ) | – | – | (1.0 | ) | ||||||||||
Asset-backed securities | – | 0.1 | – | 0.1 | ||||||||||||
Total assets, after the impact of collateral | (1.0 | ) | 0.1 | – | (0.9 | ) | ||||||||||
Deposits by customers | – | (0.5 | ) | (0.1 | ) | (0.6 | ) | |||||||||
Debt securities in issue | (0.1 | ) | – | – | (0.1 | ) | ||||||||||
Other liabilities | – | – | – | – | ||||||||||||
Subordinated liabilities | (1.9 | ) | – | – | (1.9 | ) | ||||||||||
Total liabilities | (2.0 | ) | (0.5 | ) | (0.1 | ) | (2.6 | ) | ||||||||
Net balance | (3.0 | ) | (0.4 | ) | (0.1 | ) | (3.5 | ) | ||||||||
31 December 2013 | ||||||||||||||||
Repurchase agreements | ||||||||||||||||
– Asset balance – reverse repo | 0.1 | – | – | 0.1 | ||||||||||||
Net repurchase agreement position | 0.1 | – | – | 0.1 | ||||||||||||
Derivatives | ||||||||||||||||
– Derivative assets | 2.0 | – | – | 2.0 | ||||||||||||
– Derivative liabilities | (1.9 | ) | – | – | (1.9 | ) | ||||||||||
Cash collateral in relation to derivatives: – placed | 0.1 | – | – | 0.1 | ||||||||||||
– held | (0.8 | ) | – | – | (0.8 | ) | ||||||||||
Net derivatives position | (0.6 | ) | – | – | (0.6 | ) | ||||||||||
Asset-backed securities | – | 0.1 | – | 0.1 | ||||||||||||
Total assets, after the impact of collateral | (0.5 | ) | 0.1 | – | (0.4 | ) | ||||||||||
Deposits by customers | – | (0.6 | ) | – | (0.6 | ) | ||||||||||
Debt securities in issue | (0.1 | ) | (0.1 | ) | – | (0.2 | ) | |||||||||
Other liabilities | (0.2 | ) | (0.1 | ) | – | (0.3 | ) | |||||||||
Subordinated liabilities | (0.7 | ) | – | – | (0.7 | ) | ||||||||||
Total liabilities | (1.0 | ) | (0.8 | ) | – | (1.8 | ) | |||||||||
Net balance | (1.5 | ) | (0.7 | ) | – | (2.2 | ) | |||||||||
Annual Report 2015
Risk review
This page intentionally blank
160 Santander UK plc
Annual Report 2015
Governance
Chair
Baroness Shriti Vadera | Chair since 30 March 2015, previously Independent Non-Executive Director and Deputy Chair from 1 January 2015. | |||
Skills and experience Shriti Vadera was an investment banker with SG Warburg / UBS from 1984 to 1999, on the Council of Economic Advisers, HM Treasury from 1999 to 2007, Minister in the UK Government from 2007 to 2009 (Cabinet Office, Business Department and International Development department), G20 Adviser from 2009 to 2010, and advised Governments, banks, and investors on the eurozone crisis, banking sector, debt restructuring and markets from 2010 to 2014. | Other principal appointments Chair of Santander UK Group Holdings plc* since 30 March 2015. Senior Independent Director of BHP Billiton plc since August 2015 and Non-Executive Director since 2011. Non-Executive Director of AstraZeneca plc since 2011. Board committee membership Nomination Committee since 1 January 2015 and Chair since 30 March 2015. | |||
Independent Non-Executive Directors
Scott Wheway | Senior Independent Director and Chair of Board Remuneration Committee | |||
| Appointed Senior Independent Director on 18 May 2015 and Independent Non-Executive Director on 1 October 2013. | ||||
Skills and experience Scott Wheway brings extensive retail and consumer knowledge to the Board, having formerly held various senior roles at Tesco plc, including Operations Director and CEO, Tesco Japan. Following this, he was CEO of Best Buy Europe and Managing Director and Retail Director of Boots Company plc (now known as The Boots Company Ltd) and Managing Director of Boots the Chemist at Alliance Boots plc. Scott also has experience of the financial services sector through his roles at Aviva plc and Aviva Insurance Limited. | Other principal appointments Independent Non-Executive Director of Santander UK Group Holdings plc* since 2014. Independent Non-Executive Director of Aviva plc since 2007. Chairman of Aviva Insurance Limited since 13 April 2015. Board committee membership Audit Committee since 1 September 2015. Remuneration Committee since 1 January 2014 and Chair since 1 September 2015. Nomination Committee since 1 January 2014. Risk Committee since 1 January 2014. | |||
Ed Giera | Chair of Board Risk Committee | |||
| Appointed Independent Non-Executive Director on 19 August 2015. | ||||
Skills and experience Ed Giera is an experienced Non-Executive Director, having held a number of Board roles since retiring from JP Morgan Securities, the investment banking affiliate of JP Morgan Chase & Co. He provided corporate finance advisory and fiduciary services as Principal of EJ Giera LLC and was formerly a Non-Executive Director for NovaTech LLC, the Life and Longevity Markets Association, and the Renshaw Bay Structured Finance Opportunity Fund. Ed was also a director of Pension Corporation Group Ltd from 2012 to 2015, and Pension Insurance Corporation Holdings Ltd from 2008 to 2012. | Other principal appointments Independent Non-Executive Director of Santander UK Group Holdings plc* since 19 August 2015. Non-Executive Director of ICBC Standard Bank Plc since 5 October 2015. Non-Executive Director of the Real Estate Finance Fund managed by GAM International Management Limited since 2012. Non-Executive Director of Pension Insurance Corporation Group Limited since 8 December 2015. Board committee membership Audit Committee since 19 August 2015. Nomination Committee since 19 August 2015. Remuneration Committee since 19 August 2015. Risk Committee member since 19 August and Chair since 26 October 2015. | |||
* Part of the Banco Santander group.
162 Santander UK plc
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Other countries
Balances with respect to Belgium at 31 December 2014 comprised debt securities in issue of £0.2bn (2013: £0.5bn). Balances with respect to the UK at 31 December 2014 comprised other assets of £0.8bn (2013: £0.9bn), deposits by customers of £0.1bn (2013: £0.3bn), other liabilities of £0.3bn (2013: £nil) and subordinated liabilities of £nil (2013: £1.6bn). Balances with respect to Italy at 31 December 2014 comprised debt securities in issue (purchased in the secondary market) of £0.1bn (2013: £0.2bn). Balances with respect to Germany at 31 December 2014 comprised deposits by customers of £0.1bn (2013: £0.1bn). Balances with respect to Chile at 31 December 2014 comprised derivative assets of £0.2bn (2013: £0.1bn) and derivative liabilities of £0.2bn (2013: £0.1bn). Balances with respect to Norway at 31 December 2014 comprised derivative assets of £0.1bn (2013: £nil) and derivative liabilities of £0.1bn (2013: £nil). Balances with respect to Uruguay at 31 December 2014 comprised deposits by banks of £0.1bn (2013: £nil).
Redenomination risk(unaudited)
Santander UK considers the total dissolution of the eurozone to be extremely unlikely and therefore believes widespread redenomination of its euro-denominated assets and liabilities to be highly improbable. However, for contingency planning purposes Santander UK has analysed the redenomination risk that might arise from an exit of a member state from the euro or a total dissolution of the euro and how that exit or dissolution would be implemented. It is not possible to predict what the total financial impact on Santander UK might be of a eurozone member state exit or the dissolution of the euro.
The determination of which assets and liabilities would be legally redenominated is complex and depends on a number of factors, including the precise exit scenario, as the consequences on external contracts of a disorderly exit or one sanctioned under EU law may be different. Santander UK has already identified and is monitoring these risks and has taken steps to mitigate them and/or reduce Santander UK’s overall exposure to losses that might arise in the event of a redenomination by reducing its balances and funding mismatches. As part of its objective of maintaining a diversified funding base, Santander UK raises funding in a number of currencies, including euro, and converts these back into sterling to fund its commercial assets which are largely sterling denominated.
Santander UK’s net asset position denominated in euro, reflecting assets and liabilities and associated swaps (which primarily comprise cross-currency derivatives entered into to swap funding raised in euro back into sterling for reasons set out above) arising in connection with contracts denominated in euro, amounted to net assets of £0.7bn at 31 December 2014 (2013: net assets of £0.1bn). This comprised debt securities (covered bonds and securitisations) of £20.0bn (2013: £22.0bn) issued by Santander UK as part of its MTF activities, net loans and advances of £nil (2013: £0.1bn) to other Banco Santander group companies, medium-term repo liabilities of £0.8bn (2013: £4.0bn), other deposit liabilities of £1.9bn (2013: £1.8bn), other deposits of £1.7bn (2013: £nil) by Banco Santander group companies, other loans and securities of £4.6bn (2013: £3.0bn), net trading repo liabilities of £2.8bn (2013: assets of £0.5bn) and related cross-currency swap assets of £23.3bn (2013: £24.3bn) which swap the resultant euro exposures back into sterling in order to ensure that assets and liabilities are currency matched in sterling.
Disclosures of Santander UK’s exposure to individual eurozone countries and total exposures to counterparties in those countries, including any euro-denominated contracts, are set out earlier in this section of the Risk Review.
Risk review
Areas of focus and other items
continued
2. ENHANCED DISCLOSURE TASK FORCE (‘EDTF’) RECOMMENDATIONS
In order to provide disclosures that help investors and other stakeholders understand Santander UK’s performance, financial position and changes thereto, the information provided in the Risk Review goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In particular, Santander UK provides additional disclosures having regard to the recommendations in the report ‘Enhancing the Risk Disclosures of Banks’ issued by the EDTF of the Financial Stability Board in October 2012. The report aims to help financial institutions identify areas that investors had highlighted needed better and more transparent information about banks’ risks, and how these risks relate to performance measurement and reporting. The recommendations for disclosure improvement focused on the principal risks faced by the banking industry, and included disclosures about risk governance, capital adequacy, liquidity, funding, credit risk, market risk and other risks.
Type of risk |
Recom-
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Disclosure |
Page | |||||
General
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1 |
The risks to which the business is exposed. |
27 | |||||
| 2 | Define risk terminology and measures and present day parameters. | 26-34 | ||||||
| 3 | Top and emerging risks, and the changes during the reporting period. | 36-38 | ||||||
| 4 | Discussion of future regulatory developments affecting our business model and profitability. | 12, 106, 118, 131 | ||||||
Risk governance and risk management strategies/ business model
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5 |
Risk Committees and their activities. |
161-163 | |||||
| 6 | Risk culture and risk governance and ownership. | 26-30 | ||||||
| 7 | Diagram of risk exposure by business segment. | 33 | ||||||
| 8 | Stress testing and the underlying assumptions. | 34 | ||||||
Capital adequacy and risk-weighted assets (‘RWAs’)
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9 |
Pillar 1 capital requirements. |
9-11, 14-17 | |||||
| 10 | Reconciliation of the accounting balance sheet to the regulatory balance sheet. | 124, ACRMD* 3 | ||||||
| 11 | Flow statement of the movements in regulatory capital during the reporting period. | 121 | ||||||
| 12 | Discussion of targeted level of capital, and the plans on how to establish this. | 10-13 | ||||||
| 13 | Analysis of RWAs by risk type and business segments. | 123-124 | ||||||
| 14 | Analysis of the capital requirements for each Basel asset class, including major portfolios. | 124, ACRMD 3, 4, 5, 9 | ||||||
| 15 | Analysis of credit risk for each Basel asset class. | ACRMD 6-7 | ||||||
| 16 | Flow statements reconciling movements in RWAs for each RWA type. | ACRMD 4, 9 | ||||||
| 17 | Discussion of Basel credit risk model performance. | 93, ACRMD 8, 10 | ||||||
Liquidity
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18 |
Description of how potential liquidity needs are managed and liquidity pool analysis. |
107-109 | |||||
Funding
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19 |
Encumbered and unencumbered assets analysed by balance sheet category. |
114-115 | |||||
| 20 | Consolidated total assets, liabilities and off-balance sheet commitments analysed by remaining contractual maturity. | 321 | ||||||
| 21 | Analysis of sources of funding and a description of our funding strategy. | 110-113 | ||||||
Market risk
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22 |
Relationship between the market risk measures for trading and non-trading portfolios and the balance sheet. |
90-91 | |||||
| 23 | Discussion of significant trading and non-trading market risk factors. | 92-101 | ||||||
| 24 | Measurement model limitations, assumptions and validation. | 92-93, 98 | ||||||
| 25 | Discussion of stress tests and additional risk measures. | 93-94, 99 | ||||||
Credit risk
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26 |
Analysis of aggregate credit risk exposures, including retail and corporate portfolios. |
51-58 | |||||
| 27 | Discussion of policies for identifying impaired loans defining impairments and renegotiated loans, and explaining loan forbearance. | 39-50, 237-241 | ||||||
| 28 | Reconciliations of the opening and closing balances of non-performing loans and impairment allowances during the year. | 56, 64, 75, 84, 88, 262-263 | ||||||
| 29 | Analysis of counterparty credit risk that arises from derivative transactions. | 49, 81-82, 85-88, 257 | ||||||
| 30 | Discussion of credit risk mitigation, including collateral held for all sources of credit risk. | 42, 46, 49, 50, 63, 69, 80, 82,87 | ||||||
Other risks
|
31 |
Discussion of the management of other risks. |
125-143 | |||||
| 32 | Discussion of publicly known risk events. | 125-143 |
* Refers to the page number in Santander UK’s ‘Additional Capital and Risk Management Disclosures’ available on www.aboutsantander.co.uk
Governance
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| Appointed Independent Non-Executive Director on 30 March 2015. | |||||
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Skills and experience
Chris is a Corporate Treasurers. | Other principal appointments Independent Non-Executive Director of Santander UK Group Holdings plc* since 30 March 2015. Non-Executive Director of Redburn (Europe) Ltd since 2014. Chairman of the
Board committee membership
Nomination Committee Risk Committee since 30 March 2015. | ||||
Alain Dromer | Appointed Independent Non-Executive Director on 1 October 2013. | ||||
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Skills and experience
He was previously CEO of Aviva Investors; Global Head of Group Investment Business of HSBC Investments; Head of Asset Management at CCF Crédit Commercial de France and Head of Capital Markets of La Compagnie Financière Edmond de Rothschild Banque. Prior to that, Alain held various roles in the Government of France, French Treasury including Section Head, World Monetary Affairs and IMF, and Deputy Head/Office | Other principal appointments Independent Non-Executive Director of Director of Moody’s Investors Service Ltd since 2013. Director of Moody’s Investor Service EMEA Ltd since 2013. Independent Member of the Board of Moody’s Deutschland GmbH since 2013. Independent Member of the Board of Moody’s France SAS since 2013. Non-Executive Director of Non-Executive Director of Henderson European Focus Trust plc since 2014.
Board committee membership
Remuneration Committee since 1 January 2014. Risk Committee since 15 December 2015. | ||||
Annemarie Durbin | Appointed Independent Non-Executive Director on 13 January 2016. | ||||
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Skills and experience
Annemarie has From 2007 to 2013, Annemarie was a Non-Executive Director of | Other principal appointments
Independent Non-Executive Director of Santander Non-Executive Director of WH Smith PLC since 2012. Member of the Listing Advisory Panel since 1 January 2015
Board committee membership
Remuneration Committee since 13 January 2016. Risk Committee since 13 January 2016. | ||||
* Part of the Banco Santander group.
Annual Report 2015 Governance |
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| Other principal appointments
Non-Executive Director of
Non-Executive Director Next Fifteen Communications Group plc since 1 February 2015. Member of the Member of the Advisory Board committee membership Audit Committee since 1 September 2015. Remuneration Committee since 1 September 2015. Risk Committee since 1 September 2015. | |||||||
Banco Santander nominated Non-Executive Directors | ||||||||
| Ana Botín | Appointed Non-Executive Director on 29 September 2014. | |||||||
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Governance
Board of Directors
continued
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Skills and experience Ana Botín | Other principal appointments Non-Executive Director of Santander UK Group Holdings plc* since 2014. Executive Chair of Banco Santander SA* since 2014 and Director since 1989. Non-Executive Director of The Coca-Cola Company since 2013. Founder and Vice-Chair of the Empresa y Crecimiento Foundation |
Member of the MIT’s CEO Advisory Board since 26 August 2015. Vice-Chair of the World Business Council for | ||||
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Board of Directors
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| Appointed Independent Non-Executive Director on 1 October 2012. 12 February 2015, he was no longer considered an Independent Non-Executive Director. | |||
Skills and experience Bruce Carnegie-Brown |
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2010 to 2014 and Close Brothers Group plc from 2006 to 2014. | ||||
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| Other principal appointments Non-Executive Director of Vice Chair and Lead Independent Director of Banco Santander SA* since 12 February 2015. Non-Executive Director of
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Governance* Part of the Banco Santander group.
CORPORATE GOVERNANCE STATEMENT164
The narrative reporting in this Annual Report has been enhanced from prior years to bring its disclosures in line with those required of a premium listed company. Santander UK plc is a subsidiary of Santander UK Group Holdings Limited, which is a subsidiary of Banco Santander, S.A The Company’s ordinary shares are not listed on the London Stock Exchange (‘LSE’), however, it does have preference shares listed on the LSE and, as a result, the Company is subject to certain Listing Rules and the Disclosure & Transparency Rules. However, this means the Company is not required to make certain disclosures that are normally part of the continuing obligations of premium listed companies in the UK. Santander UK is committed to achieving high standards of corporate governance and, whilst not obliged to do so, it seeks to comply with the September 2012 UK Corporate Governance Code as issued by the Financial Reporting Council (the ‘Code’) in a manner appropriate to its ownership. The Code is publicly available at www.frc.gov.uk. For purposes of this section, certain terms used, such as ‘independent’ are defined according to the Code.
Statement of compliance with the UK Corporate Governance Code
The Board confirms that, for the year ended 31 December 2014, Santander UK has applied those principles and provisions of the Code, as appropriate given its ownership structure.
Governance structure
The Board delegates certain responsibilities to Committees to assist in discharging its duties as set out below. The Committees play an essential role in supporting the Board to discharge its duties. More information on the work of the Committees can be found on pages 157 to 172.
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The Board
At the year-end, the Board comprised the Chair, three Executive Directors, six Non-Executive Directors and six Independent Non-Executive Directors. Our Chair, Lord Burns, was deemed independent upon appointment. In addition, the Board determined that Mike Amato, Roy Brown, Bruce Carnegie-Brown, Alain Dromer, Rosemary Thorne and Scott Wheway met the independence criteria set out in the Code. Short biographies of each Director, which illustrate the diverse range of skills and experience that they bring to the Board, are set out on pages 146 to 151.
The Board considers that, at the current time, it is of an appropriate size to oversee Santander UK’s business, with a structure that ensures that no individual or group dominates the decision-making process. The Board is satisfied that the Chair and those Directors who have external directorships have sufficient time available to discharge their responsibilities and to be effective members of the Board.
The Company does not require the Directors to offer themselves for re-election every year or for new Directors appointed by the Board to offer themselves for election at the next Annual General Meeting.
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Board changes
Nathan Bostock was appointed to the Board as an Executive Director and Deputy CEO on 19 August 2014 and was subsequently appointed CEO on 29 September 2014. Ana Botín relinquished her office of CEO on 29 September 2014 following her appointment as Executive Chairman of Banco Santander, S.A. and remained on the Board as a Non-Executive Director. José María Nus, who had served as Chief Risk Officer and Executive Director, resigned from the Board on 1 April 2014 and returned to a senior role at Banco Santander, S.A..
Since the year-end, Shriti Vadera joined the Board as Joint Deputy Chair on 1 January 2015 and will succeed Lord Burns as Non-Executive Chair on 30 March 2015. The Board have determined that for the purpose of the Code, Shriti Vadera was independent upon appointment. In addition, Bruce Carnegie-Brown ceased to be deemed independent on the Board of the Company upon his appointment to the Board of Banco Santander, S.A. on 12 February 2015.
Roles and responsibilities of the Board
The key responsibilities of the Board are set out on page 157. There is a clear division of responsibility between the Chair and CEO; the Chair is responsible for the leadership of the Board, and the CEO leads the management of the business. The division of responsibilities between the Chair and CEO is set out in writing and agreed by the Board. There is a formal schedule of matters reserved to the Board and a schedule of matters delegated to the CEO in place. Details of the roles of the Board and Company Secretary are set out below.
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Company Secretary
The Company Secretary works closely with the Board on constitutional and corporate governance issues. He provides direction and leadership to maintain and enhance sound standards of Corporate Governance and helps shape an appropriate schedule of topics for the year ahead, ensuring a good flow of information.
Access to advice and resources
All Directors have access to the advice and services of the Company Secretary and may take independent professional advice at the Company’s expense where necessary. The Company Secretary ensures that the Directors are provided with sufficient resources to undertake their duties.
Governance
Corporate Governance Report
continued
Directors’ induction and ongoing professional development
The Directors receive a comprehensive induction programme tailored to their skills and experience. Responsibility for designing the individual inductions and for the ongoing professional development of all Directors resides with the Chair, assisted by the Company Secretary. The induction programme includes an introduction to the Board, the Company Secretary, key executives and business areas, including visits to Santander UK’s key sites, and covers a wide range of topics, including strategy, key risks and topical issues, and the legal and regulatory landscape. The Non-Executive Directors on the Board recommended for appointment by Banco Santander, S.A. provide the Directors with regular opportunities to interact with the Company’s ultimate shareholder.
The Directors also attend regular training and briefing sessions for ongoing professional development in order to update and refresh their skills and knowledge.
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Board attendance
The Board had 12 scheduled meetings during 2014, as well as a Board Strategy Day. The Directors’ attendance at these meetings is set out in the table below. Attendance at Board Committee meetings is shown within the relevant Board Committee reports below.
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Chair | ||||||||
Lord Burns | 13 | 13 | ||||||
Executive | ||||||||
Nathan Bostock (appointed 19 August 2014) | 5 | 5 | ||||||
Stephen Jones | 13 | 13 | ||||||
Steve Pateman | 13 | 12 | ||||||
José María Nus (resigned 1 April 2014) | 3 | 3 | ||||||
Non-Executive | ||||||||
Ana Botín (Executive until 29 September 2014) | 13 | 12 | ||||||
José María Carballo | 13 | 13 | ||||||
Antonio Escámez | 13 | 13 | ||||||
José María Fuster | 13 | 13 | ||||||
Juan Rodríguez Inciarte | 13 | 13 | ||||||
Manuel Soto | 13 | 13 | ||||||
Independent Non-Executive | ||||||||
Mike Amato | 13 | 12 | ||||||
Roy Brown | 13 | 13 | ||||||
Bruce Carnegie-Brown | 13 | 13 | ||||||
Alain Dromer | 13 | 12 | ||||||
Rosemary Thorne | 13 | 13 | ||||||
Scott Wheway | 13 | 12 | ||||||
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Overview of 2014 activities
The Chair, together with the CEO and Company Secretary, ensure that the Board has an appropriate forward-looking schedule, so that its time is focused on matters of strategic importance. This remains subject to continuous review and is amended during the year to provide the Board flexibility to consider an appropriate breadth of matters.
Each regular monthly Board meeting receives for its consideration the following updates:
In addition to the monthly reporting above, the Board considers and discusses in-depth quarterly presentations from the Chief Internal Auditor on key areas to ensure robust internal controls and progress of business areas against previous audit recommendations. The Executive Director, Head of UK Banking also provides quarterly updates on Santander UK’s customer experience, examining whether the right customer outcomes are delivering against our customer-related strategies. The Board also receives frequent reports from the Chairs of the Board Committees on their work and significant developments within their remit that require further consideration by the Board.
In addition to these recurring items, in 2014 the Board’s attention was particularly focused on key matters and strategic activities, certain of which are shown below:
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In May 2014, in addition to the usual monthly meeting, the Board held a Strategy Day to discuss and debate Santander UK’s current and future challenges and ensure alignment of thinking on those critical matters. This day was devoted to an in-depth analysis of Santander UK’s strategic priorities, by looking at its expected future performance as well as examining domestic and global trends in the financial services markets and the implications for Santander UK. The day will remain a critical part of the Board’s calendar in 2015 and beyond.
Governance
Corporate Governance Report
continued
Planned activities in 2015
The Board will continue to review, approve and guide corporate strategy, major plans of action, Risk Appetite and policies, annual budgets and business plans. Banking reform will be a particular area of focus for the Board over the coming year as we further develop our legal and operating structure. This will require detailed consideration to ensure not only the future viability of Santander UK’s business model, but also a smooth journey and good outcome for its customers.
The Board will continue to devote time to ensuring that it has a deep understanding of core business areas through a rolling programme of ‘deep-dives’. In addition, it will ensure that it has an effective appreciation of developments, innovation and the competitive environment within the banking sector, so that Santander UK is well placed to pre-empt and meet the changing demands of its customers.
As in previous years, the Board will hold a Strategy Day which will enable a focussed review of those issues which it considers to be most important to the sustained success of the business. This will also provide an opportunity for the Board to consider how the business is giving life to its core values and behaviours in the implementation of its business strategy.
The Board will also maintain its close scrutiny of the internal operating environment, and the effectiveness of risk management and a strong risk culture across the business. This will provide the Board with appropriate assurance that Santander UK is managed prudently and in a way which is consistent with fair outcomes for its stakeholders.
Board effectiveness and evaluation
The Board composition and the skills, experience and knowledge of the Directors contribute greatly to the overall effectiveness of the Board. In order to maintain its effectiveness, the composition of the Board and its Committees, together with succession planning arrangements, are kept under continuous review.
The Board remains committed to continuous improvement and ongoing implementation of the actions identified as part of the external Board Effectiveness review conducted during 2013 by Bvalco Limited. A legal firm engaged by Santander UK from time to time holds a 20% shareholding in Bvalco Limited.
Since the external effectiveness review, the Board agenda has been reshaped to ensure that there is an appropriate balance of forward-looking and strategically-focussed matters for discussion. A dedicated Board Strategy Day is now held each year and the form of the agenda has been realigned to allow the Board to focus on the most pertinent matters at each meeting. In addition, Board learning and development remains a key area of focus with a more tailored approach planned for 2015.
Directors’ conflicts of interest
The Companies Act 2006 provides that a Director must avoid situations where he/she can have a direct or indirect interest that conflicts or might conflict with the interests of the Company (‘Situational Conflicts’). The Company’s Articles of Association contain provisions that allow the Board to consider and, if it sees fit, to authorise Situational Conflicts. The Board confirms that such powers have been operated effectively and that a formal system for Directors to declare their interests and for the non-conflicted Directors to authorise Situational Conflicts continues to be in place. Any authorisations given are recorded by the Secretariat Department.
Service contracts and letters of appointment
All Executive Directors have a service contract and all Non-Executive Directors have a letter of appointment.
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Board Committees
The Board Committees play an essential role in supporting the Board to discharge its duties, as well as implement its vision and strategy and provide focussed oversight of key aspects of the business.
The role and responsibilities of each Board Committee are set out in formal Terms of Reference, which are reviewed at least annually and are summarised below. The Board Committees make recommendations to the Board as they see fit, as contemplated by their Terms of Reference. The Chair of each Committee reports to the Board after each meeting on the matters discussed and the minutes of each meeting, other than the Board Nomination Committee, are provided to the Board for information. Each Committee has a formal schedule of topics that set out the matters to be discussed during the year. The schedules are reviewed and updated regularly which allows the inclusion of matters as they arise and require attention.
The activities undertaken by each of the Committees, together with planned activities for 2015 are set out in the Board Committee Chairs’ reports on pages 159 to 172. The full Terms of Reference for each Committee are available on Santander UK’s website www.aboutsantander.co.uk and from the Company Secretary upon request.
Board and Board Committee responsibilities
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Governance
Corporate Governance Report
continued
Board Committee composition
The Board and Board Nomination Committee consider the composition of each Committee to ensure that an appropriate balance of skills, experience, and independence is in place to enable them to discharge their respective duties and responsibilities effectively. The Committees’ chairmanship and membership are kept under review and are refreshed as appropriate to ensure that undue reliance is not placed upon particular individuals.
To ensure there is an opportunity for an ongoing exchange of information between the Board Committees there is an overlap of membership of Non-Executive and Independent Directors across the Committees. Given the overlap in internal controls and risk management responsibilities between the Board Audit Committee and Board Risk Committee, the respective Chairs of each of these Committees also serve as members on each Committee. This common membership ensures co-ordination and cohesion between both Committees.
The reports of the Board Committee Chairs are set out on pages 159 to 172 and provide an overview of the key activities of the Committees during 2014 and planned activities for 2015.
Committee membership at 31 December 2014
| Corporate | Directors’ | |||||||||||||||||||||
Directors | Governance Report | Remuneration Report | Directors’ Report | ||||||||||||||||||||
| José María Fuster | Appointed Non-Executive Director on 1 December 2004. | |||
Skills and experience José María Fuster joined Banco Español de Credito SA in 1998 and was appointed as Chief Information Officer of Banco Santander SA in 2003. José María started his professional career with International Business Machines SA before becoming a consultant at Arthur Andersen. He has also worked for Citibank España SA and National Westminster Bank plc. | Other principal appointments Non-Executive Director of Santander UK Group Holdings plc* since 2014. Executive Vice President, Corporate Head of Innovation of Banco Santander SA* since 16 January 2015. Director of Ingeniería de Software Bancario SL* since 2002. Director of Santander Consumer Holdings GmbH* since 2012. Director of Sistema 4B SL* since 2013. Director of Santander Consumer Bank AG* since 2009. Director of Portal Universia SA since 2010. | |||
Juan Rodríguez Inciarte | Appointed Non-Executive Director on 1 December 2004. | |||
Deputy Chair | ||||
Skills and experience Juan Rodríguez Inciarte joined Banco Santander SA in 1985. After holding various positions, he was appointed to the Board of Directors in 1991, holding this office until 1999. Juan has also held directorships at the Royal Bank of Scotland plc (RBS) and National Westminster Bank plc from 1998 to 2004, ABN Amro, First Fidelity Bancorp, and at First Union Corporation (now part of Wells Fargo). | Other principal appointments Non-Executive Director of Santander UK Group Holdings plc* since 2014. Executive Director Banco Santander SA* since 2008. Director Santander Consumer Finance SA* since 2007. Director Vista Capital de Expansion SA since 2007. Chairman Saarema Inversiones SA since 2005. Board committee membership Nomination Committee from 27 September 2011 to 27 July 2015. Risk Committee since 1 September 2015. | |||
Manuel Soto | Appointed Non-Executive Director on 1 November 2013. | |||
Skills and experience Manuel Soto was formerly a Board member of Banco Santander SA from 1999 to April 2013, and during that period was Chair of the Banco Santander SA Audit and Compliance Committee. Manuel has significant experience in financial services, having undertaken a variety of Executive and Director level roles, including a 38 year career at Arthur Andersen, where he discharged, among other responsibilities, EMEIA Area Managing Partner from 1980 to 1998, and Chairman of the Worldwide Board from 1987 to 1989. He also served on the Board as Vice Chairman of Indra Sistemas SA from 1999 to 2011 and on the Board of Corporación Financiera Alba from 1999 to 2010. | Other principal appointments Non-Executive Director of Santander UK Group Holdings plc* since 2014. Director of Cartera Industrial REA SA since 2008. Member of advisory board of Grupo Barceló since 2012. Member of advisory board of Befesa Medio Ambiente SA since 2013. Board committee membership Audit Committee since 1 January 2014. | |||
* Part of the Banco Santander group.
Annual Report 2015
Governance
Executive Director
Nathan Bostock Chief Executive Officer | Appointed Executive Director and Deputy Chief Executive Officer on 19 August 2014 and Chief Executive Officer on 29 September 2014. | |||
Skills and experience Nathan Bostock joined Santander UK from RBS, where he was an Executive Director and Group Finance Director. He joined RBS in 2009 as Head of Restructuring and Risk and Group Chief Risk Officer. Nathan previously spent eight years with Abbey National plc (now Santander UK plc) from 2001 to 2009 and served on the Board as an Executive Director from 2005. During his time with Abbey National plc, he held various senior positions including Chief Financial Officer and Executive Director. Nathan was also previously at RBS from 1991 to 2001 in a number of senior positions and spent seven years before that with Chase Manhattan Bank. | Other principal appointments Chief Executive Officer of Santander UK Group Holdings plc* since 2014. Director of Santander Fintech Limited* since 10 July 2015. Member of the PRA Practitioner Panel since 2014. Member of the Financial Services Trade and Investment Board (FSTIB) since 20 July 2015. | |||
| Non-Board Executive | ||||
Antonio Roman | Appointed Chief Financial Officer on 30 October 2015. | |||
Skills and experience Antonio Roman has extensive financial services experience across a wide range of areas including Finance, Investor Relations and Retail Banking. He was appointed Treasurer of Santander UK plc in 2014, with responsibility for the management of interest risk, liquidity, funding, economics and investor relations. Prior to that Antonio joined Banco Español de Credito SA* in 2011 as Head of Financial Management and in 2013 joined Santander UK plc as a Deputy Treasurer. Antonio also worked for Grupo Caja Madrid where he served as Financial Controller from 2007 to 2010. | Other principal appointments Director of Abbey National Treasury Services plc* since 2014. Management Board Member of Abbey Covered Bonds LLP* since 2014. Member of the British Bankers Association’s Financial and Risk Policy Committee since 1 November 2015. | |||
* Part of the Banco Santander group.
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Chair’s report on corporate governance
My report describes the roles, responsibilities and activities
of the Board and its Committees.
“Our ambition is to be the best governed bank
| This year we have appointed new INED Chairs to the Board Committees and all have a sizeable majority of INEDs as set out on page 190. We have also reviewed the membership of each Committee so that all INEDs are members of the Board Audit, Board Risk and Board Remuneration Committees in order to provide efficient working and effective oversight. The activities undertaken by each of the Committees is set out in the Board Committee Chairs’ reports on pages 171 to 185. The full Terms of Reference for each Committee are available on Santander UK’s website www.santander.co.uk and from the Company Secretary upon request. Interaction with our parent In 2015, we have defined clearly our responsibilities and relationship with Banco Santander, our sole shareholder, through the UK Group Framework agreed by Santander UK and Banco Santander. Our UK Group Framework is described in detail on page 2. Board fees We reviewed all Board and Board Committee fees with no changes made except to remove the payment of fees for Board Nomination Committee members which is increasingly the market norm, and increase the fees of Board Remuneration Committee members to bring them into line with the Board Audit and Board Risk Committees, reflecting better its enhanced role and time commitment. Board fees are set out on page 192 in the Directors’ Remuneration Report. Conflicts of interest The Company’s Articles of Association contain provisions that allow the Board to consider and, if it sees fit, to authorise situational conflicts. The Board confirms that such powers have been operated effectively and that a formal system for Directors to clear their interests and for the non-conflicted Directors to authorise situational conflicts continues to be in place. Any authorisations given are recorded by the Company Secretary. As referenced above and on page 2, the UK Group Framework defines clearly our responsibilities and relationship with Banco Santander. This includes the definition of independence which, in recognition of our ownership, is a Director who has no current or recent relationship with the Banco Santander group and Santander UK other than through the UK Board role. | |||
Shriti Vadera Chair 24 February 2016
| Board membership This has been a year of significant transformation of our governance, and changes to our Board composition. I have detailed the changes to our membership, including new appointments, in my Chair’s statement on page 1. In addition, details of Board membership, tenure and attendance can be found on page 190. The Board is satisfied that the Chair and those Directors who have external directorships have sufficient time available to discharge their responsibilities and to be effective members of the Board. Given our 100% ownership by Banco Santander and the appointment process for Directors set out in the UK Group Framework, the Company does not require the Directors to offer themselves for re-election every year or for new Directors appointed by the Board to offer themselves for election at the next Annual General Meeting. Board committees The Board delegates certain responsibilities to Committees to assist in discharging its duties, as set out on page 170. The Committees play an essential role in supporting the Board in these duties, providing focused oversight of key areas and aspects of the business. The role and responsibilities of the Board and each Board Committee are set out in formal Terms of Reference. These are reviewed at least annually, in accordance with best practice. In particular we have significantly enhanced the Terms of Reference of the Board Remuneration Committee, as described on page 184. The Board Committees make recommendations to the Board in accordance with their Terms of Reference. The Chair of each Committee reports to the Board each meeting on the matters discussed and significant developments within their remit that warrant further consideration by the Board. The minutes of each meeting, except for the Board Nomination Committee, are provided to the Board for information. | |||
Annual Report 2015
Governance
Board activities The Chair, together with the CEO and Company Secretary, ensure that the Board has an appropriate forward looking schedule, so that its time is focused on matters of strategic importance to the business and appropriate monitoring of risks. This is subject to continuous review and has enabled us to improve our approach to setting the agenda, the information we receive and the debates we have. As a result, for 2016 we will reduce the number of scheduled Board meetings held from 11 to 9 per year in line with the market norm for the sector. This remains subject to continuous review and will provide the Board flexibility to consider an appropriate breadth of matters. In July 2015, in addition to the usual monthly meeting, the Board held a Strategy Day, details of which are set out on page 3. The Board has increased its level of contact with the bank’s senior leadership by regularly inviting relevant business and function heads to present on current developments. We have provided tailored induction programmes for our new Directors, which form the basis of on-going development plans. This ensures that they have the necessary understanding of the bank and its key activities. The Company Secretary supports the Chair in designing individual inductions for all Directors, which include site visits and cover topics such as strategy, key risks and current issues including the legal and regulatory landscape. We have also instituted regular workshops for all Directors to deepen and refresh our understanding of key business issues. A summary of the Board’s activities in 2015 is set out on the following page. |  |
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Summary of Board activities in 2015
Activity | Actions taken by the Board and outcomes | |
| Business and customer | – Reviewed, challenged and approved the 3-year business plan 2016-2018 and the Budget for 2016, including associated risk assessments – Received detailed insight of, and provided input into, the Company’s Digital Strategy, both during Board meetings and at our dedicated Board Strategy Day. The Board further endorsed the Digital Strategy proposed by management, as well as the Company’s early adoption of Apple Pay – Reviewed, challenged and remained appraised of developments with customer experience and complaints – Reviewed, challenged and monitored the performance and strategy of the Retail Banking Division. This included its holistic strategy, as well as a specific focus on the customer journey, the digital proposition, customer segmentation, Wealth Management, Private Banking and customer liabilities. The Board also approved the Mortgage Strategy, the changes to the 1l2l3 World proposition and continued to monitor their development – Reviewed, challenged and remained appraised of the performance and strategy of Santander Global Corporate Banking, including its capabilities from a client perspective – Reviewed, challenged and remained appraised of the performance and strategy of Santander Corporate and Commercial Banking – Reviewed, challenged and approved Santander Consumer UK’s cooperation with Banque PSA Finance SA – Remained appraised of the Santander (UK) Group Pension Scheme, including management actions to mitigate pension risk – Reviewed the Company’s sustainability activity and report | |
| Regulation and capital | – Remained fully appraised of the regulatory dialogue regarding the application of ring-fencing requirements and management proposals for the implementation of the resultant structural change. This included the approval for the operating model to create a Retail and a separate Corporate Bank and the associated regulatory submissions – Considered and approved the ICAAP, ILAAP and Santander UK’s Recovery and Resolution Plan – Challenged and approved the adequacy and effectiveness of stress-testing and capital management – Reviewed, challenged and approved the Company’s wholesale funding programme arrangements – Reviewed and approved the payment of interim dividends – Remained appraised of regulatory developments – including competition and market reviews – ensured compliance with regulatory requirements and fully considered all regulatory feedback from the PRA and FCA – Approved the Company’s Annual Report and Accounts | |
| People | – Received regular updates and provided challenge to management on a range of people issues including HR strategy, talent management, succession planning and diversity – Gave particular focus to initiatives to embed the right culture and behaviours across the Company | |
| Governance | – Agreed a framework defining our relationship and responsibilities with Banco Santander – Agreed a set of strategic priorities for the Board to guide it in discharging its responsibilities – Reviewed enterprise wide governance arrangements to ensure that governance and controls in the UK are robust – Undertook an internal review of Board effectiveness and agreed a plan for continuous improvement. – Approved new appointments to the Board as recommended by the Board Nomination Committee – Reviewed the Terms of Reference for the Board and Board Committees | |
| Risk and control | – Received regular enterprise wide risk updates from the Chief Risk Officer – Reviewed, challenged and approved updated risk appetites and monitored performance against them across all risk types – Reviewed and challenged the Company’s Conduct Strategy Programme – Considered specific issues, including remediation of crystallised conduct risks and Santander Global Corporate Banking risk and control environment – Remained appraised of the strategy to mitigate operational risk in critical infrastructure and banking processes – Remained appraised of management actions and regulatory dialogue concerning cyber risk and resilience – Remained appraised of Corporate Affairs and Marketing activity to ensure protections are in place for Santander UK brand and reputation |
Annual Report 2015
Governance
| Board and Board Committee responsibilities | |||||||||||||||||||||
Key responsibilities | ||||||||||||||||||||||
| Board | – Review, approve and monitor performance in respect of corporate strategy, major plans of action, Risk Appetite and policies, annual budgets and business plans. – Monitor the effectiveness of the Company’s governance arrangements. – Ensure that appointments to the Board or its Committees are effected in accordance with the appropriate governance process. – Monitor and manage potential conflicts of interest of management, Board members, shareholders, external advisers and other service providers. | |||||||||||||||||||||
| For Chair’s report see page 171 | Board Nomination Committee | – Regularly review the structure, size and composition of the Board, including skills, knowledge, experience and diversity. – Consider succession planning for Directors and senior executives. – Identify and nominate candidates to fill Board vacancies as and when they arise. – Regularly assess the performance of the Board. – Review annually whether Non-Executive Directors have dedicated sufficient time to their duties to have been effective in their role. – Oversee the Company’s governance arrangements. | |||||||||||||||||||
| For Chair’s report see page 173 | Board Risk Committee | – Assess the Risk Framework and recommend it to the Board for approval. – Advise the Board on our overall Risk Appetite, tolerance and strategy. – Oversee our exposure to risk and our future strategy and advise the Board on both. – Review the effectiveness of our of risk management systems and internal controls. | |||||||||||||||||||
| For Chair’s report see page 178 | Board Audit Committee | – Monitor and review the integrity of the financial statements of the Company. – Keep under review the adequacy and effectiveness of the Company’s internal financial controls. – Review the adequacy and security of the Company’s Whistleblowing arrangements for its employees and contractors to raise concerns. – Monitor and review the effectiveness of the Company’s Internal Audit function. – Assess the performance of the External Auditors and oversight of their independence. | |||||||||||||||||||
| For Chair’s report see page 184 | Board Remuneration Committee | – Consider, agree and recommend to the Board the principles and parameters of the Company’s remuneration and reward policies and frameworks. – Consider and approve specific remuneration packages for executive directors and other senior management. – Oversee the implementation of remuneration policies, ensuring they promote sound and effective risk management. – Determine and oversee the remuneration governance framework. – Review and approve regulatory submissions in relation to remuneration. | |||||||||||||||||||
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Board Nomination Committee Chair’s report
We ensure that the Board composition and overall governance arrangements
of the bank are fit for purpose and aligned to our operating model.
“We have focused on ensuring that the Board has | We recommended the appointment of Chris Jones as our designated financial expert and Chair of Board Audit Committee. Chris brings significant financial services experience gained at PwC where he was a Senior Audit Partner and leader of its EMEA Financial Services practice. In recognition of the increasing importance of the digital agenda to the bank’s strategy, the Committee recommended the appointment of Genevieve Shore, enabling the Board to benefit from her wealth of experience in digital and business innovation. The appointment of Bruce Carnegie-Brown to the Board of Banco Santander created a vacancy in the Chair of Board Risk Committee role, as he was no longer deemed Independent in the UK. Following an open selection process, we recommended the appointment of Ed Giera, as Chair of the Board Risk Committee. He brings significant depth of risk and markets experience to the Committee and the Board. Ed assumed the Chairmanship of Board Risk Committee in October 2015. Bruce remains a Banco Santander nominated Non-Executive Director and member of the Board Risk and Remuneration Committees. Most recently, we recommended the appointment of Annemarie Durbin who has broad international banking and governance experience and joined as an INED in January 2016. Through these appointments we have maintained 50% INED membership, in line with the UK Group Framework that we formalised this year and which is defined on page 2. In addition to completion of recruitment to the Board, we have also assessed the impact of the resignations of Stephen Jones, as Chief Financial Officer and Steve Pateman, as Head of UK Banking and satisfied ourselves that arrangements were in place to ensure a smooth transition of responsibilities. Skills and experience The Committee continued to monitor Board members’ skills and experience through the year. This has informed the selection process during the recruitment of new INEDs and enabled us to assess their on-going development and training needs. The new Directors have spent significant time on their induction, including visits to corporate sites and branches, and we have instituted regular workshops for all Directors to deepen and refresh our understanding of key business issues. | |||
Shriti Vadera Board Nomination Committee Chair 24 February 2016
| Overview of the year The Committee has overseen a significant change in the membership of the Board, with a number of Directors stepping down, as set out in my statement on page 1 and four new Directors joining. We have focused on the ongoing improvement of our overall effectiveness and in particular on the arrangements to support this, and readiness for implementation of ring-fencing. Board and Committee membership During the course of the year there have been a number of changes to the composition of the Board. The Committee has been actively engaged in the process of identifying, assessing and recommending new INEDs, guided by the principles of ensuring at least 50% Independent membership (as defined on page 2), appropriate breadth and depth of skills and experience, and seeking to improve gender diversity. In replacing members who have stepped down, we looked at the Board and Committee composition on a holistic basis in order to ensure that we had the right skill sets to support the bank’s future strategy. We restructured the membership of the Committee, which previously had eight members, to comprise the Senior Independent Director, Chairs of the Board Committees and two Banco Santander nominated Non-Executive Directors, in line with the UK Group Framework. The current membership of the Nomination Committee is therefore Scott Wheway, Ed Giera, Chris Jones, Ana Botín and Bruce Carnegie-Brown. In addition to my own appointment as Chairman and Chair of the Nomination Committee, Scott Wheway was appointed Senior Independent Director, as defined in the FRC’s UK Corporate Governance Code, and Chair of the Board Remuneration Committee. Four new INEDs have been appointed since the end of 2014, new INED Chairs have been appointed for each of the Board Committees and all Committees have a sizeable majority of INEDs. We also reviewed Board Committee membership resulting in all INEDs being members of the Board Audit, Board Risk and Board Remuneration Committees to provide efficient working and effective oversight. | |||
Annual Report 2015
Governance
Diversity
The Committee has maintained its commitment to ensuring appropriate gender diversity on the Board. We currently have 31% women on the Board, increased from 13% during 2014. Having exceeded our current target of at least 25% women on the Board, we have reset our aspirational target to 33% by 2020 in line with the target set in Lord Davies’ Report, ‘Women on boards: 5 year summary’. We will continue to ensure that gender diversity remains front of mind in our succession planning. Furthermore, ensuring the right mix of skills and experience on the Board as a whole will enable the diversity of thinking that underpins the Board’s ability to provide effective challenge and oversight.
Banking Reform
The Committee spent time assessing the impact of ‘ring-fencing’ our business into a Retail and a separate Corporate Bank on our Board and Executive governance structures. We have submitted our proposed corporate governance model to the regulators along with our proposed business operating model. As we progress with implementation of a new operating model, our priority will be to deliver effective corporate governance while ensuring we meet the objectives of ring-fencing.
Internal review of Effectiveness
The Committee has overseen an internal Board Effectiveness Review conducted by the Company Secretary. This took the form of a confidential online survey completed by each board member and supplemented with individual interviews with our Company Secretary. Responses to the survey and feedback from the interviews were collated and a summary of findings presented to the Board for review. The internal review helped us develop our plans for continuous improvement for the year ahead.
Priorities for 2016
Our priorities for 2016 will include focus on ensuring continuous improvement of board effectiveness. This will be supported by an external review. We will also develop our operating structure resulting from ring-fencing requirements in 2019.
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Female Board members | Independent Board members | |||||||||
| December 2014 | January 2016 | December 2014 | January 2016 | |||||||
| 13%(2/16) | (6/16) | |||||||||
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Board Risk Committee Chair’s report
The Committee supports the Board in ensuring that the business
operates within agreed Risk Appetite while taking account of emerging risks.
“In 2015 we have seen further strong progress | Membership Bruce Carnegie-Brown, who chaired the Committee for just over three years stepped down on 26 October 2015. I became a member of the Committee on 19 August 2015 and succeeded Bruce Carnegie-Brown as Chair on 26 October 2015. Bruce remains a member of the Committee as a Banco Santander nominated Non-Executive Director, following his appointment to the board of Banco Santander on 12 February 2015. Rosemary Thorne, who was a member of the Board Risk Committee and Chair of the Board Audit Committee for nine years, stepped down on 30 June 2015. Chris Jones joined the Committee on 30 March 2015, and since 30 June 2015 has also been the Chair of the Board Audit Committee. José María Carballo stepped down from the Committee on 31 March 2015, and Mike Amato, Roy Brown and Antonio Escámez stepped down on 31 December 2015. I thank them all for their valuable service. Genevieve Shore and Juan Rodríguez Inciarte, joined the Committee on 1 September 2015. Alain Dromer joined us on 15 December 2015 and Annemarie Durbin joined us on 13 January 2016. The Terms of Reference require the majority of the members to be Independent Non-Executive Directors. This criterion was met throughout the year.
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Ed Giera Board Risk Committee Chair 24 February 2016
| Overview of the year During 2015, we continued to scrutinise our performance in the context of the main risks to which we are exposed, in particular credit, conduct and operational risk. We have also sought assurance that we are operating an effective enterprise wide Risk Framework and that an appropriate risk culture and attitude is embedded at all levels across the business. Regular business updates have enabled us to assess the impact of a range of different risk factors on our business and customers. These have included: the macro-economic environment; management of simultaneous transformation projects including regulatory initiatives and improving our customer experience; ensuring effective embedding of the right culture and behaviour; the competitive landscape; future regulatory requirements; and the reslience of IT systems to cyber risk. | |||
Annual Report 2015
Governance
Meeting our key responsibilities in 2015
How we addressed our key responsibilities relating to Risk Appetite and the Risk Framework, together with our work on stress testing and individually significant matters, is shown below. For information on our responsibilities relating to risk management and internal controls see page 177.
Significant areas of focus
Area of focus | Action taken by the Board Risk Committee | Outcome | ||
| Risk Appetite | – We have further embedded the alignment of Risk Appetite with our strategy. We performed a forward-looking annual review of Risk Appetite and set appropriate KPIs against which we can monitor performance. | – The annual review of Risk Appetite and increasing accountability for performance as part of our reward programme is more firmly embedded in our business culture.
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| Risk Framework | – We reviewed and updated the Risk Framework, reflecting recent business and organisational developments, and associated changes to our risk profile. This included: the separate identification of financial crime risk; managing legal risk as part of operational risk; and separate identification of the individual elements of what we have previously described as balance sheet management risk, in particular banking market risk, liquidity risk, capital risk and pension risk. | – Our Risk Framework continues to evolve in response to changes in our business. This ensures that the way we look at risk remains relevant to our business and the economic environment in which we operate.
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| Stress testing | – Stress testing remains a key tool to highlight and manage the impact on capital and profit and loss in stress scenarios. Methodology, governance arrangements and outputs remain subject to close monitoring by the Committee. We participated fully in the 2015 PRA concurrent stress testing exercise and were engaged throughout the process, examining the significant drivers while challenging outputs and assumptions. | – Stress test exercises informed our view on Risk Appetite and specific areas of further enquiry, such as pension risk. We recommended that the Board approve the stress testing submission to the PRA.
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| Macro-economic environment | – We have considered the impact of the sustained period of low interest rates on our business and in particular our margins. We have closely monitored the effectiveness of asset and liability management and have also considered various aspects of the pricing dynamic of our 1l2l3 World proposition under a comprehensive range of scenarios. | – We communicated the conclusions of our discussions to the Board who took the decision in September to increase the monthly fee on the 1l2l3 World products with effect from 11 January 2016. We continue to monitor asset and liability management and keep the performance of current accounts and credit card accounts under review. | ||
| Banking Reform | – We engaged in wide ranging discussions on various matters, relating to Banking Reform, the risks associated with our business model and costs. | – We continue to monitor developments relating to Banking Reform.
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| Global Corporate Banking model | – We engaged Ernst & Young (EY) to support development of a conduct risk framework, and PricewaterhouseCoopers (PwC) to review the controls and strategic operating model of our Global Corporate Banking business segment. PwC’s review also assessed Global Corporate Banking’s ability to support current and future business plans in the context of a more rigorous regulatory environment, Banking Reform, and ongoing improvements in standard industry practice. | – We considered the detailed observations with management and advised the Board on the reviews. – We approved a governance framework to monitor and review management’s proposed action plans to address the recommendations over the short and medium term.
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| UK referendum on EU membership | – We have assessed the potential consequences for our business of the UK leaving the EU (Brexit), as well as the potential impact of market instability in the lead up to the referendum and in any implementation period following a potential ‘leave’ vote. | – We are monitoring closely political developments as they progress. | ||
174 Santander UK plc
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Governance
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BOARD NOMINATION COMMITTEE CHAIR’S REPORT
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| Lord Burns (Chair) | 7 | 7 | ||||||||||
| Mike Amato | 7 | 7 | ||||||||||
| Ana Botín(until 25 February 2014) | 2 | 2 | ||||||||||
| Roy Brown | 7 | 7 | ||||||||||
| Bruce Carnegie-Brown | 7 | 7 | ||||||||||
| Alain Dromer | 7 | 6 | ||||||||||
| Juan Rodríguez Inciarte | 7 | 7 | ||||||||||
| Rosemary Thorne | 7 | 7 | ||||||||||
Scott Wheway
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Membership, attendanceOversight and skills
During 2014, we held seven meetings. The members of the Committee and attendance at meetings held in the year are shown in the table above. With effect from 1 January 2014, the membership of the Committee was expandedadvice to include Mike Amato, Alain Dromer and Scott Wheway. This enabled all Independent Non-Executive Directors to contribute to the important business covered by the Committee. As a result of Bruce Carnegie-Brown’s appointment to the Board of Banco Santander, S.A. on 12 February 2015 he ceased to be deemed independent on the Board of the Company. The Code recommends that a majority of members of the Board Nomination Committee are independent. As a result of the membership changes referred to above, the Committee satisfies this membership criterion.
In addition, Ana Botín relinquished her membership of the Committee on 25 February 2014 resulting in the membership comprising solely Non-Executive Directors. With effect from 1 January 2015, Shriti Vadera was appointed a member of the Board Nomination Committee and will assume the role of Chair of the Committee with effect from 30 March 2015, aligned to the date that she assumes the role of Chair of the Board of Directors.
Key responsibilities
The key responsibilities delegated to the Board Nomination Committee are set out on page 157.
Overview of 2014 activities
Throughout the year, we remained focussed on the continuous improvement of the Board and Board Committees. This included the ongoing review of the Board’s structure, size and composition. In particular, significant time was committed to the search for my successor as Chair and the appointment of Nathan Bostock as Deputy CEO and ultimately CEO. We were supported with the search for the Chair position by Russell Reynolds Associates. In addition, we considered the ongoing importance of the balance of membership of the Board and Board Committees, diversity of skills and experience, and succession planning arrangements in place at both a Board and senior management level. As part of our activities throughout the year, diversity remained a key consideration and important area of focus, supported by the publication of a Board Diversity Policy to complement the already established Santander UK Diversity & Inclusion Policy. An overview of key activities for the year is shown below.
Chair’s succession
One of the key responsibilities of the Board Nomination Committee is to lead the process for any appointments to the Board. This includes a formal, rigorous and transparent procedure for the appointment of new directors, with candidates identified and selected on merit against objective criteria with due regard to the benefits of diversity on the Board.
In particular, the Board Nomination Committee started to plan for my successor as Chair in the first quarter of 2014, following the announcement of my intention to step down as Chair of the Board by the year-end. This process was led by Scott Wheway, one of the Company’s Independent Non-Executive Directors, utilising his extensive experience in this area. With the support of Russell Reynolds Associates, a comprehensive search was conducted, having due regard to objective criteria as well as the diversity agenda. This comprehensive search resulted in the appointment of Shriti Vadera as my successor. Shriti Vadera brings a wealth of experience in the UK and global economies, as well as extensive banking experience, and is committed to building on our record as a scale challenger in UK banking and our work to help people and businesses prosper. Shriti Vadera assumed the role of Joint Deputy Chair with effect from 1 January 2015 to ensure an orderly transition and will formally succeed me as Chair on 30 March 2015, at which point I will relinquish my position on the Board.
CEO appointment
Following the death of the then Banco Santander Group Chairman, Emilio Botín, Ana Botín assumed the role of Banco Santander Group Executive Chairman with effect from 10 September 2014. As a result, she relinquished the office of CEO of Santander UK plc on 29 September 2014 but remains on our Board as a Non-Executive Director. The appointment of Nathan Bostock as Deputy CEO on 19 August 2014 represented a key step in ensuring that Santander UK was well positioned for succession. As a result, we recommended, and the Board approved, the appointment of Nathan Bostock as CEO of Santander UK with effect from 29 September 2014. Nathan Bostock brings a wealth of experience and an excellent track record in banking, operating at executive levels in the banking sector for over 22 years.
Governance
Corporate Governance Report
continued
Succession planning
An important role of the Committee is to ensure that robust succession plans are in place for the Board and senior management team. We spent a great deal of time throughout 2014 reviewing succession plans and ensuring that the succession pipeline and methodology being followed remained robust. Given the work conducted by the Committee in 2014, we are comfortable that succession plans remain in place and continue to evolve which will enable us to continue to take a forward-looking and proactive approach to future Board and senior management appointments aligned to the needs of Santander UK. This position is further evidenced by the appointment of a number of senior level positions from talent within Santander UK. As a result of José María Nus relinquishing his position on the Board with effect from 1 April 2014 to return to a senior role at Banco Santander, S.A., we considered the appointment of a replacement Chief Risk Officer. We were delighted to recommend the appointment of Keiran Foad as Chief Risk Officer (previously Deputy Chief Risk Officer) as successor to José María Nus in that capacity. In addition, following Karen Fortunato’s retirement from Santander UK, we appointed Shaun Coles as her successor as Company Secretary (previously Deputy Company Secretary).
Board member skills and experience
During 2014, the Committee kept the overall mix of Board member skills and experience under review in order to ensure that the Board remained well placed to meet the future challenges facing Santander UK. In particular, the Committee takes a proactive approach to planning for future appointments ensuring that any recruitment adds to the collective skill set of the Board. Furthermore, the Committee undertakes an annual review of Director time commitment and tenure. Rosemary Thorne, as Independent Non-Executive Director and Santander UK’s designated financial expert, completes nine years in office on 30 June 2015. The Committee has this position under review, together with the need to identify a successor to Bruce Carnegie-Brown as Chair of Board Risk Committee.
Diversity
During the year, the Committee reviewed the Board’s published Diversity Policy, which reflected the new CRD IV regulations which came into force on 1 January 2014. Following review, the Committee recommended the Board Diversity Policy to the Board, which is available on Santander UK’s website www.aboutsantander.co.uk. The Board continues to make progress in broadening the diversity of the Board and of senior management. In 2015, the Board intends to make further progress against the policy to ensure that it continues to drive the benefits of a diverse Board and colleagues across the business.
At 31 December 2014, 12% of the Board was female and, following the appointment of Shriti Vadera, female representation increased to 18%. Gender diversity statistics for Santander UK can be found on page 22. Although we are pleased with the progress achieved, we believe that diversity should be considered in its broadest sense, encompassing experience and background. We remain committed to maintaining a diverse Board as well as moving further towards our aim to have 25% female representation on the Board by 2017. However, all Board appointments will continue to be based on merit, with the prime consideration being to maintain and enhance the Board’s overall effectiveness.
Corporate governance
The Committee oversaw the Board’s governance arrangements to ensure that they reflected best practice and remained fit for purpose. In 2014, the Committee received regular corporate governance updates from the Company Secretary. The reports detailed the impact of emerging regulation would have on the Board and its corporate governance practices. The Committee also examines the proposed corporate governance disclosures in Santander UK’s Annual Report.
Board effectiveness
Throughout 2014, the Committee remained mindful of the actions identified and recommended by Bvalco Ltd as part of the external Board effectiveness review conducted during 2013. Such actions were aligned to the Board’s commitment to continuous improvement, which remains a key area of focus.
Planned activities for 2015
For 2015, we will maintain our support for the Board’s commitment to continuous improvement. We will undertake a further effectiveness review in 2015 in preparation for a future externally facilitated review. The composition of the Board and Board Committees will remain under constant review in order to ensure that we remain well placed for the future challenges ahead. In particular, we will continue to monitor and enhance the skills and experience requirements of Santander UK to ensure that we are best placed to deliver against our strategic objectives. Ensuring that robust succession plans are in place and kept under regular review will continue to be an important part of our work for 2015. We remain fully aware of the emerging developments in Corporate Governance arrangements applicable to banking institutions and will continue to take these into account throughout 2015 and beyond.
We will continue to consider Board and senior management diversity, including further progressing our aims under Santander UK’s Board Diversity Policy. Future Board appointments will continue to be made on merit, having due regard for the benefits of diversity, including gender. We will also continue to develop measurable objectives to implement the Board Diversity Policy which will be aligned with our ambitions in this important area.
Lord Burns
Chair of Board Nomination Committee
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BOARD RISK COMMITTEE CHAIR’S REPORT
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| Roy Brown | 12 | 12 | ||||||||||
| José María Carballo | 12 | 12 | ||||||||||
| Antonio Escámez | 12 | 9 | ||||||||||
| Rosemary Thorne | 12 | 12 | ||||||||||
Scott Wheway
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Membership, attendance and skills
During 2014, we held 12 meetings and established a sub-committee for the purpose of approving Santander UK’s stress test results as detailed below. The members of the Committee and attendance at meetings held in 2014 are shown in the table above. On 1 January 2014, the membership of the Committee was expanded to include Scott Wheway. The Terms of Reference require the majority of the members to be Independent Non-Executive Directors. With the exception of Antonio Escámez and José María Carballo, all members are Independent Non-Executive Directors therefore satisfying this membership criterion. As a result of my appointment to the Board of Banco Santander, S.A. on 12 February 2015, I ceased to be deemed independent on the Board of the Company. As a result, I will step down as Chair of the Committee as soon as a successor is appointed.
Key responsibilities
The key responsibilities delegated to the Board Risk Committee are set out on page 157.
Overview of 2014 activities
Throughout the year, the Committee received comprehensive Enterprise-Wide Risk Management reports from the Risk Division and Executive to enable it to oversee the performance of Santander UK against the approved Risk Appetite, including a focus on top and emerging risks, which are outlined on pages 36 to 38 and set out in detail in the Risk Review on pages 25 to 144. These reports were supplemented by more detailed reviews of particular aspects of our risk profile on a periodic basis, together with deep dives into specific matters requested by the Committee, further detail on which is set out below. We also reviewed the Risk Appetite and Risk Framework as set out below.
Consistent with last year, credit risk, operational risk and conduct risk continue to be our main areas of focus. Other matters reviewed included the capital and liquidity position, including stress scenarios, significant internal control matters, and other specific risks such as IT and pensions. The Committee also reviewed in detail Santander UK’s ICAAP, its Recovery and Resolution Plan, and its ILAA, making recommendations in respect of each to the Board.
The Committee met its key responsibilities as follows:
Advise the Board on the overall Risk Appetite, tolerance and strategy
The reports from the Risk Division enabled us to oversee Santander UK’s performance against the 2014 Risk Appetite, which was approved by the Santander UK Board in 2013. We reviewed and challenged the risk management information provided to us, seeking further reports, analysis and explanations from the Risk Division and other units responsible for the control of risk and business functions, as appropriate, to ensure a full understanding of the risks facing Santander UK. This was then used to assess and challenge proposals from the Executive in respect of Risk Appetite throughout the year, with the Committee reviewing management’s recommendations regarding specific limits in the business. At our meeting in December, we reviewed and challenged the proposed Risk Appetite for 2015 in detail and recommended this to the Board for approval.
Review the effectiveness of the risk management systems and internal controls
We received regular reports on the implementation of the risk control self assessment programme during the course of the year and considered the results of this programme at our meeting in December. In recognition of the importance of risk culture in the effective delivery of risk management and internal controls, we also monitored the implementation and embedding of Santander UK’s Risk Culture programme, including its alignment to the Santander Way and ‘Simple, Personal, Fair’.
Review the risk management framework and recommend it to the Board for approval
Following the approval by the Board of a revised Risk Framework, as recommended by the Committee we approved individual frameworks for each risk type and worked to ensure that the Risk Framework was being embedded consistently across Santander UK during the year. In the second half of 2014, we conducted our annual review of Santander UK’s Risk Appetite to ensure that it remained appropriate for the business and that Santander UK’s strategy was consistent with its Risk Appetite.
Governance
Corporate Governance Report
continued
Oversee and advise the Board on Santander UK’s current risk exposuresexposure and future risk strategy
During 2014,2015, we reviewed Santander UK’s exposure to the risks outlined below and also analysed emerging themes, including regulatory, macroeconomicmacro-economic and global risks, which could affect Santander UK’s ability to achieve its strategic goals.
Risk
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| Credit risk – retail | – Considered monthly reports on the overall credit quality of Santander UK’s loan | |||||
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| – Growth in retail portfolios and earnings have been achieved within approved Risk Appetite. – Recommended to the Board that additional new business could be written in line with Risk Appetite. – Agreed a governance path for future updates to the Committee.
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| Credit risk – corporate and commercial | – Considered regular reports on credit quality of SME and commercial real estate lending. – Reviewed Global Corporate Banking concentration levels, and sector and geographic risk exposures. | – Growth in corporate and commercial portfolios and earnings has been achieved within approved Risk Appetite. – Agreed an update on combined exposure to the resources sector.
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| Market risk | – Reviewed monthly analysis providing detailed VaR reports and stress testing results for a range of macro-economic scenarios to assess traded market risk exposure. | – Exposures have been maintained well within Risk Appetite. – Committee has gained assurance of adequacy of VaR reporting and stress testing.
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| Liquidity risk | – Reviewed and brought appropriate oversight to the ILAAP. – Reviewed and approved proposals for a diversification in the assets held for liquidity purposes. | – Recommended adoption by the Board.
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| Capital risk | – Reviewed and brought appropriate oversight to Santander UK’s related risks associated with the ICAAP, and its RRP. Considered a report on the potential impacts of forthcoming regulation on the firm’s capital forecasts, including leverage. | – Recommendations for approval made in respect of ICAAP and RRP to the Board. – Production of more specific and regular updates on capital going forward.
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| Pension risk | – Considered a detailed report on the impact on the balance sheet, funding for pension liabilities, and earnings of Santander UK in the event of the current low interest rate environment persisting. – Review of pension fund positioning and IAS 19 presentation. | – Continued to monitor the impact of sustained low interest rates and the effectiveness of asset and liability management. – Requested an holistic update on pension risk and governance of investment proposals.
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Other significant areas of focus included:
Annual Report 2015
Governance
| Action taken by the Board Risk Committee
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– We – Monitored on an ongoing basis an enhanced set of
| – Continued to monitor the impact of sustained low interest rates and the effectiveness of asset and liability management. – Committee requested an holistic update on pension risk and governance of investment proposals.
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– Training for our people on vulnerable customers has been rolled out through the re-launch of the I AM Risk learning programme initiated in 2012. – Maintained oversight of proper management for the customer of crystallised risks, for example wealth management. – We have reviewed conduct in light of PPI and the
| – The conduct risk framework was developed and implemented in line with regulatory commitments, with full roll out planned for 2016. – Development and implementation of a monitoring programme of conduct risk exposures and embedding of behaviours.
customers see page 148. | |||
– Regulatory risk – Reviewed the regulatory agenda and associated impact on our business including the risk – Model risk – Received and considered plans to extend further model risk management disciplines, including the development of an inventory of the most material models. Reviewed and approved a – We continue to support the I AM Risk culture which was introduced in 2012 to reinforce the Risk Framework and highlight that everyone is responsible for managing risk. We have overseen the re-launch of the I AM Risk learning programme this year which has supported learning on cyber crime, conduct risk and
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– Regular and substantive interaction on aspects of the regulatory agenda.
– Supported the implementation of new practices and procedures.
– Support of the I AM Risk culture which enables us to
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Planned activities for 2015
Priorities for 2015 will remain similar to those in 2014. Enterprise-Wide Risk Management and the progression of embedding the Risk Framework will be a continued priority along with the Risk Culture programme. Credit risk, together with operational risk and conduct risk will be our prime focus in respect of risk types. The changing regulatory environment and its implications continue to be significant agenda items as will emerging macro economic factors (such as the slowdown in economic growth in the eurozone) and emerging social and political developments (including the UK General Election).
In order to ensure that the risk management arrangements deliver outcomes that are consistent with our focus on financial resilience and improving our customer experience, we will: closely monitor financial and non-financial risk performance against Risk Appetite; challenge management on risk-related issues; and keep a focus on emerging risks including the UK political, economic and regulatory environment, and IT developments. This will enable us to develop a better radar screen of forward-looking risk, improving our ability to anticipate risks to the successful execution of Santander UK’s strategy.
Bruce Carnegie-Brown
Chair of Board Risk Committee
Governance
Corporate Governance Report
continued
BOARD AUDIT COMMITTEE CHAIR’S REPORT176 Santander UK plc
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| Rosemary Thorne (Chair) | 15 | 15 | ||||||||||
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Manuel Soto
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Membership, attendance and skills
During 2014, we held 15 meetings. The members of the Committee and attendance at meetings held during 2014 are shown in the table above. On 1 January 2014, Roy Brown and José María Carballo stepped down and Alain Dromer and Manuel Soto were appointed to the Committee. The new members bring considerable financial experience to the Committee.
The Code recommends that at least three members of the Board Audit Committee are independent and the Committee satisfied this requirement throughout the year. As a result of Bruce Carnegie-Brown’s appointment to the Board of Banco Santander, S.A. on 12 February 2015 he ceased to be deemed independent on the Board of the Company. Notwithstanding his loss of independence, he will continue to serve as a member of the Committee. However, the composition of the Committee remains under review.
Financial expert
The Board has determined that I have the necessary qualifications and experience to qualify as a Board Audit Committee financial expert. This determination is based in part on my 15 years’ experience as a Finance Director of a number of FTSE 350 Index companies, and my membership on the Financial Reporting Review Panel and the Hundred Group of Finance Directors Main Committee.
Key responsibilities
The key responsibilities delegated to the Board Audit Committee are set out on page 157.
Overview of 2014 activities
We received regular reports throughout the year from Finance, the External Auditors, Internal Audit, Compliance and Legal & Secretariat and also regularly meet with the Executive and senior management. In my capacity as Board Audit Committee Chair, I meet in private session with key members of the management team and the External Auditors ahead of each meeting. I also attend meetings with the PRA, the FCA, the Financial Reporting Council (‘FRC’), and the British Bankers’ Association (‘BBA’) both on an individual basis and together with the Chairs of Audit Committees of other major UK banks and financial services institutions. I also attend technical briefings for financial services firms at major professional services firms.
Financial reporting and policy
Our main area of activity in 2014 continued to surround Santander UK’s financial reporting cycle, primarily the Annual Report, the Half-Yearly Financial Report, and the Quarterly Management Statements. As part of this, we considered all material changes to accounting treatment and areas of significant management judgement to ensure that they were appropriate.
A comprehensive report setting out the details of the management judgements and accounting policies used for the preparation of the financial statements was presented by management as part of each reporting cycle. Detailed reports were also presented by the External Auditors. This allowed a robust challenge of management’s proposals and we were therefore able to satisfy ourselves that both the judgements themselves and any disclosure thereof were appropriate and transparent.
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Effectiveness of risk management system and internal controls
We received regular reports on the implementation of the Risk Control Self-Assessment (RCSA) programme during the course of the year and considered the results of this programme at our meeting in January 2016.
We also received regular reports on the implementation of key risk control programmes during the course of the year and considered measures and action plans to address exposures related to systems and controls. In addition to those programmes already noted, we reviewed and monitored the progress and implementation of the cyber security IT systems plan, model risk framework, and other actions to strengthen internal controls. We also continued to monitor the implementation and embedding of Santander UK’s Risk Culture programme, including its alignment to The Santander Way and Simple, Personal and Fair.
Oversight was maintained of controls relating to transactions and payments from Santander UK to the wider Banco Santander group.
Effectiveness of the Committee
Committee membership has changed during the year, though total membership numbers has remained stable. These changes have resulted in a greater diversity of members and has, in particular, strengthened our skills and knowledge of IT, cyber and other digital-related risks.
Full terms of reference can be found on our website at www.santander.co.uk and a summary is given on page 170.
We receive regular reports on enterprise wide risk, we have called risk owners to our meetings to account for their progress (a practice also established by Board Audit Committee this year), and we have called upon the resources of leading external organisations in the field of cyber security. These actions are examples of how we have looked to inform our debate and decision-making during the course of the year and contribute to our effectiveness as a Committee.
Priorities for 2016
From an operational perspective, conduct risk and cyber security will remain high on our agenda. As we move towards Banking Reform, capital stress testing and assessment of our capital adequacy will be closely monitored, alongside implementation costs. Meanwhile, credit risk, both retail and corporate and commercial, remains central to our business and will be the focus of our continued attention.
Annual Report 2015
Governance
Board Audit Committee Chair’s report
Our responsibilities include oversight of the integrity of financial reporting and
controls, the effectiveness of our internal audit function, the relationship with
the external auditor and the adequacy of our whistleblowing arrangements
“A year of audit tender, oversight of a new retail | Overview of the year Key areas of focus for the Committee during 2015 have included: – Implementing changes in Committee membership and chairmanship – Providing a recommendation to Banco Santander on an external audit tender – Refining our policy on the approval of non-audit services – Oversight of the internal audit function, including an independent assessment of effectiveness – Providing oversight on the effectiveness of financial controls and reporting – Further enhancing our whistleblowing arrangements. We have also addressed the other responsibilities delegated to the Committee by the Board. Membership I would like to thank Rosemary Thorne, who chaired the Committee for nine years and who stepped down at the end of June. After a three month transition I took over Chairmanship at the end of June. Other changes were a result of the appointment of Ed Giera, on 19 August 2015, our new Board Risk Committee Chair, who also sits on the Committee, and the addition of Scott Wheway and Genevieve Shore on 1 September 2015. The UK Corporate Governance Code recommends that at least three members of the Committee should be independent, a threshold which we met except for a short transition period of seven weeks. At 31 December 2015, five out of six members of the Committee were Independent Non-Executive Directors.
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Chris Jones Board Audit Committee Chair 24 February 2016 | ||||
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During 2014,178 Santander UK plc
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Significant financial reporting issues and judgements
The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. In 2015, we focused on the following significant financial reporting matters in relation to the financial statementsaccounting and disclosures:
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Conduct provisions The provision for conduct remediation activities for PPI and other retail products is highly judgemental and requires significant assumptions including complaint volumes, uphold rates and redress costs. |
– In November 2015, the FCA published a consultation paper on the introduction of a deadline for customer PPI
– Challenged the basis of provisioning for claims relating to
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– We will continue to review our provision levels for customer PPI complaints in light of
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Determining the appropriateness of retail credit provisions, especially for those relating to the mortgage portfolio, remains one of the most significant areas of management judgement. |
– Noted that the level of retail credit provisions had fallen during the year. This was due to an overall improvement in the macro-economic conditions with strong house price growth leading to lower levels of repossessions and associated costs. – Considered reports on the implementation of a new mortgage | – Concluded that retail credit provisions were robust and key assumptions made by management were appropriate. – Concurred with a release during the year of £125m from the retail credit provision. – Noted that, while retail credit provisions are supported by model outputs, they will remain an area of significant focus in 2016.
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Corporate credit provisions Determining the appropriateness of corporate credit provisions is highly judgemental requiring management to make | – Received detailed reports from management on credit provisions relating to
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Annual Report 2015
Governance
Governance
Corporate Governance Report
continued
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Actuaries are engaged to assess pension obligations because of the |
– Received a – Received, discussed and agreed management’s assessment of actuarial assumptions relating to mortality and their alignment to the most recently published life expectancy data. – Challenged the presentation and disclosure of these | – Requested and received a presentation by the Head of – Satisfied ourselves with management’s approach to the – Noted that, in view of the significant impact which actuarial assumptions have on the pension assets and liabilities recognised in the balance
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The Committee’s focus has been on areas of significant judgement, being those which pose the greatest risk of a material misstatement to the financial statements. In addition to the areas of significant judgement set out above, the Committee also considers other higher risk items. During 2015 these included the valuation of financial instruments (including fair value adjustments), hedge accounting, transactions with related parties and the identification and assessment of risks of material misstatement including fraud risks.
Valuation of financial instruments and hedge accounting policies, which were identified as specific areas of focus in previous years, were not considered to be significant in 2015. For financial instruments held at fair value, valuation techniques have remained constant and there would need to be a significant change in the input to fair value adjustments to cause a material misstatement. For hedge accounting policies, there were few changes in the types of hedges undertaken in comparison with previous years.
In prior years, the Committee also focused on goodwill impairment as a significant judgement area. This is no longer considered to be a significant judgement or a higher risk item as management expects the underlying businesses to which goodwill relates to remain profitable and does not believe that the effect of changes in assumptions to those that are reasonably possible would have a material impact on the financial statements.
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Other significant areas of focus particularly relating to the Annual Report included:
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Governance
Corporate Governance Report
continued
Internal Control
Robust systems of internal control are essential for a bank operating in a complex and changing business environment. We receive reports from management, Internal Audit and the External Auditors and review the effectiveness of both audit functions.
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External auditors
Audit tender
During the year, Banco Santander took the decision to re-tender the global external audit. As part of this global process, the Committee performed its own UK review of the three firms selected by the Banco Santander group, EY, KPMG and PwC.
This review included:
| – | UK-specific proposal documents and presentations from each firm, which addressed their proposed team, experience of our sector, audit approach, IT capability, approach to audit quality and transition experience |
| – | The spread of audit appointments amongst our peers to assess potential constraints on capacity |
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On the conclusion of this process the incumbent Chair, Rosemary Thorne, advised Banco Santander and the Santander UK Board of her recommendation and, following recommendations from each of the key subsidiaries across the group, Banco Santander SA and the Santander UK Board confirmed that PwC will become our external auditors for the accounting period from 1 January 2016, subject to approval at our 2016 AGM.
Oversight of the relationship with our external auditors
As part of our review of our relationship with our external auditors, Deloitte LLP, our activities included:
| – | Consideration of
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| – | Review of the summary of misstatements not corrected by management and satisfied ourselves that they were not quantitatively |
| – | Discussion with the |
| – | Discussion regarding developments in financial reporting including changes to accounting standards, statute and best
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| – | Interactions, including meetings in private session during each Committee meeting, and at other times | year. |
Planned activitiesBased on the above inputs, which were captured in a formalised assessment, we satisfied ourselves as to the rigour and quality of Deloitte’s audit process.
Deloitte’s reports in the past two years
During the two years ended 31 December 2015 and 2014, Deloitte did not issue any reports on the financial statements of Santander UK that contained an adverse opinion, or a disclaimer of opinion, nor were the auditors’ reports of Deloitte qualified or modified as to uncertainty, audit scope, or accounting principles. There has not been any disagreement (as that term is defined in Item 16F(a)(1)(iv) of Form 20-F) over any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to Deloitte’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its auditors’ reports, or any ‘reportable event’ as described in Item 16F(a)(1)(v) of Form 20-F.
Non-Audit fees
We monitored the independence of PwC, as a result of their appointment as future auditors.
During the year we updated our policy on non-audit services provided by our auditors in the context of the consultation paper issued by the FRC on implementing the changes to auditor independence requirements resulting from the new European Directive on Auditor Independence. We reviewed all proposed non-audit services to determine whether they were permitted by reference to their nature, to assess the potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees. All individual assignments over a monetary threshold require advance approval by the full Committee. This process is in addition to the requirement for all such fees to be approved by the Banco Santander Audit Committee.
A specific focus of the Committee was to assess and approve the UK review work performed by Deloitte with respect to our preparation for the Market in Financial Instruments Directive II (MiFID II) with particular reference to ensuring their continued independence.
Oversight of the relationship with PwC
In the years ended 31 December 2015 and 2014 neither we nor someone on our behalf has consulted with PricewaterhouseCoopers LLP (PwC) regarding either:
| – | The application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the consolidated financial statements of Santander UK, or |
| – | Any matter that was either the subject of a disagreement (as that term is defined in Item 16F(a)(1)(iv) of Form 20-F) and the related instructions to such Item 16F, or a ‘reportable event’ as described in Item 16F(a)(1)(v) of Form 20-F. |
Annual Report 2015
ForGovernance
Internal control
The Board Risk Committee has overall responsibility for the effectiveness of the internal control systems. However, due to the nature of internal control matters there is a natural overlap in responsibilities with those of this Committee. We recognise that a robust framework of internal control is essential for a complex and changing business environment. We had a comprehensive internal control framework in place and during the course of the year we have received and considered regular reports regarding the operation of and continued enhancement to this framework. This included reports from Internal and External Audit and related actions being taken by management, from Compliance on matters such as key conduct and non-financial regulatory risks, and Finance on internal controls over financial reporting. Regular reports have also been provided by Legal & Secretariat considering all material litigation cases and their progress.
Internal controls over financial reporting
Section 404 of the Sarbanes-Oxley Act requires management to report on the adequacy of its internal controls with regard to financial reporting. Following the adoption in December 2014 of a new framework in this regard (the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Framework), further enhancements have been made during 2015 to embed the framework.
We have received regular reports on the progress of this, and the actions taken by management with regard to any control deficiencies identified through the assessment of the effectiveness of internal controls over financial reporting.
We also noted improvements in the financial control environment during the year, and the Committee was satisfied that internal controls over financial reporting were appropriately designed and operating effectively.
Internal audit
In 2015, we will continue to focusreviewed the conclusions and recommendations of an external benchmarking assessment against industry leading practice. This included discussing the report with the partner responsible for the assignment, and receiving progress reports on ensuring the robustnessimplementation of the financial reporting process. We will consideractions identified. The findings confirmed that the impactchanges made as part of new accounting requirements,our continuous improvement programme have further strengthened the regulatory environmentfunction, and general industry conditions. We will also continue to assistthat the internal audit function has increased its engagement and influence in the risk agenda within Santander UK. As a result of the review, the Internal Audit function withhas already improved aspects of its audit methodology and is enhancing the implementationeffectiveness of its existing audit software and data analytics capability.
The internal audit plan, based on a comprehensive risk assessment, was presented for challenge and approval by the Committee and has been updated at regular intervals throughout the year, in response to changes identifiedin the business and requests from the Committee.
We have received regular reports from our Head of Internal Audit and monitored findings as part of our oversight. We have considered the aggregate number of recommendations, the rationale for any recommendations becoming past due, and broader root cause analyses.
This year we have introduced more regular presentations by management to the Committee to account for their progress on implementing internal audit’s recommendations.
Whistleblowing
The Company Secretary provides reports to us on whistleblowing events including those from our confidential whistleblowing external service provider. The reporting includes investigation progress reports and outcomes, as well as root cause analysis and information, on identifiable trends, hot spots and any observable risks. The Committee considers that the Whistleblowing Policy and reporting framework plays a key role in supporting our culture and behaviours at all levels in the business. During the year I have also been appointed by the Board as the Whistleblowers’ Champion. The purpose of this role is to oversee the independence and effectiveness of the policies and procedures on this area. The direct engagement of an independent Non-Executive Board Committee Chair in this oversight role should further enhance confidence in the integrity of our whistleblowing arrangements.
Disclosure in Annual Report
We received regular reports from the Disclosure Committee, a senior executive committee chaired by the Chief Financial Officer. Its remit is to advise the Committee on the completeness and accuracy of disclosures made by Santander UK in its continuous improvement plan.external reporting. This, together with other reports received during the year, and a review of best practice and the approach of our peers, enabled us to conclude that we were satisfied with the level of disclosure made in this 2015 Annual Report. Management also engaged the Board and Committee early on the approach to the report which enabled it to provide input into the overall tone and messaging in a timely manner.
Rosemary ThorneThe Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable and whether it provides the information necessary for readers to assess Santander UK’s position and performance, business model and strategy.
Chair of Board Audit Committee
Governance
Directors’ Remuneration Report
Directors’ Remuneration Report
BOARD REMUNERATION OVERSIGHT COMMITTEE CHAIR’S REPORT182
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Membership, attendance and skills
During 2014, we held nine scheduled meetings. The members of the Committee and attendance at meetings held in 2014 are shown in the table above. With effect from 1 January 2014, Mike Amato, Alain Dromer and Scott Wheway joined the Committee and José María Carballo and Rosemary Thorne stepped down as Committee members. Collectively, the members of the Committee have a wealth of experience and bring extensive knowledge, insight and perspective from their involvement with other organisations.
Throughout the year all the members of the Committee were considered by Santander UK to be independent, as defined in the Code, and free from any business or other relationship that could materially affect the independence of their judgement. None of the Committee members have any personal financial interest in the Company (other than as shareholders of Banco Santander, S.A.), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.plc
Key responsibilities
The key responsibilities delegated to the Committee are set out on page 157.
Introduction and Chair’s summary statement
In 2014, Santander UK delivered a strong performance against its strategic priorities. We increased significantly the numbers of loyal and satisfied customers. Against becoming the ‘bank of choice for UK companies’, we continued to deliver improvements to our services for SMEs as well as large corporates. We also saw profit before tax increase 26% to £1,399m and our capital position further improved, in respect of our objective of delivering consistent profitability and a strong balance sheet. Santander UK’s approach to remuneration should be set against that performance as well as a thorough assessment of the enterprise risks faced by it. Against this background, I would like to share with you the remuneration practices and policies for the Executive Directors, including the payments made to them in respect of performance during 2014.
This Remuneration Report is divided into three parts; the Board Remuneration Oversight Committee Chair’s Report; the Remuneration Report which summarises our policies and practices in the compensation arena; and the Remuneration Implementation Report which shows how the remuneration policy has been applied. Although the remuneration policy disclosures primarily focus on the remuneration of our Executive Directors, the broad policy principles will continue to inform the way in which all our senior management personnel are remunerated.
You will also see in the Remuneration Report several mechanisms that are intended to create alignment of interest between stakeholders and Executive Directors. For example, 50% of any annual bonus payment is converted into shares in Banco Santander, S.A., with vesting deferred for three years. The performance measures under-pinning our longer-term variable remuneration plans are structured to support and incentivise performance in line with Santander UK’s strategic objectives, encourage prudent risk management and should drive the right behaviours in line with our desired culture and values.
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In this context, the Disclosure Committee considers and advises us whether:
| – | Key messages remain consistent throughout the document, relating both to financial performance and progress against strategic objectives |
| – | All key judgements and significant issues are reported and explained clearly and adequately |
| – | There is a clear framework to the document with good signposting and a complete picture of performance and events. |
Once again we have looked to improve our external reporting to align more closely with the other UK peers and the disclosures of a premium-listed company. We have also had due regard to best practice and our relationship with our ultimate parent company, and the requirements of our public debt issuance. We have included new disclosures in line with the updated UK Corporate Governance Code, new EU legislation and industry-wide guidance on matters of corporate governance. These include the Enhanced Disclosure Task Force’s proposals for the inclusion of narrative disclosures regarding the impact of the adoption of IFRS 9 (Financial Instruments).
In addition to the above review process the Committee’s assessment of fair, balanced and understandable is underpinned by the understanding it gains through the reporting of management judgements, internal controls matters, internal audit activities and the reports of the External Auditor made to the Committee throughout the year. It also considers the robustness and outcomes of the assurance, review and verification processes conducted by management and considers whether the key risks reflected those that were of a concern to the Committee and were consistent with those reported by management.
Following our assessment we concluded that the 2015 Annual Report is fair, balanced and understandable.
Going concern
We satisfied ourselves that it is appropriate to use the going concern basis of accounting in line with a presentation made to the Committee by senior finance management. As part of the assessment we considered whether there are sufficient financial resources, including liquidity and capital, available to continue the operations of the company. We considered the Company’s resilience in the face of stress and known future challenges.
Effectiveness
The Board has determined that I have the necessary qualifications and skills to qualify as a Board Audit Committee financial expert based on my recent professional background as a senior audit partner at PwC. In my capacity as Committee Chair, consistent with the approach of my predecessor, I meet in private session with key members of the management team and the external auditors ahead of each meeting. I also attend meetings with the PRA, the FCA, the Financial Reporting Council (FRC), and the BBA both on an individual basis and together with the Chairs of Audit Committees of other major UK banks and financial institutions.
Planned activities for 2016
The key areas of focus for the Committee for 2016 will be to monitor and keep under review the transition to our new External Auditor, progress on the implementation of IFRS 9, the level and adequacy of conduct remediation provisions, and the financial control and reporting implications of Banking Reform.
Annual Report 2015
Governance
Board Remuneration Committee Chair’s report
The Committee reviews remuneration policies and their implementation
for the long-term success of Santander UK.
“We have designed remuneration and incentive plans | Based on the principles of Simple, Personal and Fair, we focused on delivering a reward framework that is simple to understand, tailored to individual roles and provided a clear link to the Santander UK’s strategic objectives. We seek to drive performance to the highest standards and looked to offer remuneration that both rewards performance and values behaviours. We also strived to deliver fairness by offering competitive remuneration to attract, retain and motivate employees of the highest calibre. We strengthened our Terms of Reference this year to better reflect the Committee’s role in the areas of governance and control. (Full Terms of Reference are available at www.santander.co.uk.) At the same time, we strengthened our membership by including all INEDs as members of the Committee. This reflects the enhanced responsibilities that the Committee now carries, and is consistent with the change in membership of the Board Risk and Audit Committees this year. We also continued to ensure that performance-related pay is deferred appropriately and remains ‘at risk’ over time. In response to new regulatory requirements, we introduced provisions which allow Santander UK to clawback variable pay awards for up to seven years after they are awarded. | |||
Scott Wheway Board Remuneration Committee Chair 24 February 2016 | Overview of the year This report has three parts: – My report as Chair of the Committee – The Remuneration Report, which summarises our remuneration policies – The Remuneration Implementation Report, which shows how these policies have been applied during 2015. We are not subject to the remuneration disclosures that apply to a FTSE-listed company, but we have provided a report which we consider appropriate to our ownership structure. We have aimed to make its content transparent and include information that shows how our directors are remunerated, and how this reflects the performance of our business. In 2015, we continued to ensure that our remuneration policies were consistent with our strategic objectives, and were designed with the long-term success of Santander UK in mind. In doing so, ensuring sound and effective risk management continued to be to the fore. This was particularly so when considering how our remuneration schemes can drive outcomes and behaviours in line with our chosen objectives. | |||
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Overview of 2014 activities
During 2014, the Committee continued to focus on ensuring that Santander UK’s remuneration policies were consistent with prudent risk management as well as remaining compliant with applicable regulation, aligned to best-practice and competitive with our peers. The Committee remained mindful of the regulatory environment and the context in which 184 Santander UK conducts its business. We continued to support remuneration practices that promote financial stability, strong risk management processes and the behaviours we wish to see in Santander UK’s culture.plc
The management and control of conduct risk was a key focus for the Committee, where our remuneration policies and practices can really have a material impact in driving both the desired behaviours in our employees and the right outcomes for our customers. As a result, throughout 2014, the Committee gave significant attention to seeking improvements in the remuneration structures operating in the Retail Banking Division. The Committee worked with the Retail Banking and People & Talent teams to look again at the design of our own incentive schemes. These dovetailed well with changes elsewhere in Santander UK’s business to do things in a Simple, Personal and Fair manner, and in line with the Santander Way.
Board Remuneration Oversight Committee calendar in 2014
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Governance
Directors’ Remuneration Report
continued
In addition to the above topics, at every meeting, the Committee reviews its forward-looking agenda and considers the implications on remuneration of any new or on-going key risk events, a management update on topical regulatory activity relevant to Santander UK and the environment in which it operates. In addition, we receive an update from our independent adviser on significant developments that are relevant and of interest to the Committee’s work.
The Committee continued to scrutinise senior management remuneration in the context of both Santander UK and individual performance. Individual bonus awards and deferred remuneration were assessed against performance adjustment standards and in line with our regulators’ rules and expectations.
Our challenges
European regulatory requirements introduced a cap on the variable element of remuneration for Material Risk Takers in large banking organisations such as ours. With shareholder approval, variable pay is permitted to a maximum of 200% of fixed pay. The Committee strongly believes in the link between pay and performance and we would like Santander UK to have the flexibility to provide total remuneration packages that allow it to attract and retain the best talent available to deliver Santander UK’s strategy. We are also careful to ensure that fixed costs are properly managed. Therefore, we approved Santander UK’s proposal to allow it to award variable remuneration up to the maximum of 200% of fixed remuneration. This, in turn, was approved by our ultimate parent company, Banco Santander, S.A. and its shareholders.
Key changes to Executive Directors in 2014
Nathan Bostock was appointed to the Board as an Executive Director and Deputy CEO on 19 August 2014 and was subsequently appointed CEO on 29 September 2014. Ana Botín relinquished her office of CEO on 29 September 2014 following her appointment as Executive Chairman of Banco Santander, S.A. and remained on the Board as a Non-Executive Director. José María Nus, who had served as Chief Risk Officer and Executive Director, resigned from the Board on 1 April 2014 and returned to a senior role at the Banco Santander group.
Since the year-end, Shriti Vadera joined the Board as joint Deputy Chair on 1 January 2015 and will succeed Lord Burns as Non-Executive Chair on 30 March 2015. The Board have determined that for the purpose of the Code, Shriti Vadera was independent upon appointment. In addition, Bruce Carnegie-Brown ceased to be deemed independent upon his appointment to the Board of Banco Santander, S.A. on 12 February 2015.
Nathan Bostock’s remuneration package on appointment as Deputy CEO was approved, as was his remuneration on appointment as CEO. With effect from 1 March 2014, Stephen Jones’ basic salary increased from £525,000 to £550,000 and Steve Pateman’s basic salary increased from £625,000 to £640,000. 2014 also saw the introduction of a revised Banco Santander group LTIP which included awards to UK Code Staff including the Executive Directors.
Planned activities for 2015
2015 will see a continued focus on ensuring that Santander UK’s remuneration practices remain robust and fair in an ever-changing regulatory environment. In July 2014, the UK regulators proposed significant changes to the Remuneration Code that, subject to the outcome of their consultation exercise, are expected to see changes coming into force in 2015. The proposed changes are aimed at strengthening the alignment of risk and reward in organisations such as ours and will have wide-ranging impacts on our remuneration structures and practices. Allied to the changes we expect to see in the Remuneration Code, will be the associated impacts resulting from the introduction of new UK regulatory frameworks to replace the Approved Persons regime. A major part of those new frameworks, the Senior Managers’ Regime, will cover Executive Directors. The proposed changes to the Remuneration Code will likely impose different deferral requirements on those under the umbrella of the Senior Managers’ Regime.
We will also be expecting the EBA to issue revised guidance to national regulators that will likely also shape future remuneration structures for regulated firms in the UK like ours. The Committee will continue to devote appropriate time to ensuring that these regulations are met and that they have the relevant understanding of the business to ensure that this is done in a way that continues to support Santander UK’s objectives. Against that backdrop, the Committee will be engaged in 2015 in assisting the Executive with a total remuneration review for the senior management group, including Executive Directors, to ensure our reward propositions are fair, consistent, market-competitive and compliant with those expected regulatory changes. The Committee will also be assisting the Executive with the implementation of the changes necessary to its remuneration framework, policies and processes to implement the PRA’s requirements on major banks to introduce clawback on variable remuneration paid after 1 January 2015.
As in previous years, we believe that in delivering on our strategic priorities, our people will be proud to work for Santander UK, our customers will be loyal and satisfied, and we will deliver consistent profitability and a strong balance sheet, enabling us to help people and businesses prosper. That is why we will ensure that pay is aligned to performance against those strategic priorities.
I hope you will find this summary clear and informative.
Roy Brown
Chair of Board Remuneration Oversight Committee
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Key activities in 2015
Our remuneration packages reflect the Simple, Personal and Fair standards applied across Santander UK. In 2015 we spent time understanding the interaction of remuneration and culture and how our remuneration structures influence our chosen behaviours. We performed a comprehensive review of our executive remuneration offering in order to optimise the structure of our package and enhance our competitiveness. We engaged with our colleagues in Risk to design a revised basis of assessment of current and future risks, linked to our Risk Appetite, prior to any award of variable remuneration from our annual bonus and long-term incentive plans. In addition, we collaborated with our colleagues on the Banco Santander Remuneration Committee in looking at a future single variable pay scheme incentivising both annual and long-term performance.
Membership
I would like to take this opportunity to thank Roy Brown his contribution to the Committee over the years. Roy stepped down as Committee Chair at the end of August and retired from the Committee and the Board at the end of the year. Mike Amato also left the Committee and the Board at the end of December. I welcome Ed Giera who joined us in August, as well as Chris Jones and Genevieve Shore, who both became members in September. Annemarie Durbin also joined us on 13 January 2016. These individuals bring a wealth of financial services, risk, strategy, digital and customer-focus experience.
Priorities for 2016
At Santander UK we are undergoing a period of further transformation as we implement our plan to achieve the strategic objectives we have set for the next three years. We will drive our digital agenda and manage our cost base, as well as prepare for the regulatory changes of Banking Reform. As we manage our performance, we will continue to balance the needs of our people, our customers, our communities and our shareholders. We will recognise the increasing competition for talent and the value our people bring to our business.
Annual Report 2015 Governance
REMUNERATION REPORTRemuneration report
Basis of preparation
This report has been prepared on behalf of the Board by the Board Remuneration Oversight Committee (‘the Committee’) in accordance with the LargeCommittee. We follow UK corporate governance regulations, guidelines and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013,codes to the extent practicable. Because the Company is not fully quoted (as defined by the Companies Act 2006), somethey are appropriate to our ownership structure. Accordingly, a number of the requirementsvoluntary disclosures relating to remuneration have no practical application for Santander UK and have not been included.presented in this report.
Remuneration policyExecutive remuneration policies and principles
Santander UK’s success depends upon the performance and commitment of talented employees. Our remuneration policies are designed to attract, retain and motivate high calibre individualswith the long-term success of the business in mind, to deliver our business strategy and reinforce our values in the context of a clearly articulated prudent Risk Appetite and a Santander UK-wide risk framework.values. We operate and apply a consistent approach to reward for all employees. In particular, our reward packages should support the delivery of our strategic priorities.
For the Executive Directors, base salaries are benchmarked to the median for our comparator group and an appropriate proportion of the total remuneration package is variable and linked to corporate, business unit and individual performance as well as Santander UK’s Risk Appetite. The Committee will ensure that individual remuneration packages are structured to align rewards with Santander UK’s performance. In this way, we balance the requirements of our major stakeholders.
The Committee reviews the performance targets in variable remuneration schemes regularly to ensure that they are both challenging and closely linked to Santander UK’s strategic priorities. Such schemes incorporate features to encourage sound risk management practices. These features include deferral of part of our annual bonus payments and the ability of the Committee to reduce or cancel the deferred element if it emerges that the original assessment of performance did not justify the award.
The performance of the Executive Directors for the purposes of any annual bonus award is assessed against a balanced scorecard incorporating financial and strategic measures. These focus on the following measures of the success of both Banco Santander, S.A. and Santander UK:
In reviewing Executive Director remuneration, the Committee takes into account the pay and employment conditionsreward of all our employees and we receive regular updateswhich upholds our prudent approach to Risk Appetite which is set as to such matters as salary increases for the general employee population, Company-wide benefit provisions and overall spend on annual incentives.part of a Santander UK-wide Risk Management Framework. No employee or Executive Director is involved in setting his/herdecisions about their own remuneration.
Governance
Directors’ Remuneration Report
continued
Elements of package
The key individual elements of the Executive Directors’Forward looking remuneration package are summarised below.
Fixed pay
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Further information on individual remuneration elements
Base salary
Base salaries were last increased with effect from March 2014. The table below sets out the base salaries for the Executive Directors at 31 December 2014
Our forward looking remuneration policies are outlined in the table below. The only change from 2015 being changes to annual and 2013.long-term incentive arrangements.
| Base salary | 2014 £000 | 2013 £000 | ||||||
Ana Botín (until 29 September 2014) | – | 1,702 | ||||||
Nathan Bostock (appointed 19 August 2014) | 1,450 | – | ||||||
José María Nus (resigned 1 April 2014) | – | 650 | ||||||
Stephen Jones | 550 | 525 | ||||||
Steve Pateman | 640 | 625 | ||||||
Variable pay | ||||||||
The Executive Directors participate in two variable pay plans: i) an annual bonus scheme, which rewards performance against challenging targets over the year; and ii) the Banco Santander group LTIP, as described in the ‘Elements of package’ section above.
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Ana Botín (until 29 September 2014) | 1,782 | 1,878 | ||||||
Nathan Bostock (appointed 19 August 2014) | 890 | – | ||||||
José María Nus (resigned 1 April 2014) | – | 563 | ||||||
Stephen Jones | 1,287 | 1,034 | ||||||
Steve Pateman | 1,500 | 1,324 | ||||||
Executive Directors’ remuneration onOn recruitment
Where we recruit an Executive Director (whether externally or internally), weWe aim to position the base salary of an Executive Director at an appropriate level, taking into consideration a range of factors including the individual’s previous remuneration, relevant experience, internal relativities, an assessment against relevant comparator groups and cost. Other elements of remuneration will be established in line with the Remuneration Policy set out in the executiveExecutive Directors’ remuneration structure table on page 174. Annual variablebelow.
Executive Directors’ remuneration structure
Fixed Pay
Principle and description | Policy | |||
| Base salary | – Market competitive pay appropriate for the role. – Fixed pay is set at a level such that it discourages inappropriate risk taking. – Reflects the responsibilities and experience of each individual. | – Salaries are set to reflect prevailing market and economic conditions and the approach to pay for all other employees. – The Committee considers the results of the annual pay review and, where appropriate, makes recommendations of changes in base salaries to the Board. | ||
| Pension arrangements | – Post-retirement benefits for participants are offered in a cost-efficient manner. | – All Executive Directors receive a cash allowance in lieu of pension. | ||
| Other benefits | – Benefits are offered to Executive Directors as part of a competitive remuneration package. | – Private medical insurance for Executive Directors and their dependants, life assurance and health screening. – Access to the Company’s all-employee share schemes on the same terms as all UK employees. | ||
Variable pay for new appointees will comprise a maximum award of 200% of fixed pay.
If the Committee concludes that it is necessary and appropriate to secure an appointment, relocation
Purpose and link to strategy | Operation | |||
| Annual incentive arrangements | – To motivate Executive Directors to achieve and exceed annual financial and strategic targets within the Company’s Risk Appetite and in alignment with our values. – Deferral of part of the annual bonus is applied in accordance with the requirements of the Remuneration Code. | – Awards are discretionary and determined by reference to performance against a scorecard of financial and strategic goals. – Awards may be made in cash and shares, but with a minimum of 50% of the award made in shares. – Share-based awards are subject to a minimum twelve month retention period following the relevant vesting date. – Malus and clawback provisions apply to all elements of variable pay. | ||
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Directors | Corporate Governance Report | Remuneration Report | Directors’ Report | |||||||||||||
Relocation support and international mobility benefits may also be provided depending on the circumstances. Any compensationprovided.
Compensation may be provided to an Executive DirectorDirectors recruited externally for the forfeiture of any award under variable pay arrangements entered into withfrom the previous employer is considered separately to the establishment ofemployer’s forward looking annualvariable remuneration arrangements. For such ‘buy-outs’, we seek to agree a reasonable level of award, on a like-for-like basis, taking into consideration the quantum of forfeited awards, their performance conditions and vesting timetable. The Committee retains discretion subject to the above, to make such compensation as it deems necessary and appropriate to secure the relevant Executive Director’s employment.
Service agreements
Governance
Directors’ Remuneration Report
continued
Executive Directors’ service agreements and terms
Executive Directors’ termsTerms and conditions of employment are set out in individual service agreements which include a notice period of six months.months from both the Executive Director and the Company. The agreements may be terminated immediately with paymentspayment of fixed pay in lieu of notice. In the event of termination for gross misconduct neither notice nor payment in lieu of notice is required and any deferred awards fall away.
Compensation for lossTermination payments
The impact of office inan Executive Directors’Director leaving the Company on remuneration under various scenarios reflects the service agreements is limited to the payment in lieu of notice. Payment of variable compensation is conditional onand the relevant planscheme rules, and the Committee’s policy in this area.
The Committee will determine whether an Executive Director is a ‘good leaver’ by virtue of their employment ending due to injury, ill-health, disability, redundancy, retirement, death, or is otherwise awardedany other reason at the Committee’s discretion. Typicallydiscretion (except for any circumstances justifying summary dismissal as determined by the amount is pro rata to the period of service during the year. The Committee has discretion to reduce the entitlement ofCommittee).
Other than a good leaverpayment in line with performance and the circumstances of the termination. In the event of a compromise or settlement agreement,redundancy for the Committee may make payments it considers reasonable in settlementCEO, none of potential legal claims. This may include an entitlement to compensation in respect of their statutory rights under employment protection legislation in the UK or other jurisdictions. The Committee may also include in such payments reasonable reimbursement of professional fees in connection with such arrangements.
The Executive Directors have servedservice contracts with Santander UK providing for benefits upon termination of employment. The CEO also remains a deferred member of Santander UK plc’s defined benefit pension scheme from previous service.
Risk and performance adjustment
All variable remuneration is subject to adjustments for all current and future risks as well as, on an individual basis, malus and clawback provisions. Performance adjustments may include, but are not limited to:
| – | Reducing a bonus outcome for the current year |
| – | Reducing the amount of any unvested deferred variable remuneration (including LTIP awards) |
| – | Requiring repayment on demand (on a net basis) of any cash and share awards received at any time during the seven year period after the date of award |
| – | Requiring a bonus which has been awarded (but not yet paid) to be forfeited. |
We will continue to ensure that the requirements of the Remuneration Code are met for our employees. We will prevent vesting of all or part of the amount of deferred remuneration in any of the following circumstances:
| – | Evidence of employee misbehaviour or material error |
| – | Material downturn in the Company or relevant business unit’s performance |
| – | The Company or relevant business unit suffers a material failure of risk management |
| – | Significant changes in the Banco Santander SA group’s or the Santander UK’s economic or regulatory capital base and the qualitative assessment of risks |
| – | A material restatement of the Banco Santander group’s or Santander UK’s financial statements (except when required due to modification of the accounting rules). |
In such circumstances, the Committee will have full discretion to determine the amount of deferred remuneration that will not vest or to extinguish an award altogether.
Annual Report 2015
Governance
Remuneration implementation report
Introduction
This report outlines how our Remuneration Policy was implemented in 2015.
The composition and total remuneration received by each Executive Director who held office during the year is shown in the table below.
Annual performance bonus
The 2015 annual performance bonus for Executive Directors was determined under four criteria (explained further below):
| – | A quantitative element of financial performance and return on assets |
| – | A qualitative element of adjustment by reference to a range of factors |
| – | A UK-focused customer service element |
| – | A UK-focused, overall risk adjustment measured against the Company’s Risk Appetite. |
Of the quantitative element, 55% of the bonus pool was based on Santander UK’s Net Operating Profit (NOP), 20% was based on Banco Santander’s NOP, 15% was based on Santander UK’s Return on Risk Weighted Assets (RoRWA) and 10% on Banco Santander’s RoRWA. In addition, the NOP element was subject to a further modifier whereby, if NOP for 2015 was 10% lower than the NOP for 2014, the bonus pool would be reduced by 5%. If NOP for 2015 was 10% higher than 2014, the bonus pool would be increased by 5%, with a sliding scale in between.
For the qualitative assessment, the bonus pool could be reduced or increased by up to 15% depending on an assessment of each of the following for Santander UK:
| – | Business results versus other UK banks |
| – | Overall effectiveness of risk management and efficient use of capital |
| – | Customer satisfaction scores |
| – | Overall contribution to the Banco Santander group. |
The UK-focused customer service element was based on Santander UK’s Financial Research Survey (FRS) results whereby the bonus pool could be reduced by up to 10% if Santander UK failed to reach its customer satisfaction targets.
Finally, an overall UK-focused risk adjustment linked to Santander UK’s Risk Appetite was applied. This provided both a formula-based assessment against Risk Appetite and an additional qualitative risk event assessment overlay that could only result in downward risk adjustment of up to 100% of the bonus pool or individual awards.
Long-Term Incentive Plan (LTIP)
LTIP performance has been measured against the growth in earnings per share (EPS), return on tangible equity (RoTE), employee satisfaction, customer satisfaction and customer loyalty of Banco Santander.
Rewarding Executives appropriately
The Committee reviews pay and reward annually and takes account of the remuneration trends elsewhere, including the relationship between Executive Director remuneration and the remuneration of other Santander UK employees. The Committee is also responsible for approving the design of any material performance-related pay plans operated by Santander UK. As part of our monitoring of pay across the Company, the Committee regularly reviews:
| – | Santander UK’s engagement with its recognised trade unions on matters relating to pay and benefits for all employees |
| – | Annual pay reviews for the general employee population |
| – | Santander UK group-wide benefit provisions |
| – | The design of, the monitoring of and the overall spend on annual incentive arrangements. |
Stakeholder views
Santander UK consults with shareholders and key stakeholders, such as its main regulators, the PRA and the FCA. Employee opinion surveys are undertaken annually on employee engagement, and discussion on remuneration matters generally takes place with union representatives during the annual pay review cycle and on relevant employee reward matters.
Executive Directors’ remuneration(audited)
Total remuneration of each Executive Director for the years ended 31 December 2015 and 2014
| Executive rewards | Nathan Bostock(1)(5) | Stephen Jones(2) (3) (6) | Steve Pateman (3) (7) | Ana Botín(4)(8) | José María Nus (9) | Total | ||||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||||||||||||||||||||||||||||||
| Salary | 1,601 | 535 | 460 | 546 | 527 | 637 | – | 1,699 | – | 516 | 2,588 | 3,933 | ||||||||||||||||||||||||||||||||||||
| Taxable benefits (cash and non-cash) | 37 | 6 | 1 | 1 | 1 | 1 | – | 34 | – | 3 | 39 | 45 | ||||||||||||||||||||||||||||||||||||
| Pension | 560 | 187 | 161 | 191 | 181 | 223 | – | – | – | – | 902 | 601 | ||||||||||||||||||||||||||||||||||||
| Bonus (paid and deferred) | 1,760 | 890 | 848 | 1,287 | – | 1,500 | – | 1,782 | – | – | 2,608 | 5,459 | ||||||||||||||||||||||||||||||||||||
| Total | 3,958 | 1,618 | 1,470 | 2,025 | 709 | 2,361 | – | 3,515 | – | 519 | 6,137 | 10,038 | ||||||||||||||||||||||||||||||||||||
| LTIP realised | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||
| Total remuneration | 3,958 | 1,618 | 1,470 | 2,025 | 709 | 2,361 | – | 3,515 | – | 519 | 6,137 | 10,038 | ||||||||||||||||||||||||||||||||||||
| LTIP granted | 240 | 150 | – | 165 | – | 165 | – | – | – | – | 240 | 480 | ||||||||||||||||||||||||||||||||||||
| (1) | Remuneration for Nathan Bostock does not include £1,800,000 (2014: £nil) relating to a buy-out of deferred performance-related programmes in respect of his previous employment. |
| (2) | Remuneration for Stephen Jones does not include £1,276,218 (2014: £1,451,589) relating to a buy-out of deferred performance-related programmes in respect of his previous employment. |
| (3) | Amounts shown related to pay as an Executive Director. Pay received after stepping down as an Executive Director was classed as pay as Key Management Personnel as defined in Note 41 of the Consolidated Financial Statements. |
| (4) | Additional benefit in kind of £11,000 paid in 2015 in respect of 2014 service. |
| (5) | Nathan Bostock joined the Company on 19 August 2014. |
| (6) | Stephen Jones stepped down as an Executive Director on 31 October 2015. |
| (7) | Steve Pateman stepped down as an Executive Director on 2 October 2015. |
| (8) | Ana Botín stepped down as an Executive Director on 29 September 2014. |
| (9) | José María Nus stepped down as an Executive Director on 1 April 2014. |
188 Santander UK plc
| Corporate | Directors’ | |||||||||||||||
Directors | Governance Report | Remuneration Report | Directors’ Report | |||||||||||||
Policy for all employees
Our performance, reward and benefits approach supports and drives our business strategy and reinforces our values in the context of a clearly articulated Risk Appetite. We apply a consistent approach to reward for all employees. Employees are entitled to a base salary and benefits, and have the opportunity to receive an element of performance-related compensation, subject to their role and reward band. The maximum opportunity of performance-related compensation available is based on the Boardseniority and responsibility of the role. In addition, a small minority of roles have benefited from a non-consolidated allowance. The operation of such allowances was reviewed in 2015 in light of regulatory developments.
Relative importance of spend on pay
The table below sets out the amounts and percentage change in profit and total employee costs for 2015 and 2014.
External consultants
In carrying out their responsibilities, the Committee seeks independent external advice as necessary. 2015 saw a change of independent advisers as a result of a recommendation to appoint PwC as Santander UK’s auditors for the periods shown belowaccounting period from 1 January 2016, subject to approval at our 2016 AGM. Therefore, the services of PwC to the Committee ceased on 31 October 2015. After that date, the Committee sought advice and assistance from Kepler, a brand of Mercer LLC, on all remaining matters pertaining to 2015. Fees (exclusive of VAT) for services provided during the financial year did not exceed £417,000 for PwC and £60,000 for Kepler.
| Relative importance of spend on pay | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| £m | £m | % | ||||||||||
Prot before tax | 1,342 | 1,399 | -4% | |||||||||
Total employee costs | 1,118 | 1,091 | 2% | |||||||||
Highest paid senior executives
The remuneration of the eight highest paid senior executives for the year ended 31 December 2014:2015 is detailed below. Senior executive officers are defined as members of the Executive Committee (excluding Executive Directors).
| Individuals | 1 £000 | 2 £000 | 3 £000 | 4 £000 | 5 £000 | 6 £000 | 7 £000 | 8 £000 | ||||||||||||||||||||||||
Fixed remuneration (including any | 732 | 799 | 825 | 703 | 609 | 637 | 564 | 595 | ||||||||||||||||||||||||
non-cash and taxable benefits) | ||||||||||||||||||||||||||||||||
Buy-out award(1) | – | – | – | – | 24 | – | – | – | ||||||||||||||||||||||||
Variable remuneration (cash – paid) | 205 | 120 | 103 | 94 | 121 | 93 | 110 | 95 | ||||||||||||||||||||||||
Variable remuneration (cash – deferred) | 307 | 181 | 155 | 141 | 182 | 140 | 165 | 142 | ||||||||||||||||||||||||
2015 remuneration | 1,244 | 1,100 | 1,083 | 938 | 936 | 870 | 839 | 832 | ||||||||||||||||||||||||
LTIP | 146 | 102 | 74 | 68 | 86 | 70 | 68 | 62 | ||||||||||||||||||||||||
Severance award
| _ | _ | _ | _ | _ | _ | _ | _ | ||||||||||||||||||||||||
| (1) | Buy-out of deferred performance related payments in connection with previous employment. |
Annual Report 2015
Governance
Board and Committee
membership, tenure, attendance and remuneration
| Board | Board Risk Committee | |||||||||||||||||||||||||||||||||||||
| Unscheduled | Schedule | |||||||||||||||||||||||||||||||||||||
| Meetings | meetings | Unscheduled | Meetings | Schedule | ||||||||||||||||||||||||||||||||||
| Appointed | Tenure to | eligible to | Meetings | eligible to | meetings | Membership | eligible to | Meetings | ||||||||||||||||||||||||||||||
| Name | Age | (Resigned) | year end | attend | attended | attend | attended | tenure | attend | attended | ||||||||||||||||||||||||||||
Chair | ||||||||||||||||||||||||||||||||||||||
Shriti Vadera(1) | 53 | 01.01.15 | 1y | 11 | 11 | 2 |
| 2
|
| |||||||||||||||||||||||||||||
Lord Burns | 71 |
| 01.12.01 (30.03.15 | ) | 13y 4m | 3 | 3 | – | – | |||||||||||||||||||||||||||||
Independent Non-Executive Directors | ||||||||||||||||||||||||||||||||||||||
Scott Wheway(2) | 49 | 01.10.13 | 2y 3m | 11 | 11 | 2 | 2 |  2y | 12 |
| 10
|
| ||||||||||||||||||||||||||
Ed Giera | 53 | 19.08.15 | 4m | 4 | 4 | – | – |  2m
| 4 | 4 | ||||||||||||||||||||||||||||
Chris Jones(3)
| 59 | 30.03.15 | 9m | 8 | 8 | 2 | 2 | 9m | 9 |
| 9
|
| ||||||||||||||||||||||||||
Alain Dromer | 61 | 01.10.13 | 2y 3m | 11 | 11 | 2 | 1 | 1m | – |
| –
|
| ||||||||||||||||||||||||||
Annemarie Durbin | 52 |
| 13.01.16
|
|  | |||||||||||||||||||||||||||||||||
Genevieve Shore | 46 | 18.05.15 | 7m | 7 | 6 | 1 | 1 | 4m | 4 |
| 4
|
| ||||||||||||||||||||||||||
Mike Amato | 59 |
| 01.08.13 (31.12.15 | ) | 2y 5m | 11 | 9 | 2 | 2 |  2y 3m | 12 | 11 | ||||||||||||||||||||||||||
Roy Brown(4)(5) (6) | 69 |
| 21.10.08 (31.12.15 | ) | 7y 2m | 11 | 11 | 2 | 1 | 7y 2m | 12 | 11 | ||||||||||||||||||||||||||
Rosemary Thorne(3) | 63 |
| 01.07.06 (30.06.15 | ) | 9y | 6 | 5 | 2 | – | 9y | 6 | 6 | ||||||||||||||||||||||||||
Banco Santander nominated Non-Executive Directors | ||||||||||||||||||||||||||||||||||||||
Ana Botín(7) | 55 | 01.12.10 | 5y 1m | 11 | 11 |
| 2
|
| – | |||||||||||||||||||||||||||||
Bruce Carnegie-Brown(8) | 56 | 01.10.12 | 3y 3m | 11 | 11 | 2 | 2 |  3y 1m
| 12 | 11 | ||||||||||||||||||||||||||||
José María Fuster | 57 | 01.12.04 | 11y 1m | 11 | 10 |
| 2
|
| 2 | |||||||||||||||||||||||||||||
Juan Rodríguez Inciarte(9) | 63 | 01.12.04 | 11y 1m | 11 | 11 |
| 2
|
| 1 | 4m | 4 | 4 | ||||||||||||||||||||||||||
Manuel Soto | 75 | 01.11.13 | 2y 2m | 11 | 11 |
| 2
|
| 2 | |||||||||||||||||||||||||||||
José María Carballo | 71 |
| 01.12.04 (30.03.15 | ) | 10y 4m | 3 | 3 | – | – | 3y 3m | 3 | 3 | ||||||||||||||||||||||||||
Antonio Escámez | 64 |
| 01.10.12 (31.12.15 | ) | 3y 3m | 11 | 11 | 2 | 2 | 2y 7m | 12 | 10 | ||||||||||||||||||||||||||
Executive Directors | ||||||||||||||||||||||||||||||||||||||
Nathan Bostock | 55 |
| 19.08.14
|
| 1y 4m
| 11 | 11 | 2 | 2 | |||||||||||||||||||||||||||||
Stephen Jones(10) | 51 |
| 06.03.12 (31.10.15 | ) | 3y 8m | 9 | 8 | 2 | 2 | |||||||||||||||||||||||||||||
Steve Pateman(11) | 52 |
| 01.06.11 (02.10.15 | ) | 4y 4m | 8 | 8 | 2 | 2 | |||||||||||||||||||||||||||||
Total
| ||||||||||||||||||||||||||||||||||||||
| (1) | Appointed Chair on 30 March 2015. |
| (2) | Senior Independent Director since 18 May 2015. |
| (3) | Deemed financial expert. |
| (4) | Previously a director of Alliance & Leicester plc since April 2007. |
| (5) | Chair of Board Remuneration Committee to 1 September 2015 and member until 31 December 2015. |
| (6) | Previously on Board Audit and Risk Committee since October 2008. |
| (7) | Executive Director and CEO from 1 December 2010 to 29 September 2014. |
| (8) | Resigned as Chair of Board Risk Committee on 26 October 2015 but remains a member. |
| (9) | Deputy Chairman. |
| (10) | Stepped down as CFO and Executive Director on 31 October 2015 and left Santander UK on 9 December 2015. |
| (11) | Stepped down as an Executive Director on 2 October 2015 and left Santander UK on 31 December 2015. |
| (12) | In addition to the above fees, Non-Executive Directors are reimbursed expenses that are incurred for business reasons. Any tax that arises on these reimbursed expenses is paid by Santander UK. Aggregate expenses, inclusive of tax paid by Santander UK, for 2015 were £115,382 (2014: £162,723). |
| (13) | In addition to the above fees, Shriti Vadera is entitled to taxable benefits as follows: private medical cover of £413 (2014: £nil) and transportation of £21,544 (2014: £nil). |
| (14) | In addition to the above fees, Lord Burns was entitled to taxable benefits as follows: transportation of £4,222 (2014: £23,694). |
| Unless otherwise stated, Non-Executive Directors do not receive any other remuneration from the Company. |
190 Santander UK plc
| Corporate | Directors’ | |||||||||||||||
Directors | Governance Report | Remuneration Report | Directors’ Report | |||||||||||||
| Total Non-Executive | ||||||||||||||||||||||||||||||||||||||
| Board Audit Committee | Board Remuneration Committee | Board Nomination Committee | fees (audited) (12-14) | |||||||||||||||||||||||||||||||||||
| Meetings | Meetings | Meetings | ||||||||||||||||||||||||||||||||||||
| Membership | eligible to | Meetings | Membership | eligible to | Meetings | Membership | eligible to | Meetings | 2015 | 2014 | ||||||||||||||||||||||||||||
| tenure | attend | attended | tenure | attend | attended | tenure | attend | attended | £000 | £000 | ||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
| 1y
| 11 | 11 | 650 | – | ||||||||||||||||||||||||||||||||||
| 3y 6m
| 3 | 3 | 158 | 600 | ||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
| 4m | 4 | 4 | 4m
| 9 | 9 | 2y | 12 | 12 | 189 | 155 | ||||||||||||||||||||||||||||
| 4m | 4 | 4 | 4m | 4 | 3 | 4m
| 4 | 4 |
| 69
|
| – | ||||||||||||||||||||||||||
| 6m
| 10 | 10 | 4m | 4 | 4 | 7m | 7 | 7 |
| 137
|
| – | ||||||||||||||||||||||||||
| 2y | 13 | 13 | 2y | 9 | 9 | 1y 7m
| 7 | 7 | 150 | 155 | ||||||||||||||||||||||||||||
| | | |||||||||||||||||||||||||||||||||||||
| 4m | 4 | 4 | 4m | 4 | 4 | 81 | – | |||||||||||||||||||||||||||||||
| 2y | 9 | 6 | 1y 7m
| 7 | 7 | 149 | 155 | |||||||||||||||||||||||||||||||
| 6y | 9 | 8 | 3y 10m
| 7 | 7 | 160 | 175 | |||||||||||||||||||||||||||||||
| 9y | 6 | 6 | 3y 9m
| 6 | 5 | 98 | 195 | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
| 5m
| 5 | 4 | – | – | ||||||||||||||||||||||||||||||||||
| 2y 8m | 5 | 4 | 3y 3m | 9 | 7 | 2y 9m
| 12 | 12 | 36 | 215 | ||||||||||||||||||||||||||||
|
| –
|
| – | |||||||||||||||||||||||||||||||||||
| 3y 10m
| 7 | 7 | – | – | ||||||||||||||||||||||||||||||||||
| 2y | 13 | 13 |
| 115
|
| 115 | ||||||||||||||||||||||||||||||||
|
| 29
|
| 115 | |||||||||||||||||||||||||||||||||||
|
| 86
|
| – | |||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
| –
|
| – | |||||||||||||||||||||||||||||||||||
|
| –
|
| – | |||||||||||||||||||||||||||||||||||
|
| –
|
| – | |||||||||||||||||||||||||||||||||||
|
| 2,107
|
| 1,880 | |||||||||||||||||||||||||||||||||||
| ||||
| ||||
| ||||
| Directors at 31 December 2015 | ||||
| or appointed post year end | ||||
| | Chair of Committee (y = years, m = months) | |||
| | Committee Member (y = years, m = months) | |||
| | Appointed in 2016 | |||
| Directors resigned during the year | ||||
| | Chair of Committee (y = years, m = months) | |||
| | Committee Member (y = years, m = months) |
Other directorships
None of the current Executive Directors hold any paid external directorships.
Former directors
Annual Report 2015
Ana Botín ceased to be an Executive Director on 29 September 2014, but has continued as a Non-Executive Director of the Company. José María Nus resigned as an Executive Director on 1 April 2014 on his appointment to a senior position with Banco Santander, S.A. in Spain.Governance
Shareholding requirements
There is no requirement on Executive Directors to build a shareholding in the shares of Banco Santander, S.A. as a result of their employment by Santander UK.
Chair and Non-Executive DirectorsDirectors’ remuneration
The Chair’s fee is reviewed and approved by the Committee. The fees paid to Non-Executive Directors are reviewed and approved by the Executive Directors and the Chair. Fees are reviewed annually taking into account information on fees paid in similar companies, as well as the time commitment for the role.
Non-Executive Directors are paid a base fee, with an additional supplement for serving on or chairing a Board Committee.
The fee policy is reviewed annually andannually. Non-Executive DirectorsDirectors’ fees were increasedrevised with effect from 1 January 2014.September 2015 resulting in removal of the fee for membership of the Board Nomination Committee, and an increase to the fees for Chair and members of the Board Remuneration Committee to £60,000 and £25,000 respectively (2014: £40,000 and £20,000). This reflects the heightened governance role of the Remuneration Committee. A market-competitive fee of £30,000 was agreed for the introduction in 2015 of the role of the Senior Independent Director. The 20142015 fee structure is shown in the table below.
| Fees paid | Board | Board | Board | Board | Board | |||||||||||||||
| Audit | Risk | Remuneration | Nomination | |||||||||||||||||
| Committee | Committee | Oversight | Committee | |||||||||||||||||
| Committee | ||||||||||||||||||||
| £000 | £000 | £000 | £000 | £000 | ||||||||||||||||
Chair (inclusive of membership fee) | 625 | (1) | 60 | 60 | 40 | – | ||||||||||||||
Member | 90 | 25 | 25 | 20 | 20 | |||||||||||||||
All Non-Executive Directors and the Chair serve under letters of appointment and either party can terminate on three months’ written notice, except in the case of the Chair and Shriti Vadera as Joint Deputy Chair where 12twelve months’ written notice is required. Neither the Chair nor the Non-Executive Directors have the right to compensation on the early termination of their appointment beyond payment in lieu of notice at the option of the Company. NeitherIn addition, neither the Chair nor the Non-Executive Directors are eligible for pension scheme membership, bonus or incentive arrangements.
Chair and Board Committee member fees | Board
£000 | Board Risk Committee £000 | Board Audit Committee £000 | Board Remuneration Committee £000 | Board Nomination Committee £000 | |||||||||||||||
Chair (inclusive of membership fee)
|
| 650
|
|
| 60
|
|
| 60
|
|
| 60
|
|
| –
|
| |||||
Member | 90 | 25 | 25 | 25 | – | |||||||||||||||
192 Santander UK plc
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|
|
|
| ||||||||||||
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|
|
| |||||||||||||
| Corporate | Directors’ | |||||||||||||||
Directors
Chair and Non-Executive Directors’ fees
| Fees paid | Board | Board | Board | Board | Board | Total | Total | |||||||||||||||||||||
| Audit | Risk | Remuneration | Nomination | 2014 | 2013 | |||||||||||||||||||||||
| Committee | Committee | Oversight | Committee | |||||||||||||||||||||||||
| Committee | ||||||||||||||||||||||||||||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||||||||||||||||||||||
Lord Burns | 625 | * | – | – | – | – | * | 625 | 600 | |||||||||||||||||||
Ana Botín (from 29 September 2014)(1) | – | – | – | – | – | – | – | |||||||||||||||||||||
Roy Brown | 90 | – | 25 | 40* | 20 | 175 | 172 | |||||||||||||||||||||
José María Carballo | 90 | – | 25 | – | – | 115 | 150 | |||||||||||||||||||||
Antonio Escámez | – | – | – | – | – | – | – | |||||||||||||||||||||
Bruce Carnegie-Brown | 90 | 25 | 60* | 20 | 20 | 215 | 185 | |||||||||||||||||||||
José María Fuster | – | – | – | – | – | – | – | |||||||||||||||||||||
Juan Rodríguez Inciarte | – | – | – | – | – | – | – | |||||||||||||||||||||
Rosemary Thorne | 90 | 60* | 25 | – | 20 | 195 | 185 | |||||||||||||||||||||
Mike Amato | 90 | – | 25 | 20 | 20 | 155 | 40 | |||||||||||||||||||||
Alain Dromer | 90 | 25 | – | 20 | 20 | 155 | 20 | |||||||||||||||||||||
Scott Wheway | 90 | – | 25 | 20 | 20 | 155 | 20 | |||||||||||||||||||||
Manuel Soto | 90 | 25 | – | – | – | 115 | 13 | |||||||||||||||||||||
Governance
Report
Remuneration
Report
Directors’ Report
Governance
Directors’ Remuneration Report
continuedreport
REMUNERATION IMPLEMENTATION REPORT
Introduction
This Remuneration Implementation Report outlines how our Remuneration Policy was implemented in 2014 and how it is intended to operate in 2015.
Role of the Board Remuneration Oversight Committee
The Committee operates according to formal Terms of Reference which are reviewed regularly in light of best practice and legal, regulatory and corporate governance developments.
The Committee is primarily responsible for overseeing and supervising the Banco Santander group’s policies and frameworks covering remuneration and reward as applied in, or devolved to the UK. It provides governance and strategic input into Santander UK’s executive and employee remuneration and reward activities. Furthermore, it plays a key role in ensuring the UK framework and reward strategy attracts and retains talent, motivates performance and ensures compliance with regulatory remuneration requirements, whilst encouraging the demonstration of appropriate behaviours. The Committee’s full Terms of Reference are available on Santander UK’s website www.aboutsantander.co.uk.
External consultants
In carrying out their responsibilities, the Committee seeks independent external advice as necessary and continued to retain the services of PwC during the year. The Committee first appointed PwC as independent advisors in 2012, following a competitive tender process. PwC attended all Committee meetings during 2014, providing independent commentary on matters under consideration by the Committee, supporting the approach to compliance with remuneration regulations and providing updates on legislative requirements, best practice and market practice appropriate to the remit of the Committee. PwC charged fees based on a time and materials basis, applying a rate card, and fees for services provided during the financial year did not exceed £300,000 inclusive of VAT.
The Committee is comfortable that the PwC engagement partner and team provide objective and independent remuneration advice to the Committee and do not have any connections with the Company that may impair their independence. In addition to providing advice on executive remuneration, PwC has provided other consultancy advice to the Santander UK group in the financial year. However, the Committee was not involved in the recommendation of their appointment and is satisfied there is no conflict with their role as independent advisers to the Committee.
PwC is a founding member of the Remuneration Consultants Group and voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The code of conduct can be found at www.remunerationconsultinggroup.com.
In addition to the use of PwC as independent consultants, the Committee is also supported by the Chief People Officer & General Counsel, the Reward Director, the Chief Risk Officer, the Director of Compliance and the Company Secretary who provide support and advice to the Committee, as required.
Membership of the Board Remuneration Oversight Committee
During 2014, the Committee comprised Roy Brown (Chair), Bruce Carnegie–Brown, Mike Amato, Alain Dromer and Scott Wheway.
The Chair of the Board, the CEO, the Chief Financial Officer, the Financial Controller, the Chief Risk Officer, the Company Secretary and the Chief People Officer & General Counsel are able to attend meetings upon request, except in instances where their own remuneration and/or reward arrangements are discussed, or in other circumstances where their attendance would not be appropriate.
Policy considerations of employment conditions elsewhere in Santander UK
The Committee reviews annually and takes account of the remuneration trends elsewhere including the relationship between Executive Director remuneration and the remuneration of other Santander UK employees. The Committee is also responsible for approving the design of, and determining targets for, any material performance-related pay plans operated by Santander UK. The Committee is kept informed on a regular basis as to:
Stakeholders’ views
Santander UK recognises the value of regular dialogue with stakeholders. Santander UK consults with investor representatives and key stakeholders, such as Santander UK’s main regulators, the FCA and the PRA. Formal consultation on the remuneration of Executive Directors is not undertaken with employees. However, employee opinion surveys are undertaken annually on employee engagement, and discussion on remuneration matters generally takes place with union representatives during the annual pay review cycle and on relevant employee reward matters.
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Differences in remuneration policy for all employees
Our performance, reward and benefits approach supports and drives our business strategy and reinforces our values in the context of a clearly articulated Risk Appetite. We apply a consistent approach to reward for all employees. All employees are entitled to base salary and benefits and have the opportunity to receive an element of performance-related compensation, subject to their role and reward band. The maximum opportunity of performance-related compensation available is based on the seniority and responsibility of the role. In addition, a small minority of roles have benefitted from a non-consolidated allowance where there has been upward developments in fixed remuneration in comparator roles outside Santander UK which may be a temporary change in market conditions. Such allowances give Santander UK a degree of flexibility in its fixed remuneration proposition. The operation of such allowances will be reviewed in 2015 in light of regulatory developments in 2014.
Relative importance of spend on pay
The amounts and percentage change in profit and total employee costs for the years ended 31 December 2014 and 2013 were:
| 2014 £000 | 2013 £000 | Change % | ||||||||||
Profit before tax | 1,399 | 1,109 | 26 | |||||||||
Total employee costs | 1,091 | 978 | 12 | |||||||||
Aggregate Directors’ remuneration
The total remuneration of the Directors for the years ended 31 December 2014 and 2013 was:
2014 £ | 2013 £ | |||||||
Salaries and fees | 6,697,041 | 6,183,203 | ||||||
Performance-related payments(1) | 5,459,000 | 4,800,051 | ||||||
Other taxable benefits | – | – | ||||||
Total remuneration excluding pension contributions | 12,156,041 | 10,983,254 | ||||||
Pension contributions | – | – | ||||||
Compensation for loss of office | – | – | ||||||
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12,156,041 |
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Executive Directors’ remuneration(audited)
The total remuneration of each Executive Director for the years ended 31 December 2014 and 2013 was:
| Salary and fees | Other benefits(1) | Performance related payments (Paid and deferred) (2) (3) | LTIP(3) | Pension allowance | Total | |||||||||||||||||||||||||||||||||||||||||||
| 2014 £000 | 2013 £000 | 2014 £000 | 2013 £000 | 2014 £000 | 2013 £000 | 2014 £000 | 2013 £000 | 2014 £000 | 2013 £000 | 2014 £000 | 2013 £000 | |||||||||||||||||||||||||||||||||||||
Ana Botín(4) | 1,699 | 1,978 | 34 | 52 | 1,782 | 1,878 | – | – | – | – | 3,515 | 3,908 | ||||||||||||||||||||||||||||||||||||
Nathan Bostock | 535 | – | 6 | – | 890 | – | – | – | 187 | – | 1,618 | – | ||||||||||||||||||||||||||||||||||||
José María Nus | 516 | 1,122 | 3 | 10 | – | 563 | – | – | – | – | 519 | 1,695 | ||||||||||||||||||||||||||||||||||||
Steve Pateman | 637 | 625 | 1 | 1 | 1,500 | 1,324 | – | – | 223 | 219 | 2,361 | 2,169 | ||||||||||||||||||||||||||||||||||||
Stephen Jones(5) | 546 | 525 | 1 | 1 | 1,287 | 1,034 | – | – | 191 | 184 | 2,025 | 1,744 | ||||||||||||||||||||||||||||||||||||
Total | 3,933 | 4,250 | 45 | 64 | 5,459 | 4,799 | – | – | 601 | 403 | 10,038 | 9,516 | ||||||||||||||||||||||||||||||||||||
These totals exclude emoluments received by Executive Directors in respect of their primary duties as directors or officers of Banco Santander, S.A. in respect of which no apportionment has been made. No Executive Directors participate in Santander UK’s Defined Benefit pension scheme, although Nathan Bostock is a deferred member of that scheme from previous service with Santander UK.
Governance
Directors’ Remuneration Report
continued
Chair and Non-Executive Directors’ remuneration(audited)
The single total amounts of remuneration for each Non-Executive Director for the years ended 31 December 2014 and 2013 were:
| Total remuneration | ||||||||
| 2014 £000 | 2013 £000 | |||||||
Chair | ||||||||
Lord Burns | 670 | 625 | ||||||
Non-Executive Directors | ||||||||
Ana Botín (appointed 29 September 2014)(1) | – | – | ||||||
Roy Brown | 189 | 183 | ||||||
José María Carballo | 115 | 150 | ||||||
Antonio Escámez | – | – | ||||||
Bruce Carnegie-Brown | 215 | 190 | ||||||
José María Fuster | – | – | ||||||
Juan Rodríguez Inciarte | – | – | ||||||
Rosemary Thorne | 200 | 190 | ||||||
Mike Amato | 250 | 65 | ||||||
Alain Dromer | 168 | 23 | ||||||
Scott Wheway | 167 | 23 | ||||||
Manuel Soto | 144 | 18 | ||||||
Total | 2,118 | 1,467 | ||||||
These totals exclude emoluments received by Directors in respect of their primary duties as directors or officers of Banco Santander, S.A. in respect of which no apportionment has been made.
Exit payments
Ana Botín left the Company’s service as an Executive Director during the year ended 31 December 2014, but remained as a Non-Executive Director from 29 September 2014. In addition, José María Nus left the Company’s service in the year and returned to a senior role in the Banco Santander group. No payments for compensation for loss of office were paid to, or receivable by, Ana Botín, José María Nus or any other Director. Certain past directors receive ex-gratia pensions as set out in Note 42 to the Consolidated Financial Statements.
Annual performance bonus
For each Executive Director, the 2014 bonus is assessed on performance against targets for net income and capital usage, and the aggregate bonus pool was adjusted based on a mix of key performance indicators.
Based on the financial and risk adjustment assessment, the Committee applies its judgement in determining the bonus outcomes. It takes into consideration any other factors, particularly in relation to legacy issues and conduct risk matters.
Long-Term Incentive Plan
In 2014, the Executive Directors were granted conditional awards under the revised Banco Santander, S.A. group LTIP. The following table shows those conditional awards under the LTIP. Further information on the LTIP can be found in note 42 to the Consolidated Financial Statements.
| 2014 £000 | 2013 £000 | |||||||
Ana Botín | – | – | ||||||
Nathan Bostock | 150 | – | ||||||
Stephen Jones | 165 | – | ||||||
Steve Pateman | 165 | – | ||||||
Certain Key Management Personnel and other nominated individuals were granted conditional awards under the 2014 LTIP. Further details can be found in Note 42 to the Consolidated Financial Statements.
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Other remuneration disclosures
The remuneration of the eight highest paid senior executive officers for the year ended 31 December 2014 is detailed below. Senior executive officers are defined as members of the Executive Committee (excluding Executive Directors).
| Individuals | 1 £000 | 2 £000 | 3 £000 | 4 £000 | 5 £000 | 6 £000 | 7 £000 | 8 £000 | ||||||||||||||||||||||||
Fixed remuneration (including any | 1,049 | 737 | 673 | 542 | 746 | 727 | 433 | 513 | ||||||||||||||||||||||||
non-cash and taxable benefits) | ||||||||||||||||||||||||||||||||
Buy-out award(1) | – | – | – | 120 | – | – | – | – | ||||||||||||||||||||||||
Variable remuneration (cash – paid) | 360 | 472 | 424 | 250 | 216 | 204 | 302 | 260 | ||||||||||||||||||||||||
Variable remuneration (cash – deferred) | 540 | 708 | 636 | 375 | 324 | 306 | 452 | 390 | ||||||||||||||||||||||||
2014 remuneration | 1,949 | 1,917 | 1,733 | 1,287 | 1,286 | 1,237 | 1,187 | 1,163 | ||||||||||||||||||||||||
LTIP | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Severance award | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
By Order of the Board Remuneration Oversight Committee
Roy Brown
24 February 2015
Introduction
The Directors have pleasure in submitting their report together with the financial statements for the year ended 31 December 2014.2015. The information in the Directors’ Report is unaudited, except where marked as audited.marked.
CorporateHistory and corporate structure
Santander UK plc is a subsidiary of Banco Santander SA, a retail and commercial bank based in Spain. Santander UK Group Holdings Limited, which is a wholly owned subsidiarywas formed from the acquisition of Banco Santander, S.A..three former building societies Abbey National, Alliance & Leicester, and Bradford & Bingley. The ordinary shares of the Company are not traded on the London Stock Exchange. Note 23 to the Consolidated Financial Statements provides atraded. A list of the principal subsidiaries of the Company, the nature of each subsidiary’s business and details of branches.branches is provided in the Shareholder information section. Note 3836 to the Consolidated Financial Statements provides details of the Company’s share capital.
The structuralStructural relationship of Santander UK with the Banco Santander group – the ‘subsidiary model’
The Banco Santander group operates a ‘subsidiary model’. This model involves autonomous units, such as Santander UK, operating in core markets, with each unit being responsible for its own liquidity, funding and capital management on an on-going basis. The model is designed to minimise the risk to the Banco Santander group, and all its units, from problems arising elsewhere in the Banco Santander group. The subsidiary model means that Banco Santander S.A.SA has no obligation to provide any liquidity, funding or capital assistance, although it enables Banco Santander S.A. to take advantage selectively of opportunities. As a PRA regulated entity, Santander UK is expected to satisfy the PRA liquidity and capital requirements on a standalone basis.
Under the subsidiary model, Santander UK plc primarily generates funding and liquidity through UK retail and corporate deposits, as well as in the financial markets through its own debt programmes and facilities to support its business activities and liquidity requirements. It does this by relying on the strength of its own balance sheet and profitability, and its own network of investors. It does not rely on a guarantee from Banco Santander S.A.SA or any other member of the Banco Santander group, (otherother than certain of the Company’s own subsidiaries)subsidiaries and its immediate holding company, Santander UK Group Holdings plc to generate this funding or liquidity. Santander UK does not raise funds to finance other members of the Banco Santander group or guarantee the debts of other members of the Banco Santander group (other than certain of the Company’s own subsidiaries).and its immediate holding company, Santander UK Group Holdings plc.
Exposures to other Banco Santander group members are established and managed on an arm’s length commercial basis. All inter-groupintra-group transactions are monitored by the Santander UK Board Risk Committee and transactions which are not in the ordinary course of business must be pre-approved by the Santander UK Board. In addition, Santander UK is subject to PRA limits on exposures to, and on liquidity provided to, other members of the Banco Santander group.
The subsidiary model gives Santander UK considerable financial flexibility, yet enables it to continue to take advantage of the significant synergies and strengths that come from being part of the global Banco Santander group, in brand, products, systems, platforms, development capacity and management capability. In the subsidiary model, the Banco Santander group facilitates the sharing of best practice and provides common technology, operations and support services to all of its subsidiaries via independent operating entities, themselves established by the Banco Santander groupSA so as to be able to continue operating as viable standalone businesses.
Whilst the Company is a subsidiary of Banco Santander, S.A., the Company’s corporate governance model ensures that the Board and Executive make their own decisions on funding, capital and liquidity, having regard to what is appropriate for Santander UK’s business and strategy.
Business review
Details of Santander UK’s activities and business performance during 2014 are set out in the Strategic Report on pages 1 to 24 and the Financial Review on pages 189 to 218.
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ProfitResult and dividends
The consolidated profit after tax for the year was £1,110m (2013: £890m)£964m (2014: £1,110m). The Directors do not recommend the payment of a final dividend for 2014 (2013:2015 (2014: £nil). TwoThree interim dividends were declared on the Company’s ordinary shares in issue during the year. The first dividend of £237m£0.6m was declared on 24 June 2014 and paid on 24 September 2014;March 2015, the second dividend of £250m£324m was declared on 23 June 2015 and paid on 28 September 2015. The third dividend of £102m was declared on 16 December 20142015 and is expected to be paid in March 2015.2016.
Details of Santander UK’s activities and business performance during 2015, together with an indication of future outlook are set out in the Strategic report on pages 1 to 4 and the Financial review on pages 5 to 34.
Events after the balance sheet date
On 3 February 2015, the Santander UK group through Santander Consumer (UK) plc (‘SCUK’) entered into an agreement with Banque PSA Finance, S.A. (‘BPF’), the auto finance unit of Group PSA Peugeot Citroën, to purchase 50% of the shares of PSA Finance UK Limited (‘PSA’). PSA, BPF and SCUKThere have set up a corporation to offer a range of consumer finance and insurance products and services for individuals, businesses and distribution networks in the automotive industry.
Share capital
Details of the Company’s share capital, including the rights and restrictions that apply to each class of shares, can be found in Note 38 to the Consolidated Financial Statements which are incorporated by reference into this report. The powers of the Directors in relation to share capital are set out in the Company’s Articles of Association and as determined by the UK Companies Act 2006.
Research and development
Santander UK has a comprehensive product approval process and policy and develops new products and services in each of its business divisions in the ordinary course of business. All new products, campaigns and business initiatives are reviewed and approved by Santander UK’s Product Approval and Oversight Committee.
Financial instruments
The financial risk management objectives and policies of Santander UK, the policy for hedging each major type of forecasted transaction for which hedge accounting is used, and the exposure of Santander UK to credit risk, market risk, and liquidity risk are outlined in the Risk Review.been no material post balance sheet events.
Directors
The names and biographical details of the current Directors are set outshown on pages 146162 to 151 and are incorporated into this report by reference. The details166.
Particulars of their remuneration are set outemoluments and interests in shares can be found in the notes as indicated below. Nathan Bostock was appointedDirectors’ Remuneration Report on pages 184 to 192.
Changes to the Board on 19 August 2014 and assumed the rolecomposition of CEO on 29 September 2014. Ana Botín relinquished her office as CEO on 29 September 2014 following her appointment as Executive Chairman at Banco Santander, S.A.. In addition, José María Nus resigned from the Board can be found on 1 April 2014pages 190 to return191, with further details, in the Chair’s report on Corporate Governance, on pages 167 to a senior role at Banco Santander, S.A.. Shriti Vadera joined170, and the Board as Joint Deputy ChairChair’s report on 1 January 2015each Committee on pages 171, 173, 178, and will succeed Lord Burns as Non-Executive Chair on 30 March 2015.184.
Appointment and retirement of Directors
All Directors are appointed and retired in accordance with the Company’s Articles of Association and the UK Companies Act 2006. The Company does not require the Directors to offer themselves for re-election every year, or that new Directors appointed by the Board offer themselves for election at the next Annual General Meeting. All Non-Executive Directors, including the Chair, serve under letters of appointment and either party can terminate on three months’ written notice, except in the case of the Chair and Shriti Vadera as Joint Deputy Chair where 12 months’ written notice is required. The appointments of Ana Botín, Juan Rodríguez Inciarte, José María Fuster,Bruce Carnegie-Brown, Antonio Escámez, José María Carballo, José María Nus, Antonio EscámezFuster, Juan Rodríguez Inciarte, and Manuel Soto were all proposed by Banco Santander, S.A.. The Company may paySantander. No Directors’ service contracts provide for benefits on termination, except in the case of redundancy of an Executive Director in lieu of notice instead of requiring them to serve their notice period. The details of their emoluments and interests can be found in the remuneration report on pages 173 to 181.
Directors’ remuneration, retirement benefits, interests and related party transactions (audited)
Details of aggregate remuneration received by the Directors of the Company in 2014 and 2013 are found in Note 42 to the Consolidated Financial Statements. The remuneration, excluding pension contributions, of the highest paid Director are contained in the Directors’ Remuneration Reportas stated on page 179 and Note 42 to the Consolidated Financial Statements. Details of the fees paid to Non-Executive Directors in 2014 and 2013 are contained in the Directors’ Remuneration187.
Annual Report on page 180. Defined benefit pension schemes are provided to certain Santander UK employees. See Note 36 to the Consolidated Financial Statements for a description of the schemes and the related costs and obligations and Note 42 to the Consolidated Financial Statements for retirement benefits accruing for any directors under a defined benefit scheme. For details of related party transactions, see Note 43 to the Consolidated Financial Statements.2015
Directors’ indemnitiesGovernance
Indemnities are provided to the Directors of the Company, its subsidiaries and associated companies by the Company against liabilities and associated costs which they could incur in the course of their duties to the Company. A copy of each of the indemnities is kept at the Company’s registered address shown in ‘Contact and Other Information’ in the ‘Shareholder Information’ section of this Annual Report.
 | For aggregate Directors’ remuneration see Note 41 | |
| For highest paid Director details see Note 41 to the Consolidated Financial Statements | |
| For Executive remuneration see pages 186 to 189 | |
| For Non-Executive remuneration see pages 190 to 192 | |
| For pension scheme details see Note 34 to the Consolidated Financial Statements | |
| For related party transactions see Note 42 to the Consolidated Financial Statements | |
| For our Risk review see pages 35 to 160 | |
Governance
Directors’ Reportindemnities
continued
Employees
Our goalIn addition to be the best bank for our customers is only achievable if we reach our aspirationDirectors and Officers liability insurance cover in place throughout 2015, individual deeds of indemnity were also in place to be the best bank for our people. An environment that provides excellent opportunities for career progression, and a culture that recognises individual needs and encourages accountability and teamwork are key to achieving this goal.
Employee involvement
Communication
Santander UK wants to involve and inform employees on matters that affect them. The intranet is a focal point for communications with daily updates on what is happening across Santander UK. ‘The Village’ is a social site for staff to share information, ideas and best practice. The ‘We are Santander’ site connects staff to all the information they need about working for Santander UK. Santander UK also uses face-to-face communication, such as team meetings, regional roadshows and annual staff conventions for strategic updates. All these channels are designed to keep employees fully informed of news and developments which may have an impact on them, and also to keep them up to date on financial, economic and other factors which affect Santander UK’s performance. Santander UK considers employees’ opinions and asks for their views on a range of issues through regular Company-wide surveys.
Consultation
Santander UK has a successful history of working in partnership with its recognised trade unions, Advance and the Communication Workers Union (‘CWU’). Both trade unions are affiliatedprovide cover to the Trades Union Congress. We consult AdvanceDirectors for liabilities to the maximum extent permitted by law. These remain in force for the duration of the Director’s period of office from the date of appointment. The Directors of the Company, including former Directors who resigned during the year, benefit from these deeds of indemnity. They constitute qualifying third party indemnity provisions for the purposes of the Companies Act 2006. Deeds for existing Directors are available for inspection at the Company’s registered office.
The Company has also granted an indemnity which constitutes ‘qualifying third party indemnity provisions’ to the Directors of its subsidiary and associated companies, including former Directors who resigned during the CWU on significant proposalsyear and change initiatives withinsince the business at both national and local levels.year-end.
Employee share ownership
Santander UK continues to operate two all-employee, HMRC-approved share schemes: a Save-As-You-Earn (‘Sharesave’) Scheme and a Share Incentive Plan (‘SIP’), the latter of which allows employees to purchase Banco Santander, S.A. shares from gross salary. Eligible senior management can participate in a Banco Santander group long-term incentive plan. In addition, for certain eligible employees, arrangements remain outstanding under the closed Alliance & Leicester SIP. Shares haveQualifying pension scheme indemnities were also been granted to eligible employees in receipt of vested deferred bonus awards. All the share options and awards relate to shares in Banco Santander, S.A. See Note 41 to the Consolidated Financial Statements for a description of the plans and the related costs and obligations.
Pension schemes
Santander UK operates a number of defined contribution pension schemes. The Santander Retirement Plan, an occupational defined contribution scheme has been the principal pension scheme since 2009, which eligible employees are enrolled in automatically. The assetsTrustees of the Santander Retirement Plan are held in a separate trustee-administered fund.UK group’s pension schemes.
Santander UK also operates a number of defined benefit pension schemes, which are closed to new members. The principal pension scheme is the Santander (UK) Group Pension Scheme, which consists of seven separate actuarially-segregated sections and has a corporate trustee, Santander (UK) Group Pension Scheme Trustees Limited. The assets of the Santander (UK) Group Pension Scheme are invested in the Santander (UK) Common Investment Fund which has a corporate trustee, Santander (CF Trustee) Limited. Asset management of the Santander (UK) Common Investment Fund is delegated to a number of fund managers and the trustees receive independent professional advice on the performance of the managers. Legal advice to the trustees is provided by external firms of solicitors. The audits of the pension schemes are separate from that of Santander UK. During the year, a number of changes were made to the benefits under the Santander (UK) Group Pension Scheme, as set out in Note 36 to the Consolidated Financial Statements.
Disability
Santander UK is committed to equality of access and quality of service for disabled people and embraces the spirit of the UK Equality Act 2010 throughout its business operations. Santander UK has processes in place to help train, develop, retain and promote employees with disabilities. It is committed to giving full and fair consideration to applications for employment made by disabled persons having regard to their particular aptitudes and abilities, and for continuing the employment of employees who have become disabled by arranging appropriate training and making reasonable adjustments within the workplace.
Ethical Code of Ethical Conduct
Santander UK is committed to maintaining high ethical standards – adhering to laws and regulations, conducting business in a responsible way and treating all stakeholders with honesty and integrity. These principles are further reflected in Santander UK’s Ethical Code of Ethical Conduct published in March 2014, which sets out the standards expected of all employees, and supports theThe Santander Way and Santander UK’s commitment to being Simple, Personal and Fair.
Under their terms and conditions of employment, staff are required to act at all times with the highest standards of business conduct in order to protect Santander UK’s reputation and ensure a company culture which is free from any risk of corruption, compromise or conflicts of interest. Staff are also required to comply with all Company policies, including the Anti-Bribery and Corruption Policy.
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These terms and conditions require that employees must:
| – | Abide by all relevant laws and |
| – | Act with integrity in all their business actions on behalf of Santander |
| – | Not use their authority or office for personal |
| – | Conduct business relationships in a transparent |
| – | Reject all improper practices or dealings they may be exposed to. |
The SEC requires companies to disclose whether they have a code of ethics that applies to the CEO and senior financial officers which promotes honest and ethical conduct, full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, prompt internal reporting of violations and accountability for adherence to such a code of ethics.
Santander UK meets these requirements through its Ethical Code of Ethical Conduct, the Anti-Bribery and Corruption Policy, the Whistleblowing Policy, the FCA’s Principles for Business, and the FCA’s Principles and Code of Practice for Approved Persons, with which the CEO and senior financial officers must comply. These include requirements to manage conflicts of interest appropriately and to disclose any information the FCA may want to know about. Santander UK provides a copy of these documents to anyone, free of charge, on application to the address on page 347.321.
Consultation
Santander UK has a successful history of working in partnership with its recognised trade unions, Advance and the Communication Workers Union (CWU). Both trade unions are affiliated to the Trades Union Congress. We consult Advance and the CWU on significant proposals and change initiatives within the business at both national and local levels.
Political contributions
In 20142015 and 2013,2014, no contributions were made for political purposes and no political expenditure was incurred.
Corporate social responsibilityShare capital
Details about the structure of the Company’s capital, including the rights and obligations attaching to each class of share in the Company, can be found in Note 36 to the Consolidated Financial Statements.
Details of employee share schemes and how rights are exercisable can be found in Note 40 to the Consolidated Financial Statements.
The powers of the Directors in relation to share capital are set out in the Company’s Articles of Association as determined by the Companies Act 2006.
194 Santander UK plc
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Subsidiaries and branches
The Santander UK group consists of a parent company, Santander UK plc, incorporated in the United Kingdom and a number of subsidiaries and associates held directly and indirectly by it. Santander UK holds directly or indirectly 100% of the issued ordinary share capital of its principal subsidiaries. All companies operate principally in their country of incorporation or registration. Abbey National Treasury Services plc, a subsidiary of Santander UK plc, also has a branch office in the US and the Cayman Islands. Santander UK plc has branches in the Isle of Man and in Jersey. For further details on Corporate Social Responsibility, including employee, carbon emissioninformation see Note 21 to the Consolidated Financial Statements.
Financial instruments
The financial risk management objectives and environmental matters see pages 22policies of Santander UK, the policy for hedging, and the exposure of Santander UK to 24 ofcredit risk, market risk, and liquidity risk are outlined in the Strategic Report. The carbon emissions disclosure as set out on page 24 is incorporatedRisk review.
Research and development
Santander UK has a comprehensive product approval process and policy. New products, campaigns and business initiatives are reviewed by reference into the Directors’ Report.Santander UK’s Product Approval and Oversight Committee.
Supervision and regulation
Under the terms of the Financial Services Act 2012, the FSA was replaced by two regulatory bodies, the PRA, which has responsibility for the prudential regulation of deposit takers and insurance companies, and the FCA, which supervises the conduct of business, and seeks to improve outcomes for consumers. Since the enactment of the changes, Santander UK is now authorised by the PRA and authorised and regulated by the FCA and is subject to UK financial services lawsthe PRA. Various of its subsidiaries and regulations. The key regulatory requirements as related to its material risk factors (including supervisionassociates are also authorised by the PRA or the FCA and regulatory risks and risks relating to taxation) are described inregulated by the Risk Factors section on pages 327 to 346.FCA and/or the PRA.
Further details on the impact of regulatory developments can be found in the Risk review on pages 118 and 131. While Santander UK operates primarily in the UK, it is also subject to the laws and regulations of the other jurisdictions in which it operates, such as the requirements of the SEC for its activities in the US.
The key regulatory requirements as related to its material risk factors (including supervision and regulatory risks and risks relating to taxation) are described in the Risk factors section on pages 299 to 320.
Internal controls
Risk management and internal controls
The Board and its Committees are responsible for reviewing and ensuring the effectiveness of management’s system of risk management and internal controls. Details
We have carried out a robust assessment of Santander UK’s risk framework and system of internal controls for risk management can be found inthe principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
For further details see the Risk Reviewreview on pages 2635 to 144.
Disclosure controls and procedures over financial reporting
Santander UK has evaluated, with the participation of its CEO and Chief Financial Officer, the effectiveness of Santander UK’s disclosure controls and procedures at 31 December 2014. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon Santander UK’s evaluation, the CEO and the Chief Financial Officer have concluded that, at 31 December 2014, Santander UK disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Santander UK in the reports that Santander UK files and submits under the US Securities Exchange Act of 1934 is recorded, processed, summarised and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Santander UK’s management, including the CEO and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Governance
Directors’ Report
continued
160.
Management’s report on internal control over financial reporting
Internal control over financial reporting is a component of an overall system of internal control. Santander UK’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation and fair presentation of financial statements for external purposes in accordance with International Financial Reporting Standards (‘IFRS’)(IFRS) as issued by the International Accounting Standards Board and as endorsed by the European Union.
Santander UK’s internal control over financial reporting includes:
| – | Policies and procedures that relate to the maintenance of records that fairly and accurately reflect the transactions and |
| – | Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only as authorised by |
| – | Controls providing reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or because the degree of compliance with policies or procedures may deteriorate.
Management is responsible for establishing and maintaining adequate internal control over the financial reporting of Santander UK.
Management assessed the effectiveness of Santander UK’s internal control over financial reporting at 31 December 20142015 based on the criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (‘COSO’)(COSO) in May 2013 (the ‘2013 Framework’). The 2013 Framework superseded the original framework issued by COSO in 1992 on 15 December 2014.Framework). Santander UK adopted the 2013 Framework from 15 December 2014. Further details of the changes made are set out below.
Based on this assessment, management believes that, at 31 December 2014,2015, that Santander UK’s internal control over financial reporting was effective.
Disclosure controls and procedures over financial reporting
Santander UK has evaluated, with the participation of its CEO and CFO, the effectiveness of Santander UK’s disclosure controls and procedures at 31 December 2015. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon Santander UK’s evaluation, the CEO and the CFO have concluded that, at 31 December 2015, Santander UK disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Santander UK in the reports that Santander UK files and submits under the US Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Santander UK’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.
Changes toin internal control over financial reporting
As part ofThere were no changes to our internal control over financial reporting during the implementation of the 2013 Framework, management undertook a full review of the existingperiod covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial control model to ensure compliance with the requirements of the 2013 Framework. As part of this review the existing financial control model was updated and enhanced to recognise the additional requirements of the new Framework. All controls have been tested and certified as part of the Year-End Control Self-Assessment process. Management believes these controls are effective.reporting.
Going concern
The going concern of Santander UK is reliant on preserving a sufficient level of capital and adequately funding the balance sheet. Santander UK’s business activities and financial position, together with the factors likely to affect its future development and performance, are set out in the Financial Review.review on pages 5 to 34. Santander UK’s objectives, policies and processes for managing the financial risks to which it is exposed, including capital, funding and liquidity, are described in the Risk Review.review. The risk factors which could materially affect Santander UK’s future performance are described in the Risk Factors section.factors section on pages 299 to 320.
Annual Report 2015
Governance
In assessing going concern, the Directors take account of all information of which they are aware about the future, which is at least, but is not limited to, 12 months from the date that the balance sheet is signed. This
The information considered by the Directors includes Santander UK’s results forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities, and possible economic, market and product developments, taking account of reasonably possible changes in trading performance. For capital, funding and liquidity purposes, Santander UK operates on a stand-alone basis; however, in casebasis and is subject to regular and rigorous monitoring by external parties. The Directors review the outputs of stress conditions, it would consult with its ultimate parent company, Banco Santander, S.A. about financial support.testing as part of the approval processes for the ICAAP, the ILAAP, our Risk Appetite and regulatory stress tests. We exceeded the Bank of England’s 2015 stress test threshold requirement.
The Directors confirmconsider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
Statement of Compliance
The UK Corporate Governance Code
The Board confirms that, they are satisfied thatfor the year ended 31 December 2015, Santander UK has sufficient resources to continue to operate for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.
Relevant audit information
Each of the Directors at the date of approval of this report confirms that:
This confirmation is givenapplied those principles and should be interpreted in accordance with the provisions of Section 418 of the UK Companies Act 2006.
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British Bankers’ AssociationBBA Code for Financial Reporting Disclosure
Santander UK’s financial statements for the year ended 31 December 20142015 have been prepared in compliance with the principles of the British Bankers’ AssociationBBA Code for Financial Reporting Disclosure.
Directors’ responsibilities
The Directors are responsible for preparing the Annual Report including the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the International Accounting Standards (‘IAS’)(IAS) Regulation to prepare the group financial statements under IFRS, as adopted by the EU, and have also elected to prepare the parent company financial statements in accordance with IFRS, as adopted by the EU. The financial statements are also required by law to be properly prepared in accordance with the UK Companies Act 2006 and Article 4 of the IAS Regulation. In addition, in order to meet certain US requirements, the Directors are required to prepare Santander UK’s financial statements in accordance with IFRS, as issued by the International Accounting Standards Board (‘IASB’)(IASB).
The Directors acknowledge their responsibility to ensureare responsible for ensuring the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss presented and that the management report (comprising the Strategic Reportreport and the Directors’ Report), includes a fair review of the development and performance of the business and a description of the principal risks and uncertainties the business faces.
IAS 1 requires that financial statements present fairly, for each financial year, the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, and other events and conditions, in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the IASB’s ‘FrameworkFramework for the preparation and presentation of financial statements’.statements. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. However, the Directors are also required to:
| – | Properly select and apply accounting |
| – | Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable |
| – | Provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial |
| – | Make an assessment of the Company’s ability to continue as a going concern. |
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the UK Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on Santander UK’sour website. Legislation in the United KingdomUK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Disclosure of information to Auditors
Each of the Directors at the date of approval of this report confirms that:
| – | So far as the Director is aware, there is no relevant audit information of which Santander UK’s auditor is unaware |
| – | The Director has taken all steps that they ought to have taken as a Director to make him or her self aware of any relevant audit information and to establish that Santander UK’s auditor is aware of that information. |
This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the UK Companies Act 2006.
Auditor
Deloitte LLP have expressedwill step down from their willingness to continue in office asof auditor and a resolution to reappoint them will be proposed at the Company’sconclusion of the forthcoming Annual General Meeting.Meeting and the Board (at the recommendation of the Audit Committee) will recommend that Members appoint PricewaterhouseCoopers LLP from the conclusion of the meeting.
By Order of the Board
/s/ Shaun Coles
Company Secretary
24 February 20152016
2 Triton Square, Regent’s Place,
London NW1 3AN
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Financial review
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SUMMARISED CONSOLIDATED INCOME STATEMENT
Year ended 31 December 2014 £m | Year ended 31 December 2013(1) £m | Year ended 31 December 2012(1) £m | ||||||||||
Net interest income | 3,434 | 2,963 | 2,734 | |||||||||
Non-interest income | 1,036 | 1,066 | 1,949 | |||||||||
Total operating income | 4,470 | 4,029 | 4,683 | |||||||||
Administrative expenses | (1,915) | (1,947) | (1,873) | |||||||||
Depreciation, amortisation and impairment | (482) | (248) | (241) | |||||||||
Total operating expenses excluding impairment losses, provisions and charges | (2,397) | (2,195) | (2,114) | |||||||||
Impairment losses on loans and advances | (258) | (475) | (988) | |||||||||
Provisions for other liabilities and charges | (416) | (250) | (429) | |||||||||
Total operating impairment losses, provisions and charges | (674) | (725) | (1,417) | |||||||||
Profit on continuing operations before tax | 1,399 | 1,109 | 1,152 | |||||||||
Tax on profit on continuing operations | (289) | (211) | (271) | |||||||||
Profit on continuing operations after tax | 1,110 | 898 | 881 | |||||||||
(Loss)/profit from discontinued operations after tax | - | (8) | 62 | |||||||||
Profit after tax for the year | 1,110 | 890 | 943 | |||||||||
Attributable to: | ||||||||||||
Equity holders of the parent | 1,110 | 890 | 943 | |||||||||
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2014 compared to 2013
Profit on continuing operations before tax increased by £290m to £1,399m in 2014 (2013: £1,109m). By income statement line, the movements were:Directors
Report |
These increases were partly offset by reduced mortgage stock margins and new lending margin pressures reflecting the lower customer rates available on incentive products as the current environment for mortgage lending led to increased activity. We have been successful in the targeted retention of customers into new Santander UK mortgages.
Remuneration
Report
Directors’ Report
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The increase also reflected further investment in business growth, including the refurbishment of the branch network and enhancements to our digital channels, as well as the commencement of depreciation on a new data centre.
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Regulatory costs relating to the FSCS of £91m (2013: £88m) and the UK Bank Levy of £74m (2013: £59m) were charged in the year. Other increases included a charge of £50m relating to the costs for our on-going branch de-duplication programme. There was a further provision of £140m including related costs, for conduct remediation. Of this, £95m related to PPI, which following a recent review of claims activity indicated that claims are now expected to continue for longer than originally anticipated. Monthly PPI redress costs including pro-active customer contact decreased to a monthly average of £11m for the full year, compared to a monthly average of £18m in 2013. The high proportion of invalid complaints continued. There was a net £45m charge to other products relating to existing remediation activities and new provisions which relate principally to wealth and investment products. See Note 35 to the Consolidated Financial Statements.
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Annual Report 2015
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198 Santander UK plc
2013 compared to 2012
Profit on continuing operations before tax decreased by £43m to £1,109m (2012: £1,152m). By income statement line, the movements were:
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These increases were partly offset by the impact of the managed reduction in selected higher risk elements of the residential mortgage portfolio, decrease in funding costs and the continued low interest rate environment. This reflected the increased drag from the run-off of the structural hedge put in place in previous years.
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The decrease was also driven by lower income from large corporates, notably as a result of lower demand for interest rate and foreign exchange risk management products, lower investment and protection fees in Retail Banking as we operated under new regulatory rules, which limited new business volumes and a return to more normalised levels in our Equity markets business. The decrease was partially offset by a change to the pricing structure for our current accounts and credit arising from the debit valuation adjustment on derivatives written by Santander UK. This adjustment was introduced in accordance with the requirements of IFRS 13.
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These increases were in part offset by tight cost control, branch de-duplication and the effects of deleveraging of the non-core corporate and legacy portfolios.
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Credit quality in the Retail Banking and Commercial Banking loan portfolios continued to be satisfactory with improving underlying performance, and on unsecured portfolios due to better credit quality business.
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No additional provisions were made for PPI in the year. The volume of PPI activity decreased and the number of complaints we received fell 29% in 2013, although the high proportion of invalid complaints continued. Monthly PPI redress costs decreased through the year to an average in the fourth quarter of the year of £11m per month, compared to a monthly average of £18m for the full year 2013 and £26m in 2012. Following a reassessment of the provision required to cover non-PPI related conduct remediation and enforcement actions in relation to interest rate hedging, Card Protection Plan and retail investments, there was a release of £45m during the year. The UK Bank Levy and FSCS fees increased by £13m to £79m in 2013 (2012: £66m). See Note 35 to the Consolidated Financial Statements.
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(Loss)/profit from discontinued operations after tax of £(8)m in 2013 (2012: £62m) comprised the profit before tax of the discontinued operations of £nil (2012: £84m), a loss on sale before tax of £10m, and a tax credit of £2m (2012: tax charge of £22m). The decrease in profit before tax principally reflected the reduction in the size of the co-brand credit cards business prior to the completion of its sale in 2013.
Critical factors affecting results
The preparation of our Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the balance sheet date and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in ‘Critical Accounting Policies and Areas of Significant Management Judgement’ in Note 1 to the Consolidated Financial Statements.
The rest of this section contains a summary of the results, and commentary thereon, by income statement line item for each segment.
Financial review
Basis of results presentation
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented. The Company’s board of directors (the ‘Board’) is the chief operating decision maker for Santander UK. The segmental information below is presented on the basis used by the Board to evaluate performance and allocate resources. The Board reviews discrete financial information for each segment of the business which follows Santander UK’s normal accounting policies and principles, including measures of operating results, assets and liabilities. As described in Note 2 to the Consolidated Financial Statements, following a strategic review, the segmental financial information reported to the Board was revised in the fourth quarter of 2014, and prior periods restated, to designate three distinct customer business segments, which reflect how we now manage and operate the bank: Retail Banking, Commercial Banking and Corporate & Institutional Banking; and allocate indirect income, expenses and charges previously held at the Corporate Centre, which can be attributed to the three customer segments. This included a review of the internal transfer pricing policy, which resulted in a further allocation of funding and liquidity costs, central operating expenses and other provisions such as conduct, branch de-duplication, the UK Bank Levy and FSCS charges.
With the allocation of indirect income, expenses and charges from the Corporate Centre and with the three distinct customer business segments at differing stages of commercial maturity, we are now able to identify better and drive with greater granularity the key drivers of our business performance. This enables a more targeted apportionment of capital and other resources in line with the individual strategies and objectives of each business segment.
Retail Banking business activities remain broadly unchanged, offering a wide range of products and financial services to individuals and small businesses (with a turnover up to £250,000 per annum). Commercial Banking provides banking services to companies with a turnover of between £250,000 and £500m per annum through our enhanced platform, distribution capability and product suite. Large corporates, with an annual turnover above £500m, are now managed in our Corporate & Institutional Banking segment, where they can be best serviced in terms of their more specialised and tailored product needs, and benefit from the Banco Santander group’s global capability. Corporate Centre now predominantly consists of the non-core corporate and legacy portfolios, mark-to-market gains/losses arising from banking book activities and residual term mismatches.
As stated in Note 1 to the Consolidated Financial Statements, Santander UK adopted IFRIC 21 with effect from 1 January 2014. The adoption of IFRIC 21 changed the accounting for the FSCS levy. For segmental reporting purposes, the FSCS is accounted for in Corporate Centre and the segmental analyses for prior years have also been adjusted to reflect this change.
| 31 December 2014 | Retail Banking £m | Commercial Banking £m | Corporate & Institutional Banking £m | Corporate Centre £m | Total £m | |||||||||||||||
Net interest income/(expense) | 3,092 | 373 | 75 | (106) | 3,434 | |||||||||||||||
Non-interest income | 560 | 112 | 277 | 87 | 1,036 | |||||||||||||||
Total operating income/(expense) | 3,652 | 485 | 352 | (19) | 4,470 | |||||||||||||||
Administration expenses | (1,543) | (260) | (231) | 119 | (1,915) | |||||||||||||||
Depreciation, amortisation and impairment | (210) | (60) | (6) | (206) | (482) | |||||||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (1,753) | (320) | (237) | (87) | (2,397) | |||||||||||||||
Impairment (losses)/releases on loans and advances | (187) | (92) | 4 | 17 | (258) | |||||||||||||||
Provisions for other liabilities and charges | (395) | (12) | (9) | - | (416) | |||||||||||||||
Total operating impairment losses, provisions and charges | (582) | (104) | (5) | 17 | (674) | |||||||||||||||
Profit/(loss) on continuing operations before tax | 1,317 | 61 | 110 | (89) | 1,399 | |||||||||||||||
Profit from discontinued operations after tax | - | - | - | - | - | |||||||||||||||
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Net interest income/(expense) | 2,738 | 284 | 65 | (124) | 2,963 | |||||||||||||||
Non-interest income | 599 | 113 | 280 | 74 | 1,066 | |||||||||||||||
Total operating income/(expense) | 3,337 | 397 | 345 | (50) | 4,029 | |||||||||||||||
Administration expenses | (1,555) | (231) | (160) | (1) | (1,947) | |||||||||||||||
Depreciation, amortisation and impairment | (195) | (49) | (4) | - | (248) | |||||||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (1,750) | (280) | (164) | (1) | (2,195) | |||||||||||||||
Impairment losses on loans and advances | (359) | (107) | - | (9) | (475) | |||||||||||||||
Provisions for other liabilities and charges | (226) | (17) | (7) | - | (250) | |||||||||||||||
Total operating impairment losses, provisions and charges | (585) | (124) | (7) | (9) | (725) | |||||||||||||||
Profit/(loss) on continuing operations before tax | 1,002 | (7) | 174 | (60) | 1,109 | |||||||||||||||
Loss from discontinued operations after tax | - | - | - | (8) | (8) | |||||||||||||||
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Net interest income/(expense) | 2,519 | 228 | 29 | (42) | 2,734 | |||||||||||||||
Non-interest income | 632 | 179 | 417 | 721 | 1,949 | |||||||||||||||
Total operating income | 3,151 | 407 | 446 | 679 | 4,683 | |||||||||||||||
Administration expenses | (1,504) | (187) | (180) | (2) | (1,873) | |||||||||||||||
Depreciation, amortisation and impairment | (192) | (45) | (4) | - | (241) | |||||||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (1,696) | (232) | (184) | (2) | (2,114) | |||||||||||||||
Impairment losses on loans and advances | (420) | (109) | - | (459) | (988) | |||||||||||||||
Provisions for other liabilities and charges | (312) | (47) | (8) | (62) | (429) | |||||||||||||||
Total operating impairment losses, provisions and charges | (732) | (156) | (8) | (521) | (1,417) | |||||||||||||||
Profit on continuing operations before tax | 723 | 19 | 254 | 156 | 1,152 | |||||||||||||||
Profit from discontinued operations after tax | - | - | - | 62 | 62 | |||||||||||||||
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Auditor’s report
Retail Banking offers a wide range of products and financial services to individuals and small businesses (with a turnover of less than £250,000 per annum), through a network of branches and ATMs, as well as through telephony, digital, mobile and intermediary channels. Retail Banking also includes Santander Consumer Finance, predominantly a vehicle finance business. Its main products are residential mortgage loans, savings and current accounts, credit cards and personal loans as well as insurance policies.
Summarised income statement
Year ended 31 December 2014 £m | Year ended 31 December 2013 £m | Year ended 31 December 2012 £m | ||||||||||
Net interest income | 3,092 | 2,738 | 2,519 | |||||||||
Non-interest income | 560 | 599 | 632 | |||||||||
Total operating income | 3,652 | 3,337 | 3,151 | |||||||||
Administration expenses | (1,543) | (1,555) | (1,504) | |||||||||
Depreciation, amortisation and impairment | (210) | (195) | (192) | |||||||||
Total operating expenses excluding impairment losses | (1,753) | (1,750) | (1,696) | |||||||||
Impairment losses on loans and advances | (187) | (359) | (420) | |||||||||
Provisions for other liabilities and charges | (395) | (226) | (312) | |||||||||
Total operating impairment losses, provisions and charges | (582) | (585) | (732) | |||||||||
Profit on continuing operations before tax | 1,317 | 1,002 | 723 | |||||||||
2014 compared to 2013
Profit on continuing operations before tax increased by £315m to £1,317m in 2014 (2013: £1,002m). By income statement line, the movements were:
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These increases were partly offset by reduced mortgage stock margins and new lending margin pressures reflecting the lower customer rates available on incentive products as the current environment for mortgage lending led to increased activity. This activity, combined with UK Government schemes (such as Help to Buy), led to an increase in customers moving from Standard Variable Rate (‘SVR’) mortgages. We have been successful in the targeted retention of customers into new Santander UK mortgages.
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Regulatory costs relating to the FSCS of £89m (2013: £86m) and the UK Bank Levy of £50m (2013: £40m) were charged in the year. Following the adoption of IFRIC 21 on 1 January 2014, the charge for the FSCS is now recognised in the first half of the year as set out in Note 1 to the Consolidated Financial Statements. IFRIC 21 has been applied retrospectively and prior periods have been adjusted. IFRIC 21 has no impact on the Bank Levy.
Other increases included a charge of £50m relating to the costs for our on-going branch de-duplication programme. There was a further provision of £150m including related costs, for conduct remediation. Of this, £95m related to PPI which, following a recent review of claims activity indicated that claims are now expected to continue for longer than originally anticipated. Monthly PPI redress costs including pro-active customer contact decreased to a monthly average of £11m for the full year, compared to a monthly average of £18m in 2013. The high proportion of invalid complaints continued. There was a net £45m charge to other products relating to existing remediation activities and new provisions which relate principally to wealth and investment products. See Note 35 to the Consolidated Financial Statements.
There was also a reduced charge for restructuring costs in the year.
Financial review
2013 compared to 2012
Profit on continuing operations before tax increased by £279m to £1,002m in 2013 (2012: £723m). By income statement line, the movements were:
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These increases were partly offset by the impact of the managed reduction in selected higher risk elements of the residential mortgage portfolio.
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Regulatory costs relating to the FSCS of £86m (2012: £44m) and the UK Bank Levy of £40m (2012: £35m) were charged in the year.
In 2012, provisions for other liabilities and charges included a net provision for conduct remediation of £186m relating to retail products. No additional provisions were made on PPI in the year. The volume of PPI activity decreased and the number of complaints we received fell in 2013 although the high proportion of invalid complaints continued. Monthly PPI redress costs decreased through the year to an average in the fourth quarter of the year of £11m per month, compared to a monthly average of £18m for the full year and £26m in 2012. Following a reassessment of the provision required to cover non-PPI related conduct remediation and enforcement actions in relation to Card Protection Plan and retail investments, there was a release of £45m during the year. See Note 35 to the Consolidated Financial Statements.
There was also an increased charge for restructuring in the year.
Balances and ratios
31 December 2014 £bn | 31 December 2013 £bn | 31 December 2012 £bn | ||||||||||
Total assets | 163.4 | 160.5 | 168.3 | |||||||||
Customer loans | 158.5 | 155.6 | 164.1 | |||||||||
- of which mortgages | 150.1 | 148.1 | 156.6 | |||||||||
- of which unsecured consumer and vehicle finance | 8.4 | 7.5 | 7.5 | |||||||||
Risk-weighted assets | 38.4 | 36.3(1) | 37.6(1) | |||||||||
Customer deposits | 129.6 | 123.2 | 127.2 | |||||||||
- of which current accounts | 41.1 | 27.9 | 15.9 | |||||||||
NPL ratio(2) (3) | 1.62% | 1.89% | 1.76% | |||||||||
Coverage ratio(2) (4) | 34% | 31% | 32% | |||||||||
Mortgage NPL ratio(2)(5) | 1.64% | 1.88% | 1.74% | |||||||||
Mortgage coverage ratio(2)(6) | 24% | 21% | 20% | |||||||||
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2014 compared to 2013
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SVR mortgage loan balances decreased by £8.4bn at 31 December 2014 to £43.9bn. We have been successful in retaining 80% of customers with maturing products on Santander UK mortgages. Interest-only mortgage balances decreased to £56.9bn (2013: £59.0bn) while Buy-to-Let mortgages increased to £3.1bn (2013: £2.2bn).
Unsecured consumer and vehicle finance balances, which include bank overdrafts, unsecured personal loans, credit cards and consumer finance, increased 12%. This was in line with the planned rollout of our 1I2I3 World loyalty strategy.
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2013 compared to 2012
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Financial review
Business volumes
31 December 2014 £bn | 31 December 2013 £bn | 31 December 2012 £bn | ||||||||||
Mortgage gross lending | 26.3 | 18.4 | 14.4 | |||||||||
Mortgage net lending | 2.0 | (8.5) | (9.6) | |||||||||
UPL gross lending | 1.5 | 1.1 | 1.1 | |||||||||
UPL net lending | 0.2 | (0.3) | (0.4) | |||||||||
Vehicle finance net lending | 0.2 | - | 0.1 | |||||||||
Customer deposit flows | 6.4 | (4.0) | 5.8 | |||||||||
Number of 1I2I3 World customers | 3.6 million | 2.4 million | 1.3 million | |||||||||
2014 compared to 2013
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The 1I2I3 World is transforming our customer profile, building deeper, more durable and more valuable relationships: 93% of 1I2I3 Current Accounts are a primary banking relationship (compared to 46% for our non-1I2I3 customers); on average 1I2I3 customers hold 2.3 products (compared to 1.5 products for non-1I2I3 customers); and average 1I2I3 account balances are 5 times higher than non-1I2I3 account balances.
1I2I3 World continued to expand, with almost 40% of customers holding both the 1I2I3 Current Account and 1I2I3 Credit Card. 1I2I3 World provides a qualitative improvement of customer relationships underpinning our retail interest margins. At 31 December 2014, £70.3bn (54%) of retail deposit balances were derived from 1I2I3 Current Account and other primary bank accounts with associated savings balances held by the same customers; an increase of 34% in the year.
2013 compared to 2012
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Commercial Banking offers a wide range of products and financial services to customers through a network of regional Corporate Business Centres (‘CBCs’) and through telephony and digital channels. The management of our customers is organised according to the annual turnover (£250,000 to £500m) of their business, enabling us to offer a differentiated service to SMEs and mid corporate customers. Commercial Banking also includes specialist commercial real estate and Social Housing lending businesses.
Summarised income statement
Year ended 31 December 2014 £m | Year ended 31 December 2013 £m | Year ended 31 December 2012 £m | ||||||||||
Net interest income | 373 | 284 | 228 | |||||||||
Non-interest income | 112 | 113 | 179 | |||||||||
Total operating income | 485 | 397 | 407 | |||||||||
Administration expenses | (260) | (231) | (187) | |||||||||
Depreciation, amortisation and impairment | (60) | (49) | (45) | |||||||||
Total operating expenses excluding impairment losses, provisions and charges | (320) | (280) | (232) | |||||||||
Impairment losses on loans and advances | (92) | (107) | �� | (109) | ||||||||
Provisions for other liabilities and charges | (12) | (17) | (47) | |||||||||
Total operating impairment losses, provisions and charges | (104) | (124) | (156) | |||||||||
Profit/(loss) on continuing operations before tax | 61 | (7) | 19 | |||||||||
2014 compared to 2013
Profit on continuing operations before tax increased by £68m to £61m in 2014 (2013: loss of £7m). By income statement line, the movements were:
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We are also investing in new platforms specifically for corporate customers and building on the expertise and presence of the wider Banco Santander group. In 2014, we launched a new corporate internet banking capability (‘Connect’), a new trade portal and trade club and the Santander Passport service. Our global alliances with other major international financial institutions, together with the extensive network provided by the Banco Santander group allow us to offer a broad range of international financial services for our customers.
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Financial review
2013 compared to 2012
Profit on continuing operations before tax decreased by £26m to a loss of £7m in 2013 (2012: profit of £19m). By income statement line, the movements were:
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Balances and ratios
31 December 2014 £bn | 31 December 2013 £bn | 31 December 2012 £bn | ||||||||||
Total assets | 18.7 | 17.0 | 15.4 | |||||||||
Customer loans | 18.7 | 17.0 | 15.4 | |||||||||
- of which SMEs | 12.6 | 11.7 | 10.6 | |||||||||
- of which mid corporate | 6.1 | 5.3 | 4.8 | |||||||||
Risk-weighted assets | 19.9 | 17.0(1) | 17.0(1) | |||||||||
Customer deposits | 15.3 | 13.8 | 10.5 | |||||||||
NPL ratio(2) (3) | 3.56% | 3.83% | 5.31% | |||||||||
Coverage ratio(2) (4) | 46% | 43% | 39% | |||||||||
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2014 compared to 2013
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Following a periodic review in the first quarter of 2014, the management of a number of customers was transferred from the SME portfolio to our mid corporate portfolio as the annual turnover of their businesses had increased. Prior periods have not been restated. The balance associated with these loans was £327m. Lending to SME customers increased 8% including the transfer (11% excluding the transfer), and with growth of 15% in mid corporates during the year (9% increase excluding transfer).
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2013 compared to 2012
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Business volumes
31 December 2014 | 31 December 2013 | 31 December 2012 | ||||||||||
New facilities | £7,935m | £6,476m | £4,691m | |||||||||
Bank account openings (No.) | 7,600 | 5,700 | 4,400 | |||||||||
CBCs (No.) | 66 | 50 | 34 | |||||||||
Relationship managers (No.) | 729 | 650 | 503 | |||||||||
2014 compared to 2013
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2013 compared to 2012
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Financial review
CORPORATE & INSTITUTIONAL BANKING
Corporate & Institutional Banking services corporate clients and financial institutions that, because of their size, complexity or sophistication, require specially-tailored services or value-added wholesale products. It offers risk management and other value-added financial services to large corporates with a turnover above £500m per annum, and financial institutions, as well as to the rest of Santander UK’s businesses. The main businesses areas include: working capital management (trade and export finance and cash management), financing (Debt Capital Markets, and corporate and specialised lending) and risk management (foreign exchange, rates and liability management).
Summarised income statement
Year ended 31 December 2014 £m | Year ended 31 December 2013 £m | Year ended 31 December 2012 £m | ||||||||||
Net interest income | 75 | 65 | 29 | |||||||||
Non-interest income | 277 | 280 | 417 | |||||||||
Total operating income | 352 | 345 | 446 | |||||||||
Administration expenses | (231) | (160) | (180) | |||||||||
Depreciation, amortisation and impairment | (6) | (4) | (4) | |||||||||
Total operating expenses excluding provisions and charges | (237) | (164) | (184) | |||||||||
Impairment losses on loans and advances | 4 | - | - | |||||||||
Provisions for other liabilities and charges | (9) | (7) | (8) | |||||||||
Total operating provisions and charges | (5) | (7) | (8) | |||||||||
Profit on continuing operations before tax | 110 | 174 | 254 | |||||||||
2014 compared to 2013
Profit on continuing operations before tax decreased by £64m to £110m in 2014 (2013: £174m). By income statement line, the movements were:
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We continued to develop the client franchise, in particular the large corporate segment, through a focussed client approach, an increase in the number of bankers providing coverage as well as improved product offerings. We continued to refocus the business mix towards core banking activities, such as global transaction banking, debt capital markets, supply chain finance and cash management. We also exited from a number of non-core activities where we lack scale and expertise.
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2013 compared to 2012
Profit on continuing operations before tax decreased by £80m to £174m in 2013 (2012: £254m). By income statement line, the movements were:
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Balances and ratios
31 December 2014 £bn | 31 December 2013 £bn | 31 December 2012 £bn | ||||||||||
Total assets(1) | 38.3 | 37.9 | 48.3 | |||||||||
Customer loans | 5.2 | 5.1 | 4.2 | |||||||||
Other assets | 33.1 | 32.8 | 44.2 | |||||||||
Risk-weighted assets | 16.8 | 16.5(1) | 14.5(1) | |||||||||
Customer deposits | 2.3 | 2.6 | 2.3 | |||||||||
NPL ratio(2) (3) | 1.01% | 0.33% | 0.40% | |||||||||
Coverage ratio(2) (4) | 138% | 453% | 514% | |||||||||
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2014 compared to 2013
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2013 compared to 2012
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Financial review
Corporate Centre includes asset and liability management for the Santander UK group and management of the non-core corporate and treasury legacy portfolios. Corporate Centre is responsible for managing capital and funding, balance sheet composition and structure and strategic liquidity risk for the Santander UK group. The non-core corporate and treasury legacy portfolios include aviation, shipping, infrastructure, commercial mortgages, Social Housing loans and structured credit assets, all of which are being run-down and/or managed for value. In addition, the co-brand credit cards business sold in 2013 was managed in Corporate Centre prior to its sale and presented as discontinued operations.
Summarised income statement
Year ended 31 December 2014 £m | Year ended 31 December 2013(1) £m | Year ended 31 December 2012(1) £m | ||||||||||
Net interest expense | (106) | (124) | (42) | |||||||||
Non-interest income | 87 | 74 | 721 | |||||||||
Total operating (expense)/income | (19) | (50) | 679 | |||||||||
Administration expenses | 119 | (1) | (2) | |||||||||
Depreciation, amortisation and impairment | (206) | - | - | |||||||||
Total operating expenses excluding impairment losses, provisions and charges | (87) | (1) | (2) | |||||||||
Impairment releases/(losses) on loans and advances | 17 | (9) | (459) | |||||||||
Provisions for other liabilities and charges | - | - | (62) | |||||||||
Total operating impairment losses, provisions and charges | 17 | (9) | (521) | |||||||||
(Loss)/profit on continuing operations before tax | (89) | (60) | 156 | |||||||||
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(Loss)/profit on discontinued operations after tax | - | (8) | 62 | |||||||||
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2014 compared to 2013
Loss on continuing operations before tax increased by £29m to £89m in 2014 (2013: loss of £60m). By income statement line, the movements were:
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Loss from discontinued operations after tax of £nil in 2014 (2013: £8m) reflected the sale of the co-brand credit cards business in 2013.
2013 compared to 2012
Loss on continuing operations before tax decreased by £216m to a loss of £60m in 2013 (2012: profit of £156m). By income statement line, the movements were:
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(Loss)/profit from discontinued operations after tax of £(8)m in 2013 (2012: £62m) comprised the profit before tax of the discontinued operations of £nil (2012: £85m), a loss on sale before tax of £10m, and a tax credit of £2m (2012: tax charge of £22m). The decrease in profit before tax principally reflected the reduction in the size of the co-brand credit cards business prior to the completion of its sale in 2013.
Balances and ratios
31 December 2014 £bn | 31 December 2013 £bn | 31 December 2012 £bn | ||||||||||
Total assets | 55.6 | 55.0 | 61.0 | |||||||||
Customer loans (non-core) | 8.3 | 9.4 | 11.0 | |||||||||
Risk-weighted assets | 7.2 | 7.9(1) | 9.5(1) | |||||||||
Customer deposits | 5.2 | 6.8 | 8.6 | |||||||||
NPL ratio(2) (3) | 1.62% | 2.36% | 4.49% | |||||||||
Coverage ratio(2) (4) | 134% | 125% | 99% | |||||||||
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Financial review
Non-core assets
31 December 2014 £bn | 31 December 2013 £bn | 31 December 2012 £bn | ||||||||||
Social housing | 6.7 | 7.1 | 7.5 | |||||||||
Commercial mortgages | 0.9 | 1.2 | 1.4 | |||||||||
Shipping | 0.3 | 0.4 | 0.7 | |||||||||
Aviation | 0.2 | 0.4 | 0.6 | |||||||||
Other | 0.2 | 0.3 | 0.8 | |||||||||
Non-core customer loans | 8.3 | 9.4 | 11.0 | |||||||||
Legacy Treasury asset portfolio | 0.7 | 2.0 | 1.9 | |||||||||
Total non-core assets | 9.0 | 11.4 | 12.9 | |||||||||
2014 compared to 2013
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2013 compared to 2012
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Eligible liquid assets decreased by £7.4bn to £29.5bn at 31 December 2013 (2012: £36.9bn). Balances were managed more efficiently, given stability in capital markets and as a consequence of the actions taken to strengthen the balance sheet by reducing short-term wholesale funding over the last three years. Surplus liquidity was also utilised to fund maturing medium term funding and to invest in the ALCO portfolio. Eligible liquid assets significantly exceeded short-term (i.e. of less than one year) wholesale funding, with a coverage ratio of 138%.
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This Financial Review describes Santander UK’s significant assets and liabilities and its strategy and reasons for entering into such transactions. In this section, references to UK and non-UK, in the geographical analysis, refer to the location of the office where the transaction is recorded.
SUMMARISED CONSOLIDATED BALANCE SHEET
2014 £m | 2013(1) £m | |||||||
Assets | ||||||||
Cash and balances at central banks | 22,562 | 26,374 | ||||||
Trading assets | 21,700 | 22,294 | ||||||
Derivative financial instruments | 23,021 | 20,049 | ||||||
Financial assets designated at fair value | 2,881 | 2,747 | ||||||
Loans and advances to banks | 2,057 | 2,347 | ||||||
Loans and advances to customers | 188,691 | 184,587 | ||||||
Loans and receivables securities | 118 | 1,101 | ||||||
Available for sale securities | 8,944 | 5,005 | ||||||
Macro hedge of interest rate risk | 963 | 769 | ||||||
Interest in other entities | 38 | 27 | ||||||
Property, plant and equipment | 1,624 | 1,521 | ||||||
Retirement benefit assets | 315 | 118 | ||||||
Tax, intangibles and other assets | 3,063 | 3,347 | ||||||
Total assets | 275,977 | 270,286 | ||||||
Liabilities | ||||||||
Deposits by banks | 8,214 | 8,696 | ||||||
Deposits by customers | 153,606 | 147,167 | ||||||
Trading liabilities | 15,333 | 21,278 | ||||||
Derivative financial instruments | 22,732 | 18,863 | ||||||
Financial liabilities designated at fair value | 2,848 | 3,407 | ||||||
Debt securities in issue | 51,790 | 50,870 | ||||||
Subordinated liabilities | 4,002 | 4,306 | ||||||
Macro hedge of interest rate risk | 139 | - | ||||||
Retirement benefit obligations | 199 | 672 | ||||||
Tax, other liabilities and provisions | 2,921 | 2,437 | ||||||
Total liabilities | 261,784 | 257,696 | ||||||
Equity | ||||||||
Total shareholders’ equity | 14,193 | 12,590 | ||||||
Total equity | 14,193 | 12,590 | ||||||
Total liabilities and equity | 275,977 | 270,286 | ||||||
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A more detailed consolidated balance sheet is contained in the Consolidated Financial Statements.
31 December 2014 compared to 31 December 2013
Assets
Cash and balances at central banks
Cash and balances held at central banks decreased by 14% to £22,562m at 31 December 2014 (2013: £26,374m), with a greater proportion of our liquid asset portfolio being held in debt securities rather than cash at central banks.
Trading assets
Trading assets decreased by 3% to £21,700m at 31 December 2014 (2013: £22,294m), reflecting lower levels of activity relating to securities purchased under resale agreements to both banks and customers partially offset by increased holdings of £4,071m of equity instruments as part of short-term markets trading activity.
Derivative financial instruments - assets
Derivative assets increased by 15% to £23,021m at 31 December 2014 (2013: £20,049m). The increase was mainly attributable to the increase in fair values of interest rate and cross currency derivative assets mainly driven by movements in yield curves and foreign exchange. This was partially offset by the maturity of trades which were economically hedging a portfolio which also matured in the year.
Financial assets designated at fair value through profit and loss
Financial assets designated at fair value through profit and loss slightly increased by 5% to £2,881m at 31 December 2014 (2013: £2,747m), primarily attributable to the increase in fair value of the debt securities portfolio and UK Social Housing association loans offset by the maturity of loans to UK Social Housing associations and new loans no longer being designated at fair value, in accordance with Santander UK’s policy.
Loans and advances to customers
Loans and advances to customers increased by 2% to £188,691m at 31 December 2014 (2013: £184,587m) principally due to an increase in mortgage lending, maintaining the positive momentum that commenced in the second quarter of 2014. In addition, corporate lending balances increased. These increases were partially offset by a reduction in non-core corporate and legacy portfolios.
Financial review
Loans and receivables securities
Loans and receivables securities decreased by 89% to £118m at 31 December 2014 (2013: £1,101m). The decrease was attributable to the disposal of legacy Treasury asset portfolio.
Available for sale securities
Available for sale securities increased by 79% to £8,944m at 31 December 2014 (2013: ��5,005m) largely due to the purchase of UK Government bonds and fixed and floating rate bonds as part of normal liquid asset portfolio management activity.
Property, plant and equipment
Property, plant and equipment increased by 7% to £1,624m at 31 December 2014 (2013: £1,521m). The increase was attributable to the completion of a Data Centre offset by depreciation charge for the year.
Retirement benefit assets
Retirement benefit assets increased by 167% to £315m at 31 December 2014 (2013: £118m). For those sections of the Santander UK Group Pension Scheme which had surpluses, the key drivers of the increase were scheme changes that limit future defined benefit pension entitlements and provide for the longer term sustainability of our staff pension arrangements. In re-measurement of the defined benefit pension schemes during the year, the return on plan assets (excluding net interest income) exceeded the actuarial losses arising from changes in financial assumptions.
Tax, intangibles and other assets
Tax, intangibles and other assets decreased by 9% to £3,063m at 31 December 2014 (2013: £3,347m). The decrease primarily reflected a reduction in intangible software assets as a result of write-offs for the decommissioning of redundant systems following the implementation of our new digital platform and the completion of our product simplification programme.
Liabilities
Deposits by banks
Deposits by banks remained broadly unchanged at £8,214m at 31 December 2014 (2013: £8,696m).
Deposits by customers
Deposits by customers increased by 4% to £153,606m at 31 December 2014 (2013: £147,167m) as we focused on retaining and originating accounts held by more loyal Retail Banking customers. Current account balances increased, partially offset by lower savings deposit balances as we focused on reducing short-term retail deposits without a broader customer relationship.
Trading liabilities
Trading liabilities decreased by 28% to £15,333m at 31 December 2014 (2013: £21,278m). A decrease in securities sold under repurchase activities and the cash collateral received as part of normal trading activity were offset by an increase in short-term deposits and short positions.
Derivative financial instruments - liabilities
Derivative liabilities increased by 21% to £22,732m at 31 December 2014 (2013: £18,863m). The increase was mainly attributable to the increase in fair values of interest rate and cross currency derivative liabilities mainly driven by movements in yield curves and foreign exchange.
Financial liabilities designated at fair value through profit and loss
Financial liabilities designated at fair value decreased by 16% to £2,848m at 31 December 2014 (2013: £3,407m). The decrease principally reflected reduced issuances in financial liabilities designated at fair value through profit or loss, with new issuances at amortised cost in debt securities in issue.
Debt securities in issue
Debt securities in issue increased by 2% to £51,790m at 31 December 2014 (2013: £50,870m) due to increased issuances under the US$20bn Euro Medium Term Note Programme and certificates of deposits offset by decrease in Holmes securitisation programme.
Subordinated liabilities
Subordinated liabilities decreased by 7% to £4,002m at 31 December 2014 (2013: £4,306m) due to the redemption of perpetual callable subordinated notes.
Retirement benefit obligations
Retirement benefit obligations decreased by 70% to £199m at 31 December 2014 (2013: £672m). The explanation for the movement is the same as that given for retirement benefit assets above.
Tax, other liabilities and provisions
Tax, other liabilities and provisions increased by 16% to £2,921m at 31 December 2014 (2013: £2,437m). The increase principally reflected the increase in dividend payable and unsettled financial transactions.
Equity
Total shareholders’ equity increased by 13% to £14,193m at 31 December 2014 (2013: £12,590m). The increase was principally attributable to the issuance of £800m Perpetual Capital Securities to our immediate parent company, actuarial gains, valuation of cashflow hedges and the retained profit for the year, partially offset by dividends declared.
RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET
In the remaining sections of the Financial Review, the principal assets and liabilities are summarised by their nature, rather than by their classification in the Consolidated Balance Sheet. The classifications of assets and liabilities in the consolidated balance sheet, including the note reference, and in the Financial Review may be reconciled as follows:
| 31 December 2014 | Financial review section | |||||||||||||||||||||||||||||||||||
| Balance sheet line item | Note | Securities | Loans and advances to banks | Loans and advances to customers | Derivatives | Tangible fixed assets | Retirement benefit assets | Other | Balance sheet total | |||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 13 | - | - | - | - | - | - | 22,562 | 22,562 | |||||||||||||||||||||||||||
Trading assets | 14 | 12,757 | 5,936 | 3,007 | - | - | - | - | 21,700 | |||||||||||||||||||||||||||
Derivative financial instruments | 15 | - | - | - | 23,021 | - | - | - | 23,021 | |||||||||||||||||||||||||||
Financial assets designated at fair value | 16 | 622 | - | 2,259 | - | - | - | - | 2,881 | |||||||||||||||||||||||||||
Loans and advances to banks | 17 | - | 2,057 | - | - | - | - | - | 2,057 | |||||||||||||||||||||||||||
Loans and advances to customers | 18 | - | - | 188,691 | - | - | - | - | 188,691 | |||||||||||||||||||||||||||
Loans and receivables securities | 21 | - | 9 | 109 | - | - | - | - | 118 | |||||||||||||||||||||||||||
Available for sale securities | 22 | 8,944 | - | - | - | - | - | - | 8,944 | |||||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | - | 963 | 963 | ||||||||||||||||||||||||||||
Interests in other entities | 23 | - | - | - | - | - | - | 38 | 38 | |||||||||||||||||||||||||||
Property, plant and equipment | 25 | - | - | - | - | 1,624 | - | - | 1,624 | |||||||||||||||||||||||||||
Retirement benefit assets | 36 | - | - | - | - | - | 315 | - | 315 | |||||||||||||||||||||||||||
Tax, intangibles and other assets | - | - | - | - | - | - | 3,063 | 3,063 | ||||||||||||||||||||||||||||
| 22,323 | 8,002 | 194,066 | 23,021 | 1,624 | 315 | 26,626 | 275,977 | |||||||||||||||||||||||||||||
Deposits by banks | Deposits by customers | Debt in issue | Derivatives | Retirement benefit obligations | Other | Balance sheet total | ||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits by banks | 28 | 8,214 | - | - | - | - | - | 8,214 | ||||||||||||||||||||||||||||
Deposits by customers | 29 | - | 153,606 | - | - | - | - | 153,606 | ||||||||||||||||||||||||||||
Trading liabilities | 30 | 7,223 | 4,899 | 3,211 | - | - | - | 15,333 | ||||||||||||||||||||||||||||
Derivative financial instruments | 15 | - | - | - | 22,732 | - | - | 22,732 | ||||||||||||||||||||||||||||
Financial liabilities designated at fair value | 31 | - | - | 2,848 | - | - | - | 2,848 | ||||||||||||||||||||||||||||
Debt securities in issue | 32 | - | - | 51,790 | - | - | - | 51,790 | ||||||||||||||||||||||||||||
Subordinated liabilities | 33 | - | - | 4,002 | - | - | - | 4,002 | ||||||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | 139 | 139 | |||||||||||||||||||||||||||||
Retirement benefit obligations | 36 | - | - | - | - | 199 | - | 199 | ||||||||||||||||||||||||||||
Tax, other liabilities and provisions | - | - | - | - | - | 2,921 | 2,921 | |||||||||||||||||||||||||||||
| 15,437 | 158,505 | 61,851 | 22,732 | 199 | 3,060 | 261,784 | ||||||||||||||||||||||||||||||
| 31 December 2013(1) | Financial review section | |||||||||||||||||||||||||||||||||||
| Balance sheet line item | Note | Securities | Loans and advances to banks | Loans and advances to customers | Derivatives | Tangible assets | Retirement assets | Other | Balance sheet total | |||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 13 | - | - | - | - | - | - | 26,374 | 26,374 | |||||||||||||||||||||||||||
Trading assets | 14 | 8,564 | 9,326 | 4,404 | - | - | - | - | 22,294 | |||||||||||||||||||||||||||
Derivative financial instruments | 15 | - | - | - | 20,049 | - | - | - | 20,049 | |||||||||||||||||||||||||||
Financial assets designated at fair value | 16 | 528 | - | 2,219 | - | - | - | - | 2,747 | |||||||||||||||||||||||||||
Loans and advances to banks | 17 | - | 2,347 | - | - | - | - | - | 2,347 | |||||||||||||||||||||||||||
Loans and advances to customers | 18 | - | - | 184,587 | - | - | - | - | 184,587 | |||||||||||||||||||||||||||
Loans and receivables securities | 21 | - | 246 | 855 | - | - | - | - | 1,101 | |||||||||||||||||||||||||||
Available for sale securities | 22 | 5,005 | - | - | - | - | - | - | 5,005 | |||||||||||||||||||||||||||
Macro hedge of interest rate risk | - | - | - | - | - | - | 769 | 769 | ||||||||||||||||||||||||||||
Interests in other entities | 23 | - | - | - | - | - | - | 27 | 27 | |||||||||||||||||||||||||||
Property, plant and equipment | 25 | - | - | - | - | 1,521 | - | - | 1,521 | |||||||||||||||||||||||||||
Retirement benefit assets | 36 | - | - | - | - | - | 118 | - | 118 | |||||||||||||||||||||||||||
Tax, intangibles and other assets | - | - | - | - | - | - | 3,347 | 3,347 | ||||||||||||||||||||||||||||
| 14,097 | 11,919 | 192,065 | 20,049 | 1,521 | 118 | 30,517 | 270,286 | |||||||||||||||||||||||||||||
| Deposits by banks | Deposits by customers | Debt in issue | Derivatives | Retirement benefit obligations | Other | Balance sheet total | ||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits by banks | 28 | 8,696 | - | - | - | - | - | 8,696 | ||||||||||||||||||||||||||||
Deposits by customers | 29 | - | 147,167 | - | - | - | - | 147,167 | ||||||||||||||||||||||||||||
Trading liabilities | 30 | 11,291 | 7,069 | 2,918 | - | - | - | 21,278 | ||||||||||||||||||||||||||||
Derivative financial instruments | 15 | - | - | - | 18,863 | - | - | 18,863 | ||||||||||||||||||||||||||||
Financial liabilities designated at fair value | 31 | - | - | 3,407 | - | - | - | 3,407 | ||||||||||||||||||||||||||||
Debt securities in issue | 32 | - | - | 50,870 | - | - | - | 50,870 | ||||||||||||||||||||||||||||
Subordinated liabilities | 33 | - | - | 4,306 | - | - | - | 4,306 | ||||||||||||||||||||||||||||
Retirement benefit obligations | 36 | - | - | - | - | 672 | - | 672 | ||||||||||||||||||||||||||||
Tax, other liabilities and provisions | - | - | - | - | - | 2,437 | 2,437 | |||||||||||||||||||||||||||||
| 19,987 | 154,236 | 61,501 | 18,863 | 672 | 2,437 | 257,696 | ||||||||||||||||||||||||||||||
|
Financial review
Santander UK’s holdings of securities only represent a small proportion of its total assets. Santander UK holds securities principally in its trading portfolio or classified as available-for-sale.
Securities analysis by type of issuer
The following table sets out the book and market values of securities at 31 December 2014, 2013 and 2012. For further information, see the Notes to the Consolidated Financial Statements.
2014 £m | 2013 £m | 2012 £m | ||||||||||
Trading portfolio | ||||||||||||
Debt securities: | ||||||||||||
UK Government | 905 | 989 | 1,817 | |||||||||
US Treasury and other US Government agencies and corporations | 309 | 399 | 31 | |||||||||
Other OECD governments | 5,788 | 5,243 | 2,069 | |||||||||
Bank and building society: | ||||||||||||
- Certificates of deposit and bonds | - | - | 13 | |||||||||
Other issuers: | ||||||||||||
- Fixed and floating rate notes – Government guaranteed | 979 | 1,081 | 426 | |||||||||
- Fixed and floating rate notes - Other | - | 147 | 138 | |||||||||
Ordinary shares and similar securities | 4,776 | 705 | 464 | |||||||||
| 12,757 | 8,564 | 4,958 | ||||||||||
Available for sale securities | ||||||||||||
Debt securities: | ||||||||||||
UK Government | 4,164 | 2,912 | 3,844 | |||||||||
US Treasury and other US Government agencies and corporations | - | - | 363 | |||||||||
Other OECD governments | - | - | 906 | |||||||||
Bank and building society: | ||||||||||||
- Certificates of deposit and bonds | 4,755 | 2,069 | 346 | |||||||||
Ordinary shares and similar securities | 25 | 24 | 24 | |||||||||
| 8,944 | 5,005 | 5,483 | ||||||||||
Financial assets designated at fair value through profit and loss | ||||||||||||
Debt securities: | ||||||||||||
Other issuers: | ||||||||||||
- Mortgage-backed securities | 226 | 229 | 250 | |||||||||
- Other asset-backed securities | 134 | 87 | 78 | |||||||||
- Other securities | 262 | 212 | 235 | |||||||||
| 622 | 528 | 563 | ||||||||||
| 22,323 | 14,097 | 11,004 | ||||||||||
UK Government
UK Government securities represent Treasury Bills and UK Government guaranteed issues by other UK banks. These securities are held for trading and liquidity purposes. For further information, see ‘Country Risk Exposure’ in the Risk Review.
US Treasury and other US Government agencies and corporations
US Treasury and other US Government agencies’ and corporations’ securities represent US Treasury Bills, including cash management bills. These securities are held for trading and liquidity purposes. For further information, see ‘Country Risk Exposure’ in the Risk Review.
Other OECD governments
Other OECD government securities represent issuances by OECD governments, other than the US and UK Governments, principally Japan, Italy and Switzerland (2013: principally Japan, Italy and Switzerland). These securities are held for trading and liquidity management purposes. For further information, see ‘Country Risk Exposure’ in the Risk Review.
Bank and building society certificates of deposit and bonds
Bank bonds represent fixed securities with short to medium-term maturities issued by banks. These were managed within the overall position for the relevant book. These securities were held for liquidity purposes.
Fixed and floating rate notes
Fixed and floating rate notes have regular interest rate profiles and are either managed within the overall position for the relevant book or are hedged into one of the main currencies. These securities are held for trading and yield purposes. For further information on Government-guaranteed fixed and floating rate notes, see ‘Country Risk Exposure’ in the Risk Review.
Mortgage-backed securities
This category principally comprises UK residential mortgage-backed securities. These securities are of good quality and contain no sub-prime element. These securities are held as part of the FMIR portfolio. See Note 16 to the Consolidated Financial Statements.
Other asset-backed securities
This category comprises a range of mostly floating-rate asset-backed securities. See Note 16 to the Consolidated Financial Statements.
Other securities
This category principally comprises reversionary UK property securities. See Note 16 to the Consolidated Financial Statements.
Ordinary shares and similar securities
This category comprises equity securities listed in the UK and other countries held for trading purposes. See Note 14 to the Consolidated Financial Statements.
Contractual maturities of securities
Contractual maturities for available-for-sale debt securities and contractual maturities of investments held for trading or classified as fair value through profit or loss are set out in Notes 22 and 44 to the Consolidated Financial Statements, respectively.
Significant exposures
The following table sets forth the book value (which equals market value) of securities of individual counterparties where the aggregate amount of those securities exceeded 10% of Santander UK’s shareholders’ funds at 31 December 2014 as set out in the Consolidated Balance Sheet. The table also sets forth the classification of the securities in the Consolidated Balance Sheet.
Trading assets £m | Available-for-sale £m | Total £m | ||||||||||
UK Government and UK Government guaranteed | 1,884 | 4,164 | 6,048 | |||||||||
Japanese Government | 3,783 | - | 3,783 | |||||||||
Loans and advances to banks include loans to banks and building societies and balances with central banks (excluding those central bank balances which can be withdrawn on demand).
Loans and advances to banks geographical analysis
The geographical analysis of loans and advances presented in the following table is based on the location of the office from which the loans and advances are made, rather than the domicile of the borrower. The balances below include loans and advances to banks that are classified in the balance sheet as trading assets, financial assets designated at fair value, or loans and receivables securities.
2014 £m | 2013 £m | 2012 £m | 2011 £m | 2010 £m | ||||||||||||||||
UK | 5,181 | 8,966 | 11,763 | 10,727 | 13,561 | |||||||||||||||
Non-UK | 2,821 | 2,953 | 1,153 | 861 | 118 | |||||||||||||||
| 8,002 | 11,919 | 12,916 | 11,588 | 13,679 | ||||||||||||||||
Further geographical analysis of loans and advances to banks based on the country of domicile of the borrower rather than the office of lending is contained in ‘Country Risk Exposure’ in the Risk Review, including details of balances with other Banco Santander group companies.
Financial review
Loans and advances to banks maturity analysis
The following table sets forth loans and advances to banks by maturity at 31 December 2014.
On demand £m | In not more than three months £m | In more than not more than one year £m | In more than one year but not more than five years £m | In more than five years but not more than ten years £m | In more than ten years £m | Total £m | ||||||||||||||||||||||
UK | 3,061 | 1,146 | 74 | 266 | 330 | 304 | 5,181 | |||||||||||||||||||||
Non-UK | 2,821 | - | - | - | - | - | 2,821 | |||||||||||||||||||||
Total | 5,882 | 1,146 | 74 | 266 | 330 | 304 | 8,002 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Fixed interest rate | 147 | 796 | 43 | - | 330 | 281 | 1,597 | |||||||||||||||||||||
– Variable interest rate | 5,334 | 321 | 31 | 266 | - | 23 | 5,975 | |||||||||||||||||||||
– Non interest-bearing | 401 | 29 | - | - | - | - | 430 | |||||||||||||||||||||
Total | 5,882 | 1,146 | 74 | 266 | 330 | 304 | 8,002 | |||||||||||||||||||||
LOANS AND ADVANCES TO CUSTOMERS
Santander UK provides lending facilities primarily to personal customers in the form of mortgages secured on residential properties and lending facilities to corporate customers. Purchase and resale agreements represent sale and repurchase activity with professional non-bank customers by the short term markets business.
Loans and advances to customers geographical analysis
The geographical analysis of loans and advances presented in the following table is based on the location of the office from which the loans and advances are made. Further geographical analysis of loans and advances to customers based on the country of domicile of the borrower rather than the office of lending is contained in ‘Country Risk Exposure’ in the Risk Review, including details of balances with other Banco Santander group companies.
The balances below are stated before the deduction for impairment loss allowances and include loans and advances to customers that are classified in the balance sheet as trading assets, financial assets designated at fair value, or loans and receivables securities.
2014 £m | 2013 £m | 2012 £m | 2011 £m | 2010 £m | ||||||||||||||||
UK | ||||||||||||||||||||
Advances secured on residential property | 150,436 | 149,017 | 157,304 | 166,841 | 166,065 | |||||||||||||||
Corporate loans | 32,262 | 29,799 | 29,571 | 29,988 | 25,737 | |||||||||||||||
Finance leases | 2,639 | 3,158 | 3,061 | 2,944 | 2,653 | |||||||||||||||
Other secured advances | 15 | - | - | - | - | |||||||||||||||
Other unsecured advances | 7,043 | 5,732 | 6,733 | 7,545 | 7,734 | |||||||||||||||
Purchase and resale agreements | 1,237 | 4,210 | 2,512 | 6,150 | 8,641 | |||||||||||||||
Loans and receivables securities | 42 | 855 | 769 | 814 | 2,075 | |||||||||||||||
Amounts due from fellow subsidiaries, associates and joint ventures | 797 | 813 | 347 | 32 | 57 | |||||||||||||||
Total UK | 194,471 | 193,584 | 200,297 | 214,314 | 212,962 | |||||||||||||||
Non-UK | ||||||||||||||||||||
Advances secured on residential property | 4 | 5 | 6 | 6 | 8 | |||||||||||||||
Corporate loans | - | - | - | 1 | 1 | |||||||||||||||
Other secured advances | - | - | - | - | - | |||||||||||||||
Other unsecured advances | - | 31 | 25 | - | - | |||||||||||||||
Purchase and resale agreements | 963 | - | 4,950 | 188 | 18 | |||||||||||||||
Loans and receivables securities | 67 | - | - | - | - | |||||||||||||||
Total non-UK | 1,034 | 36 | 4,981 | 195 | 27 | |||||||||||||||
Total | 195,505 | 193,620 | 205,278 | 214,509 | 212,989 | |||||||||||||||
Less: impairment loss allowances | (1,439) | (1,555) | (1,802) | (1,563) | (1,655) | |||||||||||||||
Total, net of impairment loss allowances | 194,066 | 192,065 | 203,476 | 212,946 | 211,334 | |||||||||||||||
Detailed analysis of the loans and receivables securities included in the table above is set out in Note 21 to the Consolidated Financial Statements. Further analysis of the impairment loss allowance is set out in Note 18 to the Consolidated Financial Statements.
No single concentration of loans and advances, with the exception of advances secured on residential properties and corporate loans, as disclosed above, accounts for more than 10% of total loans and advances and no individual country, other than the UK accounts for more than 5% of total loans and advances.
Loans and advances to customers maturity analysis
The following table sets out loans and advances to customers by maturity at 31 December 2014. Overdrafts are included in the ‘on-demand’ category. Loans and advances are included at their contractual maturity; no account is taken of a customer’s ability to repay early where it exists.
On demand £m | In not more than three months £m | In more than three months but not more than one year £m | In more than one year but not more than five years £m | In more than five years but not more than ten years £m | In more than ten years £m | Total £m | ||||||||||||||||||||||
UK | ||||||||||||||||||||||||||||
Advances secured on residential property | 1 | 452 | 675 | 6,842 | 16,612 | 125,854 | 150,436 | |||||||||||||||||||||
Corporate loans | 354 | 1,115 | 2,274 | 14,116 | 5,465 | 8,938 | 32,262 | |||||||||||||||||||||
Finance leases | - | 293 | 763 | 1,403 | 85 | 95 | 2,639 | |||||||||||||||||||||
Other secured advances | - | - | - | 3 | 4 | 8 | 15 | |||||||||||||||||||||
Other unsecured advances | 1,166 | 409 | 534 | 3,614 | 587 | 733 | 7,043 | |||||||||||||||||||||
Purchase and resale agreements | - | 1,007 | 230 | - | - | - | 1,237 | |||||||||||||||||||||
Loans and receivables securities | - | - | - | - | - | 42 | 42 | |||||||||||||||||||||
Amounts due from fellow subsidiaries, associates and joint ventures | 3 | 728 | - | 52 | 14 | - | 797 | |||||||||||||||||||||
Total UK | 1,524 | 4,004 | 4,476 | 26,030 | 22,767 | 135,670 | 194,471 | |||||||||||||||||||||
Non-UK | ||||||||||||||||||||||||||||
Advances secured on residential property | - | - | - | 1 | 1 | 2 | 4 | |||||||||||||||||||||
Purchase and resale agreements | - | 963 | - | - | - | - | 963 | |||||||||||||||||||||
Loans and receivables securities | - | - | - | - | - | 67 | 67 | |||||||||||||||||||||
Total non-UK | - | 963 | - | 1 | 1 | 69 | 1,034 | |||||||||||||||||||||
Total | 1,524 | 4,967 | 4,476 | 26,031 | 22,768 | 135,739 | 195,505 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Fixed interest rate | 57 | 2,421 | 1,532 | 8,684 | 8,301 | 78,043 | 99,038 | |||||||||||||||||||||
– Variable interest rate | 1,467 | 2,546 | 2,944 | 17,347 | 14,467 | 57,696 | 96,467 | |||||||||||||||||||||
Total | 1,524 | 4,967 | 4,476 | 26,031 | 22,768 | 135,739 | 195,505 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Interest-only advances secured on residential property | 323 | 188 | 722 | 5,858 | 10,228 | 40,268 | 57,587 | |||||||||||||||||||||
Santander UK’s policy is to hedge all fixed-rate loans and advances to customers using derivative instruments, or by matching with other on-balance sheet interest rate exposures.
The balance sheet is managed on a behavioural basis, rather than on the basis of contractual maturity, with many loans being prepaid prior to their legal maturity. This applies in particular to advances secured on residential property.
Impairment loss allowances on loans and advances to customers
Details of Santander UK’s impairment loss allowances policy are set out in Note 1 to the Consolidated Financial Statements. An analysis of impairment loss allowances on loans and advances to customers, including movements in impairment loss allowances, is set out in Note 17 to the Consolidated Financial Statements.
DERIVATIVE ASSETS AND LIABILITIES
2014 £m | 2013 £m | 2012 £m | ||||||||||
Assets | ||||||||||||
- held for trading | 20,235 | 17,433 | 28,064 | |||||||||
- held for hedging | 2,786 | 2,616 | 2,082 | |||||||||
| 23,021 | 20,049 | 30,146 | ||||||||||
Liabilities | ||||||||||||
- held for trading | 20,462 | 17,297 | 27,415 | |||||||||
- held for hedging | 2,270 | 1,566 | 1,446 | |||||||||
| 22,732 | 18,863 | 28,861 | ||||||||||
Derivatives are held for trading or for risk management purposes. All derivatives are classified as held at fair value through profit or loss. For accounting purposes, Santander UK chooses to designate certain derivatives in a hedging relationship if they meet specific criteria. The main hedging derivatives are interest rate and cross-currency swaps, which are used to hedge fixed-rate lending and structured savings products and medium-term note issuances, capital issuances and other capital markets funding.
Commercial Banking and Corporate & Institutional Banking deal with commercial customers who wish to enter into derivative contracts. Any market risk arising from such transactions is hedged by Corporate & Institutional Banking. Corporate & Institutional Banking is responsible for implementing Santander UK derivative hedging with the external market together with its own trading activities. Further detail on market risk is set out in the Risk Review. A summary of Santander UK’s derivative activities, the related risks associated with such activities and the types of hedging derivatives used in managing such risks, as well as notional amounts and assets and liabilities analysed by contract type are contained in Note 15 of the Consolidated Financial Statements.
Financial review
2014 £m | 2013 £m | 2012 £m | ||||||||||
Property, plant and equipment | 1,624 | 1,521 | 1,541 | |||||||||
Capital expenditure incurred during the year | 370 | 258 | 230 | |||||||||
Details of capital expenditure contracted but not provided for in respect of tangible fixed assets are set out in Note 25 to the Consolidated Financial Statements. Santander UK had 1,291 property interests at 31 December 2014 (2013: 1,502). The total consisted of 340 freeholds (2013: 349) and 952 operating lease interests (2013: 1,153), occupying a total floor space of 519,193 square metres (2013: 510,671 square metres).
The number of property interests is more than the number of individual properties as Santander UK has more than one interest in some properties. The majority of Santander UK’s property interests are retail branches. Included in the above total are 118 properties (2013: 208 properties) that were not occupied by Santander UK at 31 December 2014. Of Santander UK’s individual properties, 967 are located in the UK (2013: 1,056) and none in Europe and the US (2013: 1 and 2) respectively. There are no material environmental issues associated with the use of the above properties.
At 31 December 2014, Santander UK had 14 principal sites including its headquarters (2013: 16). They are used for its significant business operations, including Technology and Operations; People and Talent; Retail Banking; Commercial Banking; Corporate & Institutional Banking; Telephone Sales and Servicing; Complaints handling; Debt management; Finance; Compliance; Marketing; and IT operations including Data Centres.
Management believes its existing properties and those under construction, together with those it leases, are adequate and suitable for its business as presently conducted and to meet future business needs. All properties are adequately maintained.
2014 £m | 2013 £m | 2012 £m | ||||||||||
Retirement benefit assets | 315 | 118 | 254 | |||||||||
Retirement benefit obligations | (199) | (672) | (305) | |||||||||
Santander UK operates a number of defined contribution and defined benefit pension schemes, and post-retirement medical benefit plans. Detailed disclosures of Santander UK’s retirement benefit assets and obligations are contained in Note 36 to the Consolidated Financial Statements.
The balances below include deposits by banks that are classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
2014 £m | 2013 £m | 2012 £m | ||||||||||
Year-end balance(1) | 15,437 | 19,987 | 19,677 | |||||||||
Average balance(2) | 16,018 | 27,395 | 26,714 | |||||||||
Average interest rate(2) | 1.01% | 1.53% | 1.27% | |||||||||
|
|
At 31 December 2014, deposits by foreign banks amounted to £3,840m (2013: £14,186m, 2012: £12,280m). The following tables set forth the average balances of deposits by banks by geography.
| Average: year ended 31 December | ||||||||||||
2014 £m | 2013 £m | 2012 £m | ||||||||||
UK | 16,016 | 27,307 | 26,592 | |||||||||
Non-UK | 2 | 88 | 122 | |||||||||
| 16,018 | 27,395 | 26,714 | ||||||||||
The balances below include deposits by customers that are classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
2014 £m | 2013 £m | 2012 £m | ||||||||||
Year-end balance | 158,505 | 154,236 | 156,285 | |||||||||
Average balance(1) | 156,308 | 154,881 | 159,611 | |||||||||
Average interest rate(1) | 1.34% | 1.74% | 1.93% | |||||||||
|
The following tables set forth the average balances of deposits by geography and customer type.
| Average: year ended 31 December | ||||||||||||
2014 £m | 2013 £m | 2012 £m | ||||||||||
UK | ||||||||||||
Retail demand deposits | 91,668 | 81,022 | 78,163 | |||||||||
Retail time deposits | 29,504 | 35,925 | 41,925 | |||||||||
Wholesale deposits | 31,856 | 31,067 | 31,118 | |||||||||
| 153,028 | 148,014 | 151,206 | ||||||||||
Non-UK | ||||||||||||
Retail demand deposits | 834 | 964 | 1,375 | |||||||||
Retail time deposits | 1,218 | 2,703 | 5,818 | |||||||||
Wholesale deposits | 1,228 | 3,200 | 1,212 | |||||||||
| 3280 | 6,867 | 8,405 | ||||||||||
| 156,308 | 154,881 | 159,611 | ||||||||||
Retail demand and time deposits are obtained either through the branch network, cahoot or remotely (such as postal accounts). Retail demand and time deposits are also obtained outside the UK, principally through Abbey National International Limited and through the Isle of Man branch of Santander UK plc. They are all interest bearing and interest rates are varied from time to time in response to competitive conditions.
Demand deposits
Demand deposits consist of savings and current accounts. Savings products comprise Individual Savings Accounts, instant saver accounts, remote access accounts, such as those serviced by post, and a number of other accounts which allow the customer a limited number of notice-free withdrawals per year depending on the balance remaining in the account. These accounts are treated as demand deposits because the entire account balance may be withdrawn on demand without penalty as one of the notice-free withdrawals.
Time deposits
Time deposits consist of notice accounts, which require customers to give notice of an intention to make a withdrawal, and bond accounts, which have a minimum deposit requirement. In each of these accounts early withdrawal incurs an interest penalty.
Wholesale deposits
Wholesale deposits are those which either are obtained through the money markets or for which interest rates are quoted on request rather than being publicly advertised. These deposits are of fixed maturity and bear interest rates that reflect the inter-bank money market rates.
Financial review
Santander UK includes short-term borrowings within deposits by banks, trading liabilities, financial liabilities designated at fair value and debt securities in issue and does not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the US Securities and Exchange Commission (the ‘SEC’) as amounts payable for short-term obligations that are US Federal funds purchased and securities sold under repurchase agreements, commercial paper, borrowings from banks, borrowings from factors or other financial institutions and any other short-term borrowings reflected on Santander UK’s balance sheet. Santander UK’s only significant short-term borrowings are securities sold under repurchase agreements, commercial paper, borrowings from banks, negotiable certificates of deposit, and certain other debt securities in issue. Additional information on short-term borrowings is provided in the table below for each of the years ended 31 December 2014, 2013 and 2012.
2014 £m | 2013 £m | 2012 £m | ||||||||||
Securities sold under repurchase agreements | ||||||||||||
- Year-end balance | 9,420 | 14,844 | 24,583 | |||||||||
- Year-end interest rate | 0.35% | 0.49% | 0.40% | |||||||||
- Average balance(1) | 16,816 | 20,573 | 30,336 | |||||||||
- Average interest rate(1) | 0.35% | 0.54% | 0.39% | |||||||||
- Maximum balance(1) | 22,066 | 26,215 | 37,621 | |||||||||
Commercial paper | ||||||||||||
- Year-end balance | 4,364 | 3,996 | 3,697 | |||||||||
- Year-end interest rate | 0.24% | 0.27% | 0.37% | |||||||||
- Average balance(1) | 4,404 | 4,453 | 3,742 | |||||||||
- Average interest rate(1) | 0.29% | 0.28% | 0.61% | |||||||||
- Maximum balance(1) | 5,412 | 5,291 | 3,921 | |||||||||
Borrowings from banks (Deposits by banks)(2) | ||||||||||||
- Year-end balance | 2,983 | 3,057 | 2,372 | |||||||||
- Year-end interest rate | 0.38% | 0.02% | 0.29% | |||||||||
- Average balance(1) | 3,135 | 2,721 | 2,923 | |||||||||
- Average interest rate(1) | 0.07% | 0.03% | 0.31% | |||||||||
- Maximum balance(1) | 4,518 | 3,401 | 4,606 | |||||||||
Negotiable certificates of deposit | ||||||||||||
- Year-end balance | 3,806 | 2,646 | 4,499 | |||||||||
- Year-end interest rate | 0.36% | 1.56% | 1.97% | |||||||||
- Average balance(1) | 4,044 | 2,529 | 2,208 | |||||||||
- Average interest rate(1) | 0.39% | 1.51% | 1.39% | |||||||||
- Maximum balance(1) | 5,142 | 3,173 | 4,499 | |||||||||
Other debt securities in issue | ||||||||||||
- Year-end balance | 4,446 | 5,434 | 2,789 | |||||||||
- Year-end interest rate | 2.52% | 3.37% | 2.99% | |||||||||
- Average balance(1) | 4,858 | 4,919 | 5,644 | |||||||||
- Average interest rate(1) | 2.89% | 3.00% | 2.70% | |||||||||
- Maximum balance(1) | 5,975 | 7,245 | 7,049 | |||||||||
|
|
Commercial paper is issued by Abbey National Treasury Services plc and Abbey National North America LLC. Abbey National Treasury Services plc issues commercial paper with a minimum issuance amount of Euro 100,000 with a maximum maturity of 364 days. Abbey National North America LLC issues commercial paper with minimum denominations of US$100,000 with maturity of up to 270 days from the date of issue.
Certificates of deposit and certain time deposits
The following table sets forth the maturities of Santander UK’s certificates of deposit and other large wholesale time deposits from non-bank counterparties in excess of £50,000 (or the non-sterling equivalent of £50,000) at 31 December 2014. A proportion of Santander UK’s retail time deposits also exceeds £50,000 at any given date; however, the ease of access and other terms of these accounts means that they may not have been in excess of £50,000 throughout 2014.
Furthermore, the customers may withdraw their funds on demand upon payment of an interest penalty. For these reasons, no maturity analysis is presented for such deposits.
Not more than three months £m | In more than three months but not more than six months £m | In more than six months but not more than one year £m | In more than one year £m | Total £m | ||||||||||||||||
Certificates of deposit: | ||||||||||||||||||||
- UK | 1,683 | 583 | 277 | - | 2,543 | |||||||||||||||
- Non-UK | 1,197 | 33 | 33 | 204 | 1,467 | |||||||||||||||
Wholesale time deposits: | ||||||||||||||||||||
- UK | 639 | 30 | 99 | 101 | 869 | |||||||||||||||
| 3,519 | 646 | 409 | 305 | 4,879 | ||||||||||||||||
At 31 December 2013, an additional £14m of wholesale deposits were repayable on demand.
Santander UK has issued debt securities in a range of maturities, interest rate structures and currencies, for purposes of meeting liquidity, funding and capital needs.
| Note | 2014 £m | 2013 £m | 2012 £m | |||||||||||||
Trading liabilities | 30 | 3,211 | 2,918 | 4,119 | ||||||||||||
Financial liabilities designated at fair value | 31 | 2,848 | 3,407 | 4,002 | ||||||||||||
Debt securities in issue | 32 | 51,790 | 50,870 | 59,621 | ||||||||||||
Subordinated liabilities | 33 | 4,002 | 4,306 | 3,781 | ||||||||||||
| 61,851 | 61,501 | 71,523 | ||||||||||||||
Most of the debt securities that Santander UK has issued are classified as ‘Debt securities in issue’ in the balance sheet. The remaining debt securities issued by Santander UK are classified separately in the balance sheet, either because they qualify as ‘Trading liabilities’ or were designated upon initial recognition as ‘Financial liabilities designated at fair value’, or there are key differences in the legal terms of the securities, such as liquidation preferences, or subordination of the rights of holders to the rights of holders of certain other liabilities (‘Subordinated liabilities’). Further information is set out in Notes 30 to 33 to the Consolidated Financial Statements.
Santander UK enters into cross-currency derivatives in connection with all funding raised through the issuance of debt securities in currencies other than sterling (principally euro, US dollars and Japanese yen) which swap foreign currency liabilities back into sterling as Santander UK’s commercial balance sheet is almost entirely denominated in sterling.
The amounts and maturities of contractual obligations in respect of guarantees are described in Note 37 to the Consolidated Financial Statements. Other contractual obligations, including payments of principal and interest where applicable, are set out in the table below. Interest payments are included in the maturity column of the interest payments themselves, and are calculated using current interest rates.
| Payments due by period | ||||||||||||||||||||
Total £m | Less than 1 year £m | 1-3 years £m | 3-5 years £m | Over 5 years £m | ||||||||||||||||
Deposits by banks(1) (2) | 15,437 | 11,179 | 3,943 | 199 | 116 | |||||||||||||||
Deposits by customers - repos(1) | 4,540 | 4,040 | - | - | 500 | |||||||||||||||
Deposits by customers - other(2) | 153,965 | 148,367 | 4,406 | 856 | 336 | |||||||||||||||
Derivative financial instruments | 22,732 | 2,834 | 2,519 | 2,403 | 14,976 | |||||||||||||||
Debt securities in issue(3) | 57,849 | 13,891 | 11,096 | 6,154 | 26,708 | |||||||||||||||
Subordinated liabilities | 4,002 | 269 | 541 | 513 | 2,679 | |||||||||||||||
Retirement benefit obligations | 9,314 | 225 | 496 | 566 | 8,027 | |||||||||||||||
Operating lease obligations | 406 | 67 | 119 | 108 | 112 | |||||||||||||||
Purchase obligations | 465 | 465 | - | - | - | |||||||||||||||
| 268,710 | 181,337 | 23,120 | 10,799 | 53,454 | ||||||||||||||||
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As the above table is based on contractual maturities, no account is taken of call features related to Subordinated liabilities. The repayment terms of the debt securities may be accelerated in line with the covenants contained within the individual loan agreements. Details of deposits by banks and deposits by customers can be found in Notes 28 and 29 to the Consolidated Financial Statements. Santander UK has entered into outsourcing contracts where, in some circumstances, there is no minimum specified spending requirement. In these cases, anticipated spending volumes have been included within purchase obligations.
Under current conditions, Santander UK’s working capital is expected to be sufficient for its present requirements and to pursue its planned business strategies.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, Santander UK issues guarantees on behalf of customers. The significant types of guarantees are standby letters of credit which represent the taking on of credit on behalf of customers when actual funding is not required, normally because a third party is not prepared to accept the credit risk of the ANTS group’s customer. These are included in the normal impairment loss allowance assessment alongside other forms of credit exposure
In addition, Santander UK, as is normal in such activity, gives representations, indemnities and warranties on the sale of subsidiaries, businesses and other assets. The maximum potential amount of any claims made against these is usually significantly higher than actual settlements. Provisions are made with respect to management’s best estimate of the likely outcome, either at the time of sale, or subsequently if additional information becomes available.
See Note 24 to the Consolidated Financial Statements for further information regarding off-balance sheet arrangements. See Note 37 to the Consolidated Financial Statements for additional information regarding Santander UK’s guarantees, commitments and contingencies. In the ordinary course of business, Santander UK also enters into securitisation transactions as described in Note 19 to the Consolidated Financial Statements. The securitisation companies are consolidated and the assets continue to be administered by Santander UK. The securitisation companies provide Santander UK with an important source of long-term funding.
Financial review
Interest rate sensitivity refers to the relationship between interest rates and net interest income resulting from the periodic repricing of assets and liabilities. The largest administered rate items in Santander UK’s balance sheet are residential mortgages and retail deposits, the majority of which bear interest at variable rates. Santander UK is able to mitigate the impact of interest rate movements on net interest income in Retail Banking by repricing separately the variable rate mortgages and variable rate retail deposits, subject to competitive pressures.
Santander UK also offers fixed-rate mortgages and savings products on which the interest rate paid by or to the customer is fixed for an agreed period of time at the start of the contract. Santander UK manages the margin on fixed-rate products by the use of derivatives matching the fixed-rate profiles. The risk of prepayment is reduced by imposing early termination charges if the customers terminate their contracts early.
Santander UK seeks to manage the risks associated with movements in interest rates as part of its management of the overall non-trading position. This is done within limits as described in the Risk Review.
Changes in net interest income - volume and rate analysis
The following table allocates changes in interest income, interest expense and net interest income (including amounts classified in discontinued operations) between changes in volume and changes in rate for the years ended 31 December 2014, 2013 and 2012. Volume and rate variances have been calculated on the movement in the average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities. The variance caused by changes in both volume and rate has been allocated to rate changes.
| 2014/2013 | 2013/2012 | |||||||||||||||||||||||
Total change | Changes due to increase/(decrease) in | Total change | Changes due to increase/(decrease) in | |||||||||||||||||||||
| £m | Volume £m | Rate £m | £m | Volume £m | Rate £m | |||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans and advances to banks: | ||||||||||||||||||||||||
- UK | (20) | (36) | 16 | (37) | (15) | (22) | ||||||||||||||||||
- Non-UK | 11 | 7 | 4 | 10 | 20 | (10) | ||||||||||||||||||
Loans and advances to customers: | ||||||||||||||||||||||||
- UK | (392) | (44) | (348) | (237) | (347) | 110 | ||||||||||||||||||
Other interest earning financial assets: | ||||||||||||||||||||||||
- UK | 31 | 30 | 1 | - | 14 | (14) | ||||||||||||||||||
- Non-UK | (3) | (3) | - | 2 | 1 | 1 | ||||||||||||||||||
Total interest income | ||||||||||||||||||||||||
- UK | (381) | (50) | (331) | (274) | (348) | 74 | ||||||||||||||||||
- Non-UK | 8 | 4 | 4 | 12 | 21 | (9) | ||||||||||||||||||
| (373) | (46) | (327) | (262) | (327) | 65 | |||||||||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits by banks: | ||||||||||||||||||||||||
- UK | (107) | (39) | (68) | 1 | (52) | 53 | ||||||||||||||||||
- Non-UK | - | - | - | - | - | - | ||||||||||||||||||
Deposits by customers - retail demand deposits: | ||||||||||||||||||||||||
- UK | (14) | 139 | (153) | (193) | 46 | (239) | ||||||||||||||||||
- Non-UK | (10) | (2) | (8) | (27) | (12) | (15) | ||||||||||||||||||
Deposits by customers - retail time deposits: | ||||||||||||||||||||||||
- UK | (465) | (210) | (255) | 4 | (167) | 171 | ||||||||||||||||||
- Non-UK | (46) | (36) | (10) | (88) | (82) | (6) | ||||||||||||||||||
Deposits by customers - wholesale deposits: | ||||||||||||||||||||||||
- UK | (51) | (26) | (25) | 37 | 82 | (45) | ||||||||||||||||||
- Non-UK | - | 1 | (1) | 1 | - | 1 | ||||||||||||||||||
Subordinated debt: | ||||||||||||||||||||||||
- UK | 45 | 12 | 33 | (68) | (44) | (24) | ||||||||||||||||||
Debt securities in issue: | ||||||||||||||||||||||||
- UK | (192) | (68) | (124) | (161) | (155) | (6) | ||||||||||||||||||
- Non-UK | (6) | 1 | (7) | (8) | 12 | (20) | ||||||||||||||||||
Other interest-bearing financial liabilities: | ||||||||||||||||||||||||
- UK | 2 | 1 | 1 | 11 | 30 | (19) | ||||||||||||||||||
Total interest expense | ||||||||||||||||||||||||
- UK | (782) | (191) | (591) | (369) | (260) | (109) | ||||||||||||||||||
- Non-UK | (62) | (36) | (26) | (122) | (82) | (40) | ||||||||||||||||||
| (844) | (227) | (617) | (491) | (342) | (149) | |||||||||||||||||||
Net interest income | 471 | 181 | 290 | 229 | 15 | 214 | ||||||||||||||||||
As year-end statements may not be representative of activity throughout the year, average balance sheets are presented below. The average balance sheets summarise the significant categories of assets and liabilities, together with average interest rates.
| 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
Average Balance(1) £m | Interest £m | Average rate % | Average balance(1) £m | Interest(4,5) £m | Average rate % | Average balance(1) £m | Interest £m | Average rate % | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Loans and advances to banks: | ||||||||||||||||||||||||||||||||||||
- UK | 19,263 | 111 | 0.58 | 26,432 | 131 | 0.50 | 28,941 | 168 | 0.58 | |||||||||||||||||||||||||||
- Non-UK | 10,078 | 30 | 0.30 | 7,453 | 19 | 0.25 | 2,339 | 9 | 0.38 | |||||||||||||||||||||||||||
Loans and advances to customers:(3) | ||||||||||||||||||||||||||||||||||||
- UK | 187,843 | 6,548 | 3.49 | 189,048 | 6,940 | 3.67 | 198,657 | 7,177 | 3.61 | |||||||||||||||||||||||||||
- Non-UK | 5 | - | - | 6 | - | - | 7 | - | - | |||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||||||
- UK | 8,312 | 108 | 1.30 | 6,009 | 77 | 1.28 | 5,093 | 77 | 1.51 | |||||||||||||||||||||||||||
- Non-UK | - | - | - | 166 | 3 | 1.81 | 92 | 1 | 1.09 | |||||||||||||||||||||||||||
Total average interest-earning assets, interest income(2) | 225,501 | 6,797 | 3.01 | 229,114 | 7,170 | 3.13 | 235,129 | 7,432 | 3.24 | |||||||||||||||||||||||||||
Impairment loss allowances | (1,502) | - | - | (1,704) | - | - | (1,707) | - | - | |||||||||||||||||||||||||||
Trading business | 18,549 | - | - | 25,032 | - | - | 26,445 | - | - | |||||||||||||||||||||||||||
Assets designated at FVTPL | 2,793 | - | - | 3,140 | - | - | 4,439 | - | - | |||||||||||||||||||||||||||
Other non-interest-earning assets | 34,204 | - | - | 38,414 | - | - | 42,624 | - | - | |||||||||||||||||||||||||||
Total average assets | 279,545 | - | - | 293,996 | - | - | 306,930 | - | - | |||||||||||||||||||||||||||
Non-UK assets as a % of total | 3.61% | - | - | 2.59% | - | - | 0.79% | - | - | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Deposits by banks: | ||||||||||||||||||||||||||||||||||||
- UK | (6,855) | (81) | 1.18 | (8,624) | (188) | 2.18 | (11,945) | (187) | 1.57 | |||||||||||||||||||||||||||
- Non-UK | (2) | - | - | (13) | - | - | (65) | - | - | |||||||||||||||||||||||||||
Deposits by customers - retail demand: | ||||||||||||||||||||||||||||||||||||
- UK | (91,668) | (1,047) | 1.14 | (81,022) | (1,061) | 1.31 | (78,163) | (1,254) | 1.60 | |||||||||||||||||||||||||||
- Non-UK | (834) | (3) | 0.36 | (964) | (13) | 1.35 | (1,375) | (40) | 2.91 | |||||||||||||||||||||||||||
Deposits by customers - retail time: | ||||||||||||||||||||||||||||||||||||
- UK | (29,504) | (708) | 2.40 | (35,925) | (1,173) | 3.26 | (41,925) | (1,169) | 2.79 | |||||||||||||||||||||||||||
- Non-UK | (1,218) | (20) | 1.64 | (2,703) | (66) | 2.44 | (5,818) | (154) | 2.65 | |||||||||||||||||||||||||||
Deposits by customers – wholesale: | ||||||||||||||||||||||||||||||||||||
- UK | (26,361) | (293) | 1.11 | (28,525) | (344) | 1.21 | (22,506) | (307) | 1.36 | |||||||||||||||||||||||||||
- Non-UK | (1,169) | (1) | 0.09 | (628) | (1) | 0.16 | (52) | - | - | |||||||||||||||||||||||||||
Bonds and medium-term notes: | ||||||||||||||||||||||||||||||||||||
- UK | (46,517) | (1,021) | 2.19 | (49,292) | (1,213) | 2.46 | (55,567) | (1,374) | 2.47 | |||||||||||||||||||||||||||
- Non-UK | (4,730) | (11) | 0.23 | (4,512) | (17) | 0.38 | (3,043) | (25) | 0.82 | |||||||||||||||||||||||||||
Dated and undated loan capital and other subordinated liabilities: | ||||||||||||||||||||||||||||||||||||
- UK | (4,285) | (151) | 3.52 | (3,860) | (106) | 2.75 | (5,159) | (174) | 3.37 | |||||||||||||||||||||||||||
- Non-UK | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Other interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
- UK | (422) | (27) | 6.40 | (406) | (25) | 6.16 | (129) | (14) | 10.85 | |||||||||||||||||||||||||||
Total average interest-bearing liabilities, interest expense(2) | (213,565) | (3,363) | 1.57 | (216,474) | (4,207) | 1.94 | (225,747) | (4,698) | 2.08 | |||||||||||||||||||||||||||
Trading business | (22,242) | - | - | (30,546) | - | - | (28,962) | - | - | |||||||||||||||||||||||||||
Liabilities designated at FVTPL | (3,556) | - | - | (4,997) | - | - | (5,152) | - | - | |||||||||||||||||||||||||||
- Other non-interest bearing liabilities | (26,606) | - | - | (29,003) | - | - | (33,770) | - | - | |||||||||||||||||||||||||||
Shareholders’ funds | (13,576) | - | - | (12,976) | - | - | (13,299) | - | - | |||||||||||||||||||||||||||
Total average liabilities and shareholders’ funds | (279,545) | - | - | (293,996) | - | - | (306,930) | - | - | |||||||||||||||||||||||||||
Non-UK liabilities as a % of total | 2.84% | - | - | 3.00% | - | - | 3.37% | - | - | |||||||||||||||||||||||||||
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Financial review
2014 £m | 2013 £m | 2012 £m | ||||||||||
Net cash (outflow)/inflow from operating activities | (5,559) | 4,752 | 4,024 | |||||||||
Net cash (outflow)/inflow from investing activities | (4,145) | 182 | (5,808) | |||||||||
Net cash (outflow)/inflow from financing activities | (335) | (8,423) | 1,101 | |||||||||
Decrease in cash and cash equivalents | (10,039) | (3,489) | (683) | |||||||||
The major activities and transactions that affected Santander UK’s cash flows during 2014, 2013 and 2012 were as follows:
In 2014, the net cash outflow from operating activities of £5,559m resulted from the reduction in trading balances, increased customer lending partially offset by increased customer savings and deposits from other banks. In 2014, the net cash outflow from investing activities of £4,145m principally reflected the purchase and sale of available-for-sale securities. In 2014, the net cash outflow from financing activities of £335m reflected the repayment of debt securities maturing in the year of £20,310m offset by new issues of debt securities of £19,936m and the issuance of £800m Perpetual Capital Securities. Further outflows of cash occurred in the payment of interim dividends of £447m on ordinary shares and £40m of dividends on other equity instruments. In 2014, cash and cash equivalents decreased by £10,039m principally from the increase in customer lending and purchase of available-for-sale securities.
In 2013, the net cash inflow from operating activities of £4,752m resulted from the continued reduction in Santander UK’s lending portfolios, partially offset by a reduction in customer savings and deposits from other banks. In 2013, the net cash inflow from investing activities of £182m was in principle derived from the purchase and sale of UK Treasury bills, partially offset by the purchase of property, plant and equipment. In 2013, the net cash outflow from financing activities of £8,423m reflected the repayment of loan capital maturing in the year of £33,170m partially offset by new issues of loan capital of £25,469m. Further outflows of cash occurred in the payment of £665m dividends on ordinary shares. In 2013, cash and cash equivalents decreased by £3,489m principally from the repayment of matured loan capital offset by reduced customer lending.
In 2012, the net cash inflow from operating activities of £4,024m resulted from Santander UK’s continued de-leveraging process of legacy portfolios in run-off, partially offset by a reduction in trading liabilities. In 2012, the net cash outflow from investing activities of £5,808m resulted primarily from the acquisition of UK Treasury bills and the purchase of property, plant and equipment. In 2012, the net cash inflow from financing activities of £1,101m reflected new issues of loan capital of £37,219m offset by repayments of loan capital maturing in the year of £35,636m and payment of £425m dividends on ordinary shares. In 2012, cash and cash equivalents decreased by £683m principally from the continued de-leveraging process of legacy portfolios in run-off offset by the purchase of Treasury bills.
| Primary | ||||||
| financial | ||||||
Financial statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Santander UK plc
We have audited the accompanying consolidated balance sheets of Santander UK plc and subsidiaries (the ‘Group’)Group) as at 31 December 20142015 and 2013,2014, and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity, and consolidated cash flow statements for each of the three years in the period ended 31 December 2014,2015, the related Notes 1 to 48 and the information on page 36 to 160 of the Risk Review,review, except for those items marked as unaudited. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Santander UK plc and subsidiaries as at 31 December 20142015 and 2013,2014, and the results of their operations and their cash flows for each of the three years in the period ended 31 December 2014,2015, in conformity with International Financial Reporting Standards (‘IFRS’)(IFRS) as adopted by the European Union and IFRS as issued by the International Accounting Standards Board (‘IASB’)(IASB).
/s/ Deloitte LLP
London, United Kingdom
24 February 2016
Annual Report 2015
Deloitte LLP
London, UK
24 February 2015
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Financial statements
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200 Santander UK plc
Independent Auditor’s report | Primary financial statements | Notes to the financial statements | ||||||||||||||
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Annual Report 2015
For the years ended 31 December 2014, 2013 and 2012
| Notes | 2014 £m | 2013(1) £m | 2012(1) £m | |||||||||||
Interest and similar income | 3 | 6,797 | 7,170 | 7,432 | ||||||||||
Interest expense and similar charges | 3 | (3,363) | (4,207) | (4,698) | ||||||||||
Net interest income | 3,434 | 2,963 | 2,734 | |||||||||||
Fee and commission income | 4 | 1,095 | 1,058 | 1,086 | ||||||||||
Fee and commission expense | 4 | (356) | (300) | (225) | ||||||||||
Net fee and commission income | 739 | 758 | 861 | |||||||||||
Net trading and other income | 5 | 297 | 308 | 1,088 | ||||||||||
Total operating income | 4,470 | 4,029 | 4,683 | |||||||||||
Administration expenses | 6 | (1,915) | (1,947) | (1,873) | ||||||||||
Depreciation, amortisation and impairment | 7 | (482) | (248) | (241) | ||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (2,397) | (2,195) | (2,114) | |||||||||||
Impairment losses on loans and advances | 9 | (258) | (475) | (988) | ||||||||||
Provisions for other liabilities and charges | 9 | (416) | (250) | (429) | ||||||||||
Total operating impairment losses, provisions and charges | (674) | (725) | (1,417) | |||||||||||
Profit on continuing operations before tax | 1,399 | 1,109 | 1,152 | |||||||||||
Tax on profit on continuing operations | 10 | (289) | (211) | (271) | ||||||||||
Profit on continuing operations after tax | 1,110 | 898 | 881 | |||||||||||
(Loss)/profit from discontinued operations after tax | 11 | - | (8) | 62 | ||||||||||
Profit after tax for the year | 1,110 | 890 | 943 | |||||||||||
Attributable to: | ||||||||||||||
Equity holders of the parent | 1,110 | 890 | 943 | |||||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
| Notes | 2015 £m | 2014 £m | 2013 £m | |||||||||||
Interest and similar income | 3 | 6,695 | 6,797 | 7,170 | ||||||||||
Interest expense and similar charges | 3 | (3,120) | (3,363) | (4,207) | ||||||||||
Net interest income | 3,575 | 3,434 | 2,963 | |||||||||||
Fee and commission income | 4 | 1,115 | 1,095 | 1,058 | ||||||||||
Fee and commission expense | 4 | (400) | (356) | (300) | ||||||||||
Net fee and commission income | 715 | 739 | 758 | |||||||||||
Net trading and other income | 5 | 283 | 297 | 308 | ||||||||||
Total operating income | 4,573 | 4,470 | 4,029 | |||||||||||
Operating expenses before impairment losses, provisions and charges | 6 | (2,400) | (2,397) | (2,195) | ||||||||||
Impairment losses on loans and advances | 8 | (66) | (258) | (475) | ||||||||||
Provisions for other liabilities and charges | 8 | (762) | (416) | (250) | ||||||||||
Total operating impairment losses, provisions and charges | (828) | (674) | (725) | |||||||||||
Profit from continuing operations before tax | 1,345 | 1,399 | 1,109 | |||||||||||
Tax on profit from continuing operations | 9 | (381) | (289) | (211) | ||||||||||
Profit from continuing operations after tax | 964 | 1,110 | 898 | |||||||||||
Loss from discontinued operations after tax | 10 | - | - | (8) | ||||||||||
Profit after tax for the year | 964 | 1,110 | 890 | |||||||||||
Attributable to: | ||||||||||||||
Equity holders of the parent | 939 | 1,110 | 890 | |||||||||||
Non-controlling interests | 37 | 25 | - | - | ||||||||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the years ended 31 December 2014, 2013 and 2012
| Notes | 2014 £m | 2013(1) £m | 2012(1) £m | |||||||||||
Profit for the year | 1,110 | 890 | 943 | |||||||||||
Other comprehensive income/(expense): | ||||||||||||||
Other comprehensive income that may be reclassified to profit or loss subsequently: | ||||||||||||||
Available-for-sale securities | ||||||||||||||
- Net gains on available-for-sale securities | 22 | 235 | 15 | 6 | ||||||||||
- Net gains on available-for-sale securities transferred to profit or loss on sale | (208) | (46) | (17) | |||||||||||
- Tax on above items | 10 | (6) | 7 | 3 | ||||||||||
| 21 | (24) | (8) | ||||||||||||
Cash flow hedges: | ||||||||||||||
- Net gains/(losses) on cash flow hedges | 44 | (207) | - | |||||||||||
- Net gains on cash flow hedges transferred to profit or loss | 427 | 66 | - | |||||||||||
- Tax on above items | 10 | (99) | 31 | - | ||||||||||
| 372 | (110) | - | ||||||||||||
Exchange differences on translation of foreign operations | (4) | - | - | |||||||||||
Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently | 389 | (134) | (8) | |||||||||||
Other comprehensive income that will not be reclassified to profit or loss subsequently: | ||||||||||||||
Remeasurement of defined benefit pension obligations | 36 | 132 | (564) | (183) | ||||||||||
Tax on above item | 10 | (27) | 113 | 42 | ||||||||||
Net other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently | 105 | (451) | (141) | |||||||||||
Total other comprehensive income/(expense) for the year net of tax | 494 | (585) | (149) | |||||||||||
Total comprehensive income for the year | 1,604 | 305 | 794 | |||||||||||
Attributable to: | ||||||||||||||
Equity holders of the parent | 1,604 | 305 | 794 | |||||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
| Notes | 2015 £m | 2014 £m | 2013 £m | |||||||||||
Profit for the year | 964 | 1,110 | 890 | |||||||||||
Other comprehensive income/(expense): | ||||||||||||||
Other comprehensive income that may be reclassified to profit or loss subsequently: | ||||||||||||||
Available-for-sale securities | ||||||||||||||
- Net gains on available-for-sale securities | 20 | 14 | 235 | 15 | ||||||||||
- Net losses/(gains) on available-for-sale securities transferred to profit or loss | 42 | (208) | (46) | |||||||||||
- Tax on above items | 9 | (2) | (6) | 7 | ||||||||||
| 54 | 21 | (24) | ||||||||||||
Cash flow hedges: | ||||||||||||||
- Net (losses)/gains on cash flow hedges | (307) | 44 | (207) | |||||||||||
- Net losses on cash flow hedges transferred to profit or loss | 305 | 427 | 66 | |||||||||||
- Tax on above items | 9 | (6) | (99) | 31 | ||||||||||
| (8) | 372 | (110) | ||||||||||||
Exchange differences on translation of foreign operations | (5) | (4) | - | |||||||||||
Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently | 41 | 389 | (134) | |||||||||||
Other comprehensive income that will not be reclassified to profit or loss subsequently: | ||||||||||||||
Remeasurement of defined benefit pension obligations | 34 | 319 | 132 | (564) | ||||||||||
Tax on above item | 9 | (89) | (27) | 113 | ||||||||||
Net other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently | 230 | 105 | (451) | |||||||||||
Total other comprehensive income/(expense) for the year net of tax | 271 | 494 | (585) | |||||||||||
Total comprehensive income for the year | 1,235 | 1,604 | 305 | |||||||||||
Attributable to: | ||||||||||||||
Equity holders of the parent | 1,209 | 1,604 | 305 | |||||||||||
Non-controlling interests | 37 | 26 | - | - | ||||||||||
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Consolidated Financial Statements.
202 Santander UK plc
Independent Auditor’s report | Primary financial statements | Notes to the financial statements | ||||||||||||||
Financial statements
At 31 December 2014 and 2013
| Notes | 2014 £m | 2013(1) £m | ||||||||
Assets | ||||||||||
Cash and balances at central banks | 13 | 22,562 | 26,374 | |||||||
Trading assets | 14 | 21,700 | 22,294 | |||||||
Derivative financial instruments | 15 | 23,021 | 20,049 | |||||||
Financial assets designated at fair value | 16 | 2,881 | 2,747 | |||||||
Loans and advances to banks | 17 | 2,057 | 2,347 | |||||||
Loans and advances to customers | 18 | 188,691 | 184,587 | |||||||
Loans and receivables securities | 21 | 118 | 1,101 | |||||||
Available-for-sale securities | 22 | 8,944 | 5,005 | |||||||
Macro hedge of interest rate risk | 963 | 769 | ||||||||
Interests in other entities | 23 | 38 | 27 | |||||||
Intangible assets | 24 | 2,187 | 2,335 | |||||||
Property, plant and equipment | 25 | 1,624 | 1,521 | |||||||
Current tax assets | - | 114 | ||||||||
Deferred tax assets | 26 | - | 16 | |||||||
Retirement benefit assets | 36 | 315 | 118 | |||||||
Other assets | 27 | 876 | 882 | |||||||
Total assets | 275,977 | 270,286 | ||||||||
Liabilities | ||||||||||
Deposits by banks | 28 | 8,214 | 8,696 | |||||||
Deposits by customers | 29 | 153,606 | 147,167 | |||||||
Trading liabilities | 30 | 15,333 | 21,278 | |||||||
Derivative financial instruments | 15 | 22,732 | 18,863 | |||||||
Financial liabilities designated at fair value | 31 | 2,848 | 3,407 | �� | ||||||
Debt securities in issue | 32 | 51,790 | 50,870 | |||||||
Subordinated liabilities | 33 | 4,002 | 4,306 | |||||||
Macro hedge of interest rate risk | 139 | - | ||||||||
Other liabilities | 34 | 2,302 | 1,883 | |||||||
Provisions | 35 | 491 | 550 | |||||||
Current tax liabilities | 69 | 4 | ||||||||
Deferred tax liabilities | 59 | - | ||||||||
Retirement benefit obligations | 36 | 199 | 672 | |||||||
Total liabilities | 261,784 | 257,696 | ||||||||
Equity | ||||||||||
Share capital and other equity instruments | 38 | 4,244 | 3,709 | |||||||
Share premium | 38 | 5,620 | 5,620 | |||||||
Retained earnings | 4,056 | 3,377 | ||||||||
Other reserves | 273 | (116) | ||||||||
Total shareholders’ equity | 14,193 | 12,590 | ||||||||
Total liabilities and equity | 275,977 | 270,286 | ||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
| Notes | 2015 £m | 2014 £m | ||||||||
Assets | ||||||||||
Cash and balances at central banks | 16,842 | 22,562 | ||||||||
Trading assets | 12 | 23,961 | 21,700 | |||||||
Derivative financial instruments | 13 | 20,911 | 23,021 | |||||||
Financial assets designated at fair value | 14 | 2,398 | 2,881 | |||||||
Loans and advances to banks | 15 | 3,548 | 2,057 | |||||||
Loans and advances to customers | 16 | 198,045 | 188,691 | |||||||
Loans and receivables securities | 19 | 52 | 118 | |||||||
Available-for-sale securities | 20 | 9,012 | 8,944 | |||||||
Macro hedge of interest rate risk | 781 | 963 | ||||||||
Interests in other entities | 21 | 48 | 38 | |||||||
Intangible assets | 22 | 2,231 | 2,187 | |||||||
Property, plant and equipment | 23 | 1,597 | 1,624 | |||||||
Current tax assets | 49 | - | ||||||||
Retirement benefit assets | 34 | 556 | 315 | |||||||
Other assets | 25 | 1,375 | 876 | |||||||
Total assets | 281,406 | 275,977 | ||||||||
Liabilities | ||||||||||
Deposits by banks | 26 | 8,278 | 8,214 | |||||||
Deposits by customers | 27 | 164,074 | 153,606 | |||||||
Trading liabilities | 28 | 12,722 | 15,333 | |||||||
Derivative financial instruments | 13 | 21,508 | 22,732 | |||||||
Financial liabilities designated at fair value | 29 | 2,016 | 2,848 | |||||||
Debt securities in issue | 30 | 49,615 | 51,790 | |||||||
Subordinated liabilities | 31 | 3,885 | 4,002 | |||||||
Macro hedge of interest rate risk | 110 | 139 | ||||||||
Other liabilities | 32 | 2,335 | 2,302 | |||||||
Provisions | 33 | 870 | 491 | |||||||
Current tax liabilities | 1 | 69 | ||||||||
Deferred tax liabilities | 24 | 223 | 59 | |||||||
Retirement benefit obligations | 34 | 110 | 199 | |||||||
Total liabilities | 265,747 | 261,784 | ||||||||
Equity | ||||||||||
Share capital and other equity instruments | 36 | 4,911 | 4,244 | |||||||
Share premium | 36 | 5,620 | 5,620 | |||||||
Retained earnings | 4,679 | 4,056 | ||||||||
Other reserves | 314 | 273 | ||||||||
Total shareholders’ equity | 15,524 | 14,193 | ||||||||
Non-controlling interests | 37 | 135 | - | |||||||
Total equity | 15,659 | 14,193 | ||||||||
Total liabilities and equity | 281,406 | 275,977 | ||||||||
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Consolidated Financial Statements.
The Primary Financial Statements and the accompanying Notes to the Financial Statements were approved and authorised for issue by the Board on 24 February 20152016 and signed on its behalf by:
Stephen Jones
Chief Financial Officer
Company Registered Number: 2294747
 |  | |
| Nathan Bostock | Antonio Roman | |
| Chief Executive Officer | Chief Financial Officer | |
Annual Report 2015
Financial statements
CONSOLIDATED CASH FLOW STATEMENT
For the years ended 31 December
| Notes | 2015 £m | 2014 £m | 2013 £m | |||||||||||
Cash flows (used in)/from operating activities | ||||||||||||||
Profit for the year | 964 | 1,110 | 890 | |||||||||||
Adjustments for: | ||||||||||||||
Non-cash items included in profit | 1,841 | 1,306 | 1,618 | |||||||||||
Change in operating assets | (9,990) | (11,662) | 17,616 | |||||||||||
Change in operating liabilities | 4,292 | 4,475 | (15,951) | |||||||||||
Corporation taxes paid | (419) | (149) | (118) | |||||||||||
Effects of exchange rate differences | (585) | (613) | 702 | |||||||||||
Net cash flow (used in)/from operating activities | 38 | (3,897) | (5,533) | 4,757 | ||||||||||
Cash flows (used in)/from investing activities | ||||||||||||||
Investments in other entities | 21, 46 | (109) | - | (18) | ||||||||||
Purchase of property, plant and equipment and intangible assets | 22, 23 | (356) | (506) | (339) | ||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 40 | 71 | 99 | |||||||||||
Purchase of available-for-sale securities | (2,021) | (4,236) | (2,904) | |||||||||||
Proceeds from sale and redemption of available-for-sale securities | 1,928 | 526 | 3,344 | |||||||||||
Net cash flow (used in)/from investing activities | (518) | (4,145) | 182 | |||||||||||
Cash flows (used in)/from financing activities | ||||||||||||||
Issue of Perpetual Capital Securities | 36 | 750 | 800 | - | ||||||||||
Issue of debt securities | 13,267 | 19,936 | 25,469 | |||||||||||
Issuance costs of debt securities | (33) | (26) | (20) | |||||||||||
Repayment of debt securities | (16,098) | (20,310) | (32,880) | |||||||||||
Repurchase of other equity instruments | 36 | (99) | (274) | (275) | ||||||||||
Dividends paid on ordinary shares | 11 | (575) | (447) | (665) | ||||||||||
Dividends paid on preference shares classified in equity | 11 | (2) | (19) | (19) | ||||||||||
Dividends paid on Reserve Capital Instruments | 11 | (21) | (21) | (21) | ||||||||||
Dividends paid on Perpetual Preferred Securities | 11 | - | - | (17) | ||||||||||
Dividends paid on Perpetual Capital Securities | 11 | (103) | - | - | ||||||||||
Net cash flow used in financing activities | (2,914) | (361) | (8,428) | |||||||||||
Net decrease in cash and cash equivalents | (7,329) | (10,039) | (3,489) | |||||||||||
Cash and cash equivalents at beginning of the year | 27,363 | 37,179 | 41,639 | |||||||||||
Effects of exchange rate changes on cash and cash equivalents | 317 | 223 | (971) | |||||||||||
Cash and cash equivalents at the end of the year | 38 | 20,351 | 27,363 | 37,179 | ||||||||||
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
204 Santander UK plc
Independent Auditor’s report | Primary financial statements | Notes to the financial statements | ||||||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the years ended 31 December 2014, 2013 and 2012
| Other reserves | Other reserves | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes | Share capital £m | Share £m | Available £m | Cash flow £m | Foreign £m | Retained £m | Total £m | Notes | Share capital £m | Share £m | Available £m | Cash flow £m | Foreign £m | Retained earnings(1) £m | Total £m | Non- controlling £m | Total £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||
1 January 2015 | 4,244 | 5,620 | (2) | 262 | 13 | 4,056 | 14,193 | — | 14,193 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income/(expense) for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | - | 939 | 939 | 25 | 964 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other comprehensive income/(expense) for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 14 | - | - | - | 14 | - | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net losses on available-for-sale securities transferred to profit or loss | - | - | 42 | - | - | - | 42 | - | 42 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net losses on cash flow hedges | - | - | - | (307) | - | - | (307) | - | (307) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net losses on cash flow hedges transferred to profit or loss | - | - | - | 305 | - | - | 305 | - | 305 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | 34 | - | - | - | - | - | 318 | 318 | 1 | 319 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Exchange differences on translation of foreign operations | - | - | - | - | (5) | - | (5) | - | (5) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Tax on other comprehensive income/(expense) | - | - | (2) | (6) | - | (89) | (97) | - | (97) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(expense) for the year, net of tax | - | - | 54 | (8) | (5) | 229 | 270 | 1 | 271 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of subsidiary with non-controlling interests | 46 | - | - | - | - | - | - | - | 109 | 109 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issue of Perpetual Capital Securities | 36 | 750 | - | - | - | - | - | 750 | - | 750 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of other equity instruments | 36 | (83) | - | - | - | - | (16) | (99) | - | (99) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax on other equity instruments | 36 | - | - | - | - | - | 24 | 24 | - | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on ordinary shares | 11 | - | - | - | - | - | (427) | (427) | - | (427) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on other equity instruments | 11 | - | - | - | - | - | (126) | (126) | - | (126) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2015 | 4,911 | 5,620 | 52 | 254 | 8 | 4,679 | 15,524 | 135 | 15,659 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 January 2014 | 3,709 | 5,620 | (23) | (110) | 17 | 3,377 | 12,590 | 3,709 | 5,620 | (23) | (110) | 17 | 3,377 | 12,590 | - | 12,590 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income/(expense) for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | - | 1,110 | 1,110 | - | - | - | - | - | 1,110 | 1,110 | - | 1,110 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other comprehensive income for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other comprehensive income/(expense) for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 235 | - | - | - | 235 | - | - | 235 | - | - | - | 235 | - | 235 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities transferred to profit or loss | - | - | (208) | - | - | - | (208) | - | - | (208) | - | - | - | (208) | - | (208) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on cash flow hedges | - | - | - | 44 | - | - | 44 | - | - | - | 44 | - | - | 44 | - | 44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net losses on cash flow hedges transferred to profit or loss | - | - | - | 427 | - | - | 427 | - | - | - | 427 | - | - | 427 | - | 427 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | - | - | - | - | - | 132 | 132 | - | - | - | - | - | 132 | 132 | - | 132 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Exchange differences on translation of foreign operations | - | - | - | - | (4) | - | (4) | - | - | - | - | (4) | - | (4) | - | (4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Tax on other comprehensive income | - | - | (6) | (99) | - | (27) | (132) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | 21 | 372 | (4) | 105 | 494 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Tax on other comprehensive income/(expense) | - | - | (6) | (99) | - | (27) | (132) | - | (132) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(expense) for the year, net of tax | - | - | 21 | 372 | (4) | 105 | 494 | - | 494 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issue of Perpetual Capital Securities | 800 | - | - | - | - | - | 800 | 36 | 800 | - | - | - | - | - | 800 | - | 800 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of Preference Shares | (265) | - | - | - | - | (9) | (274) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends and other distributions | - | - | - | - | - | (527) | (527) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of other equity instruments | 36 | (265) | - | - | - | - | (9) | (274) | - | (274) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on ordinary shares | 11 | - | - | - | - | - | (487) | (487) | - | (487) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on other equity instruments | 11 | - | - | - | - | - | (40) | (40) | - | (40) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2014 | 4,244 | 5,620 | (2) | 262 | 13 | 4,056 | 14,193 | 4,244 | 5,620 | (2) | 262 | 13 | 4,056 | 14,193 | - | 14,193 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 January 2013 | 3,999 | 5,620 | 1 | - | 17 | 3,405 | 13,042 | 3,999 | 5,620 | 1 | - | 17 | 3,405 | 13,042 | - | 13,042 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income/(expense) for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | - | 890 | 890 | - | - | - | - | - | 890 | 890 | - | 890 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other comprehensive income for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other comprehensive income/(expense) for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 15 | - | - | - | 15 | - | - | 15 | - | - | - | 15 | - | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities transferred to profit or loss | - | - | (46) | - | - | - | (46) | - | - | (46) | - | - | - | (46) | - | (46) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net losses on cash flow hedges | - | - | - | (207) | - | - | (207) | - | - | - | (207) | - | - | (207) | - | (207) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net losses on cash flow hedges transferred to profit or loss | - | - | - | 66 | - | - | 66 | - | - | - | 66 | - | - | 66 | - | 66 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | - | - | - | - | - | (564) | (564) | - | - | - | - | - | (564) | (564) | - | (564) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Tax on other comprehensive income | - | - | 7 | 31 | - | 113 | 151 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | (24) | (110) | - | (451) | (585) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of preference shares | 38 | (290) | - | - | - | - | 15 | (275) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends and other distributions | 12 | - | - | - | - | - | (482) | (482) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Tax on other comprehensive income/(expense) | - | - | 7 | 31 | - | 113 | 151 | - | 151 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(expense) for the year, net of tax | - | - | (24) | (110) | - | (451) | (585) | - | (585) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of other equity instruments | 36 | (290) | - | - | - | - | 15 | (275) | - | (275) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on ordinary shares | 11 | - | - | - | - | - | (425) | (425) | - | (425) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on other equity instruments | 11 | - | - | - | - | - | (57) | (57) | - | (57) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2013 | 3,709 | 5,620 | (23) | (110) | 17 | 3,377 | 12,590 | 3,709 | 5,620 | (23) | (110) | 17 | 3,377 | 12,590 | - | 12,590 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 January 2012 | 3,999 | 5,620 | 9 | - | 17 | 3,110 | 12,755 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | - | 943 | 943 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other comprehensive income for the year: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 6 | - | - | - | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Net gains on available-for-sale securities transferred to profit or loss | - | - | (17) | - | - | - | (17) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | - | - | - | - | - | (183) | (183) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Tax on other comprehensive income | - | - | 3 | - | - | 42 | 45 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | (8) | - | - | (141) | (149) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends and other distributions | 12 | - | - | - | - | - | (507) | (507) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December 2012 | 3,999 | 5,620 | 1 | - | 17 | 3,405 | 13,042 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Includes capital redemption reserve of £21m (2014: £265m, 2013: £nil) arising from the purchase of £300m fixed/floating rate non-cumulative callable preference shares in 2013, 2014 and 2015. |
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Consolidated Financial Statements.
Annual Report 2015
Financial statements
At 31 December
| Notes | 2015 £m | 2014 £m | ||||||||||
Assets | ||||||||||||
Cash and balances at central banks | 14,562 | 18,102 | ||||||||||
Derivative financial instruments | 13 | 3,302 | 3,412 | |||||||||
Financial assets designated at fair value | 14 | 60 | 83 | |||||||||
Loans and advances to banks | 15 | 18,962 | 6,073 | |||||||||
Loans and advances to customers | 16 | 181,608 | 170,211 | |||||||||
Loans and receivables securities | 19 | 4,991 | 4,598 | |||||||||
Available-for-sale securities | 20 | 7,828 | 6,405 | |||||||||
Macro hedge of interest rate risk | (35) | 7 | ||||||||||
Interests in other entities | 21 | 5,203 | 5,366 | |||||||||
Intangible assets | 22 | 2,017 | 1,986 | |||||||||
Property, plant and equipment | 23 | 1,266 | 1,260 | |||||||||
Current tax assets | 198 | 208 | ||||||||||
Retirement benefit assets | 34 | 537 | 311 | |||||||||
Other assets | 25 | 1,159 | 783 | |||||||||
Total assets | 241,658 | 218,805 | ||||||||||
Liabilities | ||||||||||||
Deposits by banks | 26 | 28,268 | 12,553 | |||||||||
Deposits by customers | 27 | 189,291 | 183,788 | |||||||||
Derivative financial instruments | 13 | 3,028 | 2,154 | |||||||||
Debt securities in issue | 30 | - | 112 | |||||||||
Subordinated liabilities | 31 | 3,951 | 4,065 | |||||||||
Macro hedge of interest rate risk | (5) | - | ||||||||||
Other liabilities | 32 | 2,073 | 2,028 | |||||||||
Provisions | 33 | 815 | 436 | |||||||||
Deferred tax liabilities | 24 | 176 | 26 | |||||||||
Retirement benefit obligations | 34 | 110 | 199 | |||||||||
Total liabilities | 227,707 | 205,361 | ||||||||||
Equity | ||||||||||||
Share capital and other equity instruments | 36 | 4,911 | 4,244 | |||||||||
Share premium | 36 | 5,620 | 5,620 | |||||||||
Retained earnings | 3,354 | 3,557 | ||||||||||
Other reserves | 66 | 23 | ||||||||||
Total shareholders’ equity | 13,951 | 13,444 | ||||||||||
Total liabilities and equity | 241,658 | 218,805 | ||||||||||
The accompanying Notes to the Financial Statements form an integral part of these Financial Statements.
The Financial Statements were approved and authorised for issue by the Board on 24 February 2016 and signed on its behalf by:
| | |
| Nathan Bostock | Antonio Roman | |
| Chief Executive Officer | Chief Financial Officer |
Financial statements
Company Registered Number: 2294747
CONSOLIDATED CASH FLOW STATEMENT206 Santander UK plc
For the years ended 31 December 2014, 2013 and 2012
| Notes | 2014 £m | 2013(1) £m | 2012(1) £m | |||||||||||
Cash flows (used in)/from operating activities | ||||||||||||||
Profit for the year | 1,110 | 890 | 943 | |||||||||||
Adjustments for: | ||||||||||||||
Non cash items included in profit | 1,306 | 1,618 | 1,511 | |||||||||||
Change in operating assets | (11,662) | 17,616 | 8,340 | |||||||||||
Change in operating liabilities | 4,449 | (15,956) | (4,578) | |||||||||||
Corporation taxes paid | (149) | (118) | (231) | |||||||||||
Effects of exchange rate differences | (613) | 702 | (1,961) | |||||||||||
Net cash flow (used in)/from operating activities | 39 | (5,559) | 4,752 | 4,024 | ||||||||||
Cash flows (used in)/from investing activities | ||||||||||||||
Investments in other entities | - | (18) | (6) | |||||||||||
Purchase of property, plant and equipment and intangible assets | 24,25 | (506) | (339) | (454) | ||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 71 | 99 | 80 | |||||||||||
Purchase of available-for-sale securities | (4,236) | (2,904) | (6,338) | |||||||||||
Proceeds from sale and redemption of available-for-sale securities | 526 | 3,344 | 910 | |||||||||||
Net cash flow (used in)/from investing activities | (4,145) | 182 | (5,808) | |||||||||||
Cash flows (used in)/from financing activities | ||||||||||||||
Issue of debt securities | 19,936 | 25,469 | 37,219 | |||||||||||
Issue of Perpetual Capital Securities | 800 | - | - | |||||||||||
Repayment of debt securities | (20,310) | (32,880) | (35,636) | |||||||||||
Repurchase of preference shares | (274) | (290) | - | |||||||||||
Dividends paid on ordinary shares | 12 | (447) | (665) | (425) | ||||||||||
Dividends paid on preference shares classified in equity | 12 | (19) | (19) | (19) | ||||||||||
Dividends paid on Reserve Capital Instruments | 12 | (21) | (21) | (21) | ||||||||||
Dividends paid on Perpetual Preferred Securities | 12 | - | (17) | (17) | ||||||||||
Net cash flow (used in)/from financing activities | (335) | (8,423) | 1,101 | |||||||||||
Net decrease in cash and cash equivalents | (10,039) | (3,489) | (683) | |||||||||||
Cash and cash equivalents at beginning of the year | 37,179 | 41,639 | 42,946 | |||||||||||
Effects of exchange rate changes on cash and cash equivalents | 223 | (971) | (624) | |||||||||||
Cash and cash equivalents at the end of the year | 39 | 27,363 | 37,179 | 41,639 | ||||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Consolidated Financial Statements.
| Independent | Primary financial | Notes to the | ||||||||||||
| Auditor’s Report | statements | financial statements | ||||||||||||
COMPANY BALANCE SHEETCASH FLOW STATEMENT
AtFor the years ended 31 December 2014 and 2013
| Notes | 2014(1) £m | 2013(1),(2) £m | ||||||||
Assets | ||||||||||
Cash and balances at central banks | 13 | 18,102 | 21,399 | |||||||
Derivative financial instruments | 15 | 3,412 | 2,461 | |||||||
Financial assets designated at fair value | 16 | 83 | 1 | |||||||
Loans and advances to banks | 17 | 6,073 | 109,267 | |||||||
Loans and advances to customers | 18 | 170,211 | 164,393 | |||||||
Loans and receivables securities | 21 | 4,598 | 5,474 | |||||||
Available-for-sale securities | 22 | 6,405 | 2,029 | |||||||
Macro hedge of interest rate risk | 7 | - | ||||||||
Interests in other entities | 23 | 5,366 | 6,176 | |||||||
Intangible assets | 24 | 1,986 | 1,678 | |||||||
Property, plant and equipment | 25 | 1,260 | 1,196 | |||||||
Current tax assets | 208 | 423 | ||||||||
Deferred tax assets | 26 | - | 54 | |||||||
Retirement benefit assets | 36 | 311 | 110 | |||||||
Other assets | 27 | 783 | 808 | |||||||
Total assets | 218,805 | 315,469 | ||||||||
Liabilities | ||||||||||
Deposits by banks | 28 | 12,553 | 115,218 | |||||||
Deposits by customers | 29 | 183,788 | 179,399 | |||||||
Derivative financial instruments | 15 | 2,154 | 1,803 | |||||||
Debt securities in issue | 32 | 112 | 156 | |||||||
Subordinated liabilities | 33 | 4,065 | 4,212 | |||||||
Other liabilities | 34 | 2,028 | 1,584 | |||||||
Provisions | 35 | 436 | 481 | |||||||
Deferred tax liabilities | 26 | - | ||||||||
Retirement benefit obligations | 36 | 199 | 670 | |||||||
Total liabilities | 205,361 | 303,523 | ||||||||
Equity | ||||||||||
Share capital and other equity instruments | 38 | 4,244 | 3,709 | |||||||
Share premium | 38 | 5,620 | 5,620 | |||||||
Retained earnings | 3,557 | 2,617 | ||||||||
Available for sale reserve | 23 | - | ||||||||
Total shareholders’ equity | 13,444 | 11,946 | ||||||||
Total liabilities and equity | 218,805 | 315,469 | ||||||||
(1) The Company financial statements and all related footnotes have not been audited under the standards of the Public Company Accounting Oversight Board.
(2) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
| Notes | 2015 £m | 2014 £m | 2013 £m | |||||||||||
Cash flows (used in)/from operating activities | ||||||||||||||
Profit/(loss) for the year | 115 | 1,346 | 225 | |||||||||||
Adjustments for: | ||||||||||||||
Non-cash items included in profit | 1,603 | 2,166 | 2,424 | |||||||||||
Change in operating assets | (15,710) | 50,829 | 22,447 | |||||||||||
Change in operating liabilities | 22,083 | (98,441) | (4,826) | |||||||||||
Corporation taxes paid | (132) | (59) | (87) | |||||||||||
Effects of exchange rate differences | (104) | 66 | (182) | |||||||||||
Net cash flow (used in)/from operating activities | 38 | 7,855 | (44,093) | 20,001 | ||||||||||
Cash flows (used in)/from investing activities | ||||||||||||||
Investment in other entities | 21 | - | - | (1,084) | ||||||||||
Purchase of property, plant and equipment and intangible assets | 22,23 | (313) | (372) | (320) | ||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 28 | 13 | 38 | |||||||||||
Purchase of available-for-sale securities | (2,021) | (4,236) | (1,680) | |||||||||||
Proceeds from sale and redemption of available-for-sale securities | 617 | 109 | - | |||||||||||
Net cash flow used in investing activities | (1,689) | (4,486) | (3,046) | |||||||||||
Cash flows (used in)/from financing activities | ||||||||||||||
Issue of Perpetual Capital Securities | 750 | 800 | - | |||||||||||
Issue of debt securities | 1,059 | - | 907 | |||||||||||
Issuance costs of debt securities | (6) | - | (3) | |||||||||||
Repayment of debt securities | (1,251) | (342) | (227) | |||||||||||
Repurchase of preference shares | (99) | (274) | (275) | |||||||||||
Dividends paid on ordinary shares | 11 | (575) | (447) | (665) | ||||||||||
Dividends paid on Perpetual Preferred Securities | 11 | - | - | (17) | ||||||||||
Dividends paid on preference shares classified in equity | 11 | (2) | (19) | (19) | ||||||||||
Dividends paid on Reserve Capital Instruments | 11 | (21) | (21) | (21) | ||||||||||
Dividends paid on Perpetual Capital Securities | 11 | (103) | - | - | ||||||||||
Net cash flow used in financing activities | (248) | (303) | (320) | |||||||||||
Net (decrease)/increase in cash and cash equivalents | 5,918 | (48,882) | 16,635 | |||||||||||
Cash and cash equivalents at beginning of the year | 22,035 | 70,917 | 54,282 | |||||||||||
Cash and cash equivalents at the end of the year | 38 | 27,953 | 22,035 | 70,917 | ||||||||||
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Financial Statements.
The Primary Financial Statements and the accompanying Notes to the Financial Statements were approved and authorised for issue by the Board on 25 February 2015 and signed on its behalf by:
Annual Report 2015
Stephen Jones
Chief Financial Officer
Company Registered Number: 2294747
Financial statements
COMPANY STATEMENT OF CHANGES IN EQUITY
For the years ended 31 December 2014, 2013 and 2012
| Notes | Share capital and £m | Share premium £m | Available for £m | Retained £m | Total(2) £m | |||||||||||||||||
1 January 2014 | 3,709 | 5,620 | - | 2,617 | 11,946 | |||||||||||||||||
Total comprehensive income for the year: | ||||||||||||||||||||||
- Profit for the year | - | - | - | 1,346 | 1,346 | |||||||||||||||||
- Other comprehensive income for the year: | ||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 257 | - | 257 | |||||||||||||||||
- Net gains on available-for-sale securities transferred to profit or loss on sale | - | - | (228) | - | (228) | |||||||||||||||||
- Other movements | - | - | - | 21 | 21 | |||||||||||||||||
- Remeasurement of defined benefit pension obligations | - | - | - | 136 | 136 | |||||||||||||||||
- Tax on other comprehensive income | - | - | (6) | (27) | (33) | |||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | 23 | 130 | 153 | |||||||||||||||||
Issue of Perpetual Capital Securities | 800 | - | - | - | 800 | |||||||||||||||||
Repurchase of preference shares | (265) | - | - | (9) | (274) | |||||||||||||||||
Dividends | - | - | - | (527) | (527) | |||||||||||||||||
31 December 2014 | 4,244 | 5,620 | 23 | 3,557 | 13,444 | |||||||||||||||||
1 January 2013 | 3,999 | 5,620 | (2) | 3,310 | 12,927 | |||||||||||||||||
Total comprehensive income for the year: | ||||||||||||||||||||||
- Profit for the year | - | - | - | 225 | 225 | |||||||||||||||||
- Other comprehensive income for the year: | ||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 2 | - | 2 | |||||||||||||||||
- Remeasurement of defined benefit pension obligations | - | - | - | (564) | (564) | |||||||||||||||||
- Tax on other comprehensive income | - | - | - | 113 | 113 | |||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | 2 | (451) | (449) | |||||||||||||||||
Repurchase of preference shares | 38 | (290) | - | - | 15 | (275) | ||||||||||||||||
Dividends | 12 | - | - | - | (482) | (482) | ||||||||||||||||
31 December 2013 | 3,709 | 5,620 | - | 2,617 | 11,946 | |||||||||||||||||
1 January 2012 | 3,999 | 5,620 | 7 | 4,714 | 14,340 | |||||||||||||||||
Total comprehensive income for the year: | ||||||||||||||||||||||
- Profit for the year | - | - | - | (756) | (756) | |||||||||||||||||
- Other comprehensive income for the year: | ||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 2 | - | 2 | |||||||||||||||||
- Net gains on available-for-sale securities transferred to profit or loss | - | - | (14) | - | (14) | |||||||||||||||||
- Remeasurement of defined benefit pension obligations | - | - | - | (183) | (183) | |||||||||||||||||
- Tax on other comprehensive income | - | - | 3 | 42 | 45 | |||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | (9) | (141) | (150) | |||||||||||||||||
Dividends | 12 | - | - | - | (507) | (507) | ||||||||||||||||
31 December 2012 | 3,999 | 5,620 | (2) | 3,310 | 12,927 | |||||||||||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
(2) The Company financial statements and all related footnotes have not been audited under the standards of the Public Company Accounting Oversight Board.
| Notes | Share capital £m | Share premium £m | Available for sale £m | Cash flow £m | Retained £m | Total £m | ||||||||||||||||||||||
1 January 2015 | 4,244 | 5,620 | 23 | - | 3,557 | 13,444 | ||||||||||||||||||||||
Total comprehensive income/(expenses) for the year: | ||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | 115 | 115 | ||||||||||||||||||||||
- Other comprehensive income/(expenses) for the year: | ||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 10 | - | - | 10 | ||||||||||||||||||||||
- Net losses on available-for-sale securities transferred to profit or loss | - | - | 40 | - | - | 40 | ||||||||||||||||||||||
- Net gains on cash flow hedges | - | - | - | 74 | - | 74 | ||||||||||||||||||||||
- Net gains on cash flow hedges transferred to profit or loss | - | - | - | (81) | - | (81) | ||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | 34 | - | - | - | - | 316 | 316 | |||||||||||||||||||||
- Tax on other comprehensive income | - | - | (1) | 1 | (89) | (89) | ||||||||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | 49 | (6) | 227 | 270 | ||||||||||||||||||||||
Issue of Perpetual Capital Securities | 36 | 750 | - | - | - | - | 750 | |||||||||||||||||||||
Repurchase of other equity instruments | 36 | (83) | - | - | - | (16) | (99) | |||||||||||||||||||||
Dividends on ordinary shares | 11 | - | - | - | - | (427) | (427) | |||||||||||||||||||||
Dividends on other equity instruments | 11 | - | - | - | - | (126) | (126) | |||||||||||||||||||||
Tax on repurchase of other equity instruments | - | - | - | - | 24 | 24 | ||||||||||||||||||||||
31 December 2015 | 4,911 | 5,620 | 72 | (6) | 3,354 | 13,951 | ||||||||||||||||||||||
1 January 2014 | 3,709 | 5,620 | - | - | 2,617 | 11,946 | ||||||||||||||||||||||
Total comprehensive income/(expenses) for the year: | ||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | 1,346 | 1,346 | ||||||||||||||||||||||
- Other comprehensive income/(expenses) for the year: | ||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 257 | - | - | 257 | ||||||||||||||||||||||
- Net gains on available-for-sale securities transferred to profit or loss | - | - | (228) | - | - | (228) | ||||||||||||||||||||||
- Other movements | - | - | - | - | 21 | 21 | ||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | 34 | - | - | - | - | 136 | 136 | |||||||||||||||||||||
- Tax on other comprehensive income/(expenses) | - | - | (6) | - | (27) | (33) | ||||||||||||||||||||||
Other comprehensive income for the year, net of tax | - | - | 23 | - | 130 | 153 | ||||||||||||||||||||||
Issue of Perpetual Capital Securities | 36 | 800 | - | - | - | - | 800 | |||||||||||||||||||||
Repurchase of other equity instruments | 36 | (265) | - | - | - | (9) | (274) | |||||||||||||||||||||
Dividends on ordinary shares | 11 | - | - | - | - | (487) | (487) | |||||||||||||||||||||
Dividends on other equity instruments | 11 | - | - | - | - | (40) | (40) | |||||||||||||||||||||
31 December 2014 | 4,244 | 5,620 | 23 | - | 3,557 | 13,444 | ||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||
1 January 2013 | 3,999 | 5,620 | (2) | - | 3,310 | 12,927 | ||||||||||||||||||||||
Total comprehensive income/(expenses) for the year: | ||||||||||||||||||||||||||||
- Profit for the year | - | - | - | - | 225 | 225 | ||||||||||||||||||||||
- Other comprehensive income/(expenses) for the year: | ||||||||||||||||||||||||||||
- Net gains on available-for-sale securities | - | - | 2 | - | - | 2 | ||||||||||||||||||||||
- Remeasurement of defined benefit pension obligations | 34 | - | - | - | - | (564) | (564) | |||||||||||||||||||||
- Tax on other comprehensive income | - | - | - | - | 113 | 113 | ||||||||||||||||||||||
| Other comprehensive income/(expenses) for the year, net of tax | - | - | 2 | - | (451) | (449) | ||||||||||||||||||||||
Repurchase of other equity instruments | 36 | (290) | - | - | - | 15 | (275) | |||||||||||||||||||||
Dividends on ordinary shares | 11 | - | - | - | - | (425) | (425) | |||||||||||||||||||||
Dividends on other equity instruments | 11 | - | - | - | - | (57) | (57) | |||||||||||||||||||||
31 December 2013 | 3,709 | 5,620 | - | - | 2,617 | 11,946 | ||||||||||||||||||||||
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Financial Statements.
208 Santander UK plc
| Independent | Primary financial | Notes to the | ||||||||||||
For the years ended 31 December 2014, 2013 and 2012
| Notes | 2014(1) £m | 2013(1),(2) £m | 2012(1),(2) £m | |||||||||||
Cash flows (used in)/from operating activities | ||||||||||||||
Profit/(loss) for the year | 1,346 | 225 | (756) | |||||||||||
Adjustments for: | ||||||||||||||
Non cash items included in profit | 2,166 | 2,424 | 1,053 | |||||||||||
Change in operating assets | 50,829 | 22,447 | 2,446 | |||||||||||
Change in operating liabilities | (98,441) | (4,814) | 10,394 | |||||||||||
Corporation taxes paid | (59) | (87) | (149) | |||||||||||
Effects of exchange rate differences | 66 | (182) | (530) | |||||||||||
Net cash flow (used in)/from operating activities | 39 | (44,093) | 20,013 | 12,458 | ||||||||||
Cash flows (used in)/from investing activities | ||||||||||||||
Interests in other entities | 23 | - | (1,084) | - | ||||||||||
Purchase of property, plant and equipment and intangible assets | 24,25 | (372) | (320) | (354) | ||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 13 | 38 | 3 | |||||||||||
Purchase of available-for-sale securities | (4,236) | (1,680) | (348) | |||||||||||
Proceeds from sale and redemption of available-for-sale securities | 109 | - | 46 | |||||||||||
Net cash flow used in investing activities | (4,486) | (3,046) | (653) | |||||||||||
Cash flows (used in)/from financing activities | ||||||||||||||
Issue of debt securities | - | 907 | - | |||||||||||
Issue of Perpetual Capital Securities | 800 | - | - | |||||||||||
Repayment of debt securities | (342) | (227) | (2,394) | |||||||||||
Repurchase of preference shares | (274) | (290) | - | |||||||||||
Dividends paid on ordinary shares | 12 | (447) | (665) | (425) | ||||||||||
Dividends paid on Perpetual Preferred Securities | 12 | - | (17) | (17) | ||||||||||
Dividends paid on preference shares classified in equity | 12 | (19) | (19) | (19) | ||||||||||
Dividends paid on Reserve Capital Instruments | 12 | (21) | (21) | (21) | ||||||||||
Net cash flow used in financing activities | (303) | (332) | (2,876) | |||||||||||
Net (decrease)/increase in cash and cash equivalents | (48,882) | 16,635 | 8,929 | |||||||||||
Cash and cash equivalents at beginning of the year | 70,917 | 54,282 | 45,353 | |||||||||||
Effects of exchange rate changes on cash and cash equivalents | - | - | - | |||||||||||
Cash and cash equivalents at the end of the year | 39 | 22,035 | 70,917 | 54,282 | ||||||||||
(1) The Company financial statements and all related footnotes have not been audited under the standards of the Public Company Accounting Oversight Board.
(2) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
The accompanying Notes to the Financial Statements and the audited sections of the Risk Review form an integral part of these Financial Statements.
1. ACCOUNTING POLICIES
These financial statements are prepared for Santander UK plc (the ‘Company’)Company) and the Santander UK plc group (the ‘SantanderSantander UK group’)group) under the UK Companies Act 2006. The principal activity of the Santander UK group is the provision of an extensive range of personal financial services, and a wide range of banking and financial services to business and public sector customers.
Santander UK plc is a public limited company, incorporated in England and Wales having a registered office in England. It is an operating company undertaking banking and financial services transactions.
Basis of preparation
These financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. The financial statements have been prepared on the going concern basis using the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities held at fair value through profit or loss and all derivative contracts, assets held for sale, retirement benefit obligations and cash-settled share based payments. An assessment of the appropriateness of the adoption of the going concern basis of accounting is disclosed in the Directors’ statement of going concern set out in the Directors’ Report.
Compliance with International Financial Reporting Standards
The Santander UK group consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’)(IASB), including interpretations issued by the IFRS Interpretations Committee (‘IFRIC’)(IFRIC) of the IASB (together ‘IFRS’)IFRS). The Santander UK group has also complied with its legal obligation to comply with International Financial Reporting Standards as adopted by the European Union as there are no applicable differences between the two frameworks for the periods presented.
The Company financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and as applied in accordance with the provision of the UK Companies Act 2006.
Disclosures required by IFRS 7 ‘Financial Instruments: Disclosure’ relating to the nature and extent of risks arising from financial instruments can be found in the Risk Review which form an integral part of these financial statements.
Recent accounting developments
In 2014, the Santander UK group adopted the following new accounting pronouncements and amendments to standards which became effective for financial years beginning on 1 January 2014.
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The impact of applying IFRIC 21 at 1 January 2014 was to increase retained earnings by £70m, increase deferred tax assets by £19m, and to reduce provisions by £89m. The impact of IFRIC 21 on the results for the year ended 31 December 2013 increase provisions for other liabilities and charges by £30m and to decrease tax on profit on continuing operations by £7m resulting in a decrease of profit on continuing operations after tax by £23m. The impact of IFRIC 21 on the results for the year ended 31 December 2012 was to decrease provisions for other liabilities and charges by £5m and to increase tax on profit on continuing operations by £1m resulting in an increase of profit on continuing operations after tax by £4m. The impact of applying IFRIC 21 at 1 January 2013 was to increase retained earnings by £93m, increase deferred tax assets by £26m, and to reduce provisions by £119m. In accordance with IFRIC 21, FSCS levies of £91m have been recognised in provisions for other liabilities and charges for the year ended 31 December 2014 (see Note 35). The application of IFRIC 21 had no impact on cash and cash equivalents or net cash flows from operating activities. Within the cash flow statement, the impact of the application of IFRIC 21 on the profit for the year was offset by an equal and opposite impact on the change in operating liabilities.
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Future accounting developments
The Santander UK group has not yet adopted the following significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective for the Santander UK group:
| a) | IFRS 9 ‘Financial Instruments’ |
Phase 1: Classification and measurement of financial assets and financial liabilities. Financial assets are classified on the basis of the business model within which they are held and their contractual cash flow characteristics. The standard also introduces a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments. The requirements for the classification and measurement of financial liabilities were carried forward unchanged from IAS 39, however, the requirements relating to the fair value option for financial liabilities were changed to address own credit risk and, in particular, the presentation of gains and losses within other comprehensive income.
Phase 2: Impairment methodology. IFRS 9 fundamentally changes the impairment requirements relating to the accounting for an entity’s expected credit losses on its financial assets and commitments to extend credit. It is no longer necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses, and changes in those expected credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition.
Phase 3: Hedge accounting. These requirements align hedge accounting more closely with risk management and establish a more principle-based approach to hedge accounting. Dynamic hedging of open portfolios is being dealt with as a separate project and until such time as that project is complete, entities can choose between applying the hedge accounting requirements of IFRS 9 or to continue to apply the existing hedge accounting requirements in IAS 39. The revised hedge accounting requirements in IFRS 9 are applied prospectively.
Annual Report 2015
Financial statements
The effective date of IFRS 9 is 1 January 2018. For annual periods beginning before 1 January 2018, an entity may elect to early apply only the requirements for the presentation of gains and losses on financial liabilities designated at fair value through profit or loss. At the date of publication of these Consolidated Financial Statements the standard is awaiting EU endorsement and the impact of the standard is currently being assessed. It is not yet practicable to quantify the effect of IFRS 9 on these Consolidated Financial Statements.
With reference to the expected credit loss (ECL) approach to impairment under IFRS 9 (Phase 2 above), the following sets out the general principles, a comparison of the current impairment and ECL approaches, specific modelling techniques and details of key responsibilities and accountabilities.
1.General principles: The current incurred credit loss provisioning approach applied in IAS 39 will be replaced with a forward looking expected loss impairment model under IFRS 9. ECL forecasts combine modelled estimates of a borrower’s probability of default and transaction estimates of exposure at default and loss given default that are discounted using the effective interest rate. Modelled ECLs will be informed by the best information available on forecasts of future macroeconomic credit conditions such as GDP, unemployment rates, house prices, etc. Existing risk management methodologies will be leveraged as a basis for calculating ECLs, with appropriate adjustments made to ensure estimates are forward looking. Modelling techniques are used to establish statistical relationships between macroeconomic data and the drivers of default and loss either for specific obligors, facilities, segments or portfolios.
2.How the current impairment approach compares with the new ECL approach: The key change compared to the current incurred credit loss provisioning approach is that the ECL approach must reflect both current and forecast changes in macroeconomic data over a horizon that extends from 12 months to the remaining life of the asset if a borrower’s credit risk is deemed to have deteriorated significantly at the reporting date compared to the origination date. These macroeconomic forecasts are required to be unbiased and probability weighted amounts determined by evaluating a range of possible outcomes and considering reasonable and supportable information at the reporting date. Similar to the current incurred credit loss provisioning approach, management will exercise judgement as to whether additional adjustments are required in order to adequately reflect possible events or conditions that could affect credit risk. Such adjustments are expected to be temporary in nature as the relevant factor or event becomes more clearly reflected in modelled ECL forecasts.
3.Specific modelling techniques to implement the ECL approach: IFRS 9 forecasting models attempt to find stable relationships between historical observed default and loss experience and macroeconomic variables over time. By modelling these relationships and measuring current values of each economic variable, forecasters can then apply conditional assumptions to form an expected future value of those variables. While these econometric models attempt to consistently capture correlations across economic variables, forecasts tend to be closer to actual outcomes during more benign periods in the economic cycle but can under/over predict when structural breaks occur in economic relationships or when there is high uncertainty around conditioning assumptions, e.g. at peaks and troughs in the economic cycle.
4.Key responsibilities and accountabilities: Santander UK has established an IFRS 9 steering group which is accountable for IFRS 9 implementation. The steering group is supported by working groups responsible for compliance with the new accounting standard relating to model methodology, technical accounting, policies and IT system design. Issues identified by the steering group that cannot be resolved are escalated to the appropriate Board committees.
| b) | IFRS 15 ‘Revenue from Contracts with Customers’ |
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| d) | During 2015, the IASB published its exposure draft of amendments to IAS 19 ‘Employee Benefits’ and IFRIC 14 ‘IAS 19 – The Limit on a |
Comparative information
As required by US public company reporting requirements, these financial statements include two years of comparative information for the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related Notes.
210 Santander UK plc
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Consolidation
a) Subsidiaries
The Consolidated Financial Statements incorporate the financial statements of Santander UK plc and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved where the Company has (i) power over the investee; (ii) is exposed, or has rights, to variable returns from its involvement with the investee; and (iii) has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including:
- | the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote |
- | potential voting rights held by the Company, other vote holders or other |
- | rights arising from other contractual |
- | any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. |
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and the consolidated statement of comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Inter-company transactions, balances and unrealised gains on transactions between Santander UK group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.
Financial review
The acquisition method of accounting is used to account for the acquisition of subsidiaries which meet the definition of a business. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. Acquisition related costs are expensed as incurred. The excess of the cost of acquisition, as well as the fair value of any interest previously held, over the fair value of the Santander UK group’s share of the identifiable net assets of the acquired subsidiary, associate or business at the date of acquisition is recorded as goodwill. When the Santander UK group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 ‘Financial Instruments: Recognition and Measurement’ or, when applicable, the costs on initial recognition of an investment in an associate or jointly controlled entity.
Transactions between entities under common control, i.e. fellow subsidiaries of Banco Santander S.A.SA (the ‘ultimate parent’)ultimate parent) are outside the scope of IFRS 3 – ‘Business Combinations’, and there is no other guidance for such situations under IFRS. The Santander UK group elects to account for transactions between entities under common control for cash consideration in a manner consistent with the approach under IFRS 3R, unless the transaction represents a reorganisation of entities within the Santander UK group, in which case the transaction is accounted for at its historical cost. Business combinations between entities under common control transacted for non-cash consideration are accounted for by the Santander UK group in a manner consistent with group reconstruction relief under UK GAAP (merger accounting).
b) Associates and joint ventures
Associates are entities over which the Santander UK group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Unrealised gains on transactions between the Santander UK group and its associates are eliminated to the extent of the Santander UK group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Santander UK group’s investment in associates includes goodwill on acquisition.
Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Accounting policies have been aligned to the extent there are differences from the Santander UK group’s policies.
The Santander UK group’s investments in associates and joint ventures are accounted for by the equity method of accounting and are initially recorded at cost and adjusted each year to reflect the Santander UK group’s share of the post-acquisition results of the joint venture or associate. When the Santander UK group’s share of losses of an associate or a joint venture exceeds the Santander UK group’s interest in that associate or joint venture, the Santander UK group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Santander UK group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.
Foreign currency translation
Items included in the financial statements of each entity (including foreign branch operations) in the Santander UK group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the ‘functional currency’)functional currency). The Consolidated Financial Statements are presented in sterling, which is the functional currency of the Company.
Income statements and cash flows of foreign entities are translated into the Santander UK group’s presentation currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December.
Exchange differences arising from the translation of the net investment in foreign entities are recognised in other comprehensive income. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Foreign currency transactions are translated into the functional currency of the entity involved at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement unless recognised in other comprehensive income in connection with a cash flow hedge. Non-monetary items denominated in a foreign currency measured at historical cost are not re-translated. Exchange rate differences arising on non-monetary items measured at fair value are recognised in the consolidated income statement except for differences arising on available-for-sale equity securities which are recognised in other comprehensive income.
Annual Report 2015
Financial statements
Exchange rate differences recognised in the consolidated income statement on items not at fair value through profit and loss were £477m income (2014: £486m income, (2013:2013: £(450)m expense, 2012: £1,631m income)expense) and are presented in the line net trading and other income (see Note 5). Exchange rate differences on items measured at fair value through profit or loss are included in the changes to fair value as presented in net trading and other income.
Revenue recognition
a) Interest income and expense
Interest income on financial assets that are classified as loans and receivables or available-for-sale, and interest expense on financial liabilities other than those at fair value through profit and loss are determined using the effective interest method. The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding future credit losses. The calculation includes all amounts paid or received by the Santander UK group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of the financial instrument and all other premiums or discounts. Interest income on assets classified as loans and receivables and available-for-sale, interest expense on liabilities classified at amortised cost, and interest income and expense on hedging derivatives are recognised in interest and similar income and interest expense and similar charges in the income statement.
In accordance with IFRS, the Santander UK group recognises interest income on assets after they have been written down as a result of an impairment loss. Interest continues to be accrued on all loans and the element of interest that is not anticipated to be recovered is provided for.
Interest income on impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
b) Fee and commission income and expense
Fees and commissions that are not an integral part of the effective interest rate are recognised when the service is provided.provided, or on the performance of a significant act. For retail and corporate products, fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK group’s branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial products. Revenue from these income streams is recognised when the service is provided.
For insurance products, fee and commission income consists principally of commissions earned on the sale of building and contents insurance, life protection insurance and payment cover insurance. Revenue from these income streams is recognised when the service is provided.
Asset management fee and commission income comprises portfolio and other management advisory and service fees, investment fund management fees, and fees for private banking, financial planning and custody services. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts as the service is provided. Asset management fees related to investment funds are recognised rateably over the period the service is provided. The same principle is applied for private banking, financial planning and custody services that are continuously provided over an extended period of time.
Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (e.g. certain loan commitment fees) is recognised as an adjustment to the effective interest rate and recorded in ‘Interest income’.
c) Dividend income
Except for equity securities classified as trading assets or financial assets held at fair value through profit or loss, described below, dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity securities.
d) Net trading and other income
Net trading and other income comprises all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss (including financial assets and liabilities held for trading, trading derivatives and designated as fair value through profit or loss), together with related interest income, expense, dividends and changes in fair value of any derivatives managed in conjunction with these assets and liabilities. Changes in fair value of derivatives in a fair value hedging relationship are also recognised in net trading and other income. Net trading and other income also include income from operating lease assets, and profits/(losses) arising on the sales of property, plant and equipment and subsidiary undertakings.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, including computer software, which are assets that necessarily take a substantial period of time to develop for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period in which they occur.
Pensions and other post-retirement benefits
The Santander UK group operates various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, as determined by periodic actuarial calculations. A defined benefit plan is a pension plan that guarantees an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. A defined contribution plan is a pension plan under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund). The pension paid to the member at retirement is based on the amount in the separate fund for each member. The Santander UK group has no legal or constructive obligations to pay further contributions into the fund to ‘top up’ benefits to a certain guaranteed level. Pension costs are charged to the ‘Administration expenses’, within the line item ‘Administration expenses’,‘Operating expenses before impairment losses, provisions and charges’ with the net interest on the defined benefit asset or liability included within ‘Net interest income’ in the income statement.
a) Defined benefit plans
The asset or liability recognised in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The assets of the schemes are measured at their fair values at the balance sheet date. Full actuarial valuations of the Santander UK group’s principal defined benefit schemes are carried out on a triennial basis. Each scheme’s Trustee is responsible for the actuarial valuations and in doing so considers or relies in part on a report of a third party expert.
The present value of the defined benefit obligation is estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, then discounted to present value using an interest rate applicable to high-quality AA rated corporate bonds of the same currency and which have terms to maturity closest to the terms of the scheme liabilities, adjusted where necessary to match those terms. In determining the value of scheme liabilities, demographic and financial assumptions are made by management about mortality, inflation, discount rates, pension increases and earnings growth, based on past experience. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively.
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Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme.
The income statement includes the net interest income/expense on the net defined benefit liability/asset, current service cost and any past service cost and gain or loss on settlement. Remeasurement of defined benefit pension schemes, including return on scheme assets (excludes amounts included in net interest), actuarial gains and losses arising from changes in financial assumptions and changes in actuarial assumptions and the effect of the changes to the asset ceiling (if applicable) are recognised in other comprehensive income. Remeasurement recognised in other comprehensive income will not be reclassified to the income statement. Past-service costs are recognised as an expense in the income statement at the earlier of when the plan amendment or curtailment occurs and when the related restructuring costs or termination benefits are recognised. Curtailments include the impact of significant reductions in the number of employees covered by a plan, or amendments to the terms of the plan so that a significant element of future service will no longer qualify for benefits or will qualify only for reduced benefits. Curtailment gains and losses on businesses that meet the definition of discontinued operations are included in profit or loss for the year from discontinued operations. Gains and losses on settlements are recognised when the settlement occurs.
Financial review
b) Defined contribution plans
For defined contribution plans, the Santander UK group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Santander UK group has no further payment obligation. The regular contributions constitute net periodic costs for the year in which they are due and are included in staff costs which are presented in Administration expenses in the income statement.
c) Post-retirement medical benefit plans
Post-retirement medical benefit liabilities are determined using the Projected Unit Credit Method, with actuarial valuations updated at each yearend.year end. The expected benefit costs are accrued over the period of employment using an accounting methodology similar to that for the defined benefit pension scheme.
Share-based payments
The Santander UK group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its employees. Shares of the Santander UK group’s parent, Banco Santander S.A.SA are purchased in the open market by the Santander UK group (for the Employee Sharesave scheme) or are purchased by Banco Santander S.A.SA or another Banco Santander group company (for awards granted under the Long TermLong-Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options as they vest.
Options granted under the Employee Sharesave scheme are accounted for as cash-settled share-based payment transactions. Awards granted under the Long-Term Incentive Plan and Deferred Shares Bonus Plan are accounted for as equity-settled share-based payment transactions.
The fair value of the services received is measured by reference to the fair value of the shares or share options initially on the date of the grant for both the cash and equity settled share-based payments and then subsequently at each reporting date for the cash settled share-based payments. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement within administration expenses, over the period that the services are received, which is the vesting period.
A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date for cash-settled share-based payments. A liability equal to the amount to be reimbursed to Banco Santander S.A.SA is recognised at the current fair value determined at the grant date for equity-settled share-based payments.
The fair value of the options granted under the Employee Sharesave scheme is determined using an option pricing model, which takes into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the Banco Santander S.A.SA share price over the life of the option and the dividend growth rate. The fair value of the awards granted for the Long Term Incentive Plan was determined at the grant date using an option pricing model, which takes into account the share price at grant date, the risk free interest rate, the expected volatility of the Banco Santander S.A.SA share price over the life of the award and the dividend growth rate. Vesting conditions included in the terms of the grant are not taken into account in estimating fair value, except for those that include terms related to market conditions. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options.
Where an award has been modified, as a minimum, the expense of the original award continues to be recognised as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or increase the number of equity instruments, the incremental fair value of the award or incremental fair value of the modification of the award is recognised in addition to the expense of the original grant, measured at the date of modification, over the modified vesting period.
A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised immediately for the amount that would otherwise have been recognised for services over the vesting period.
Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition, as well as the fair value of any interest previously held, over the fair value of the Santander UK group’s share of the identifiable net assets of the acquired subsidiary, associate, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in intangible assets. Goodwill on acquisitions of associates is included as part of Investment in associates. Goodwill is tested for impairment at each balance sheet date, or more frequently when events or changes in circumstances dictate, and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business sold.
Other intangible assets are recognised if they arise from contracted or other legal rights or if they are capable of being separated or divided from the Santander UK group and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over the useful economic life of the assets in question, which ranges from three to seven years. Other intangible assets are reviewed annually for impairment indicators and tested for impairment where indicators are present.
Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of these products can be measured reliably. These costs include payroll, the costs of materials and services and directly attributable overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of three to seven years, unless the software is an integral part of the related computer hardware, in which case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended. Costs associated with maintaining software programmes are expensed as incurred.
Annual Report 2015
Financial statements
Property, plant and equipment
Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. A review for indications of impairment is carried out at each reporting date. Gains and losses on disposal are determined by reference to the carrying amount and are reported in net trading and other income. Repairs and renewals are charged to the income statement when the expenditure is incurred. Internally developed software meeting the criteria set out in ’Goodwill and other intangible assets’ above and externally purchased software are classified in property, plant and equipment on the balance sheet where the software is an integral part of the related computer hardware.
Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life, as follows:
Owner-occupied properties | Not exceeding 50 years | |
Office fixtures and equipment | 3 to 15 years | |
Computer software | 3 to 7 years |
Depreciation is not charged on freehold land and assets under construction.
Financial assets and liabilities
Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander UK group determines the classification of its financial assets and liabilities at initial recognition. Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, available-for-sale and held to maturity financial assets. Financial assets that are classified at fair value through profit or loss, which have not been designated as such or are not accounted for as derivatives, or assets classified as available-for-sale, may subsequently in rare circumstances, be reclassified from the fair value through profit or loss category to the loans and receivables, available-for-sale or held to maturity categories. In order to meet the criteria for reclassification, the asset must no longer be held for the purpose of selling or repurchasing in the near term and must also meet the definition of the category into which it is to be reclassified had it not been required to classify it at fair value through profit or loss at initial recognition. The reclassified value is the fair value of the asset at the date of reclassification. The Santander UK group has not utilised this option and therefore has not reclassified any assets from the fair value through profit or loss category that were classified as such at initial recognition. Financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition.
Financial assets are derecognised when the rights to receive cash flows have expired or the Santander UK group has transferred its contractual right to receive the cash flows from the assets and either: (1) substantially all the risks and rewards of ownership have been transferred; or (2) the Santander UK group has neither retained nor transferred substantially all of the risks and rewards, but has transferred control. Financial liabilities are derecognised when extinguished, cancelled or expire.expired.
A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the market place concerned. Regular way purchases of financial assets classified as loans and receivables, issues of equity or financial liabilities measured at amortised cost are recognised on settlement date; all other regular way purchases and issues are recognised on trade date.
a) Financial assets and liabilities at fair value through profit or loss
Financial assets and financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition.
Financial asset and financial liabilities are classified as held for trading if they are derivatives or it they are acquired or incurred principally for the purpose of selling or repurchasing in the near term, or form part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.
In certain circumstances financial assets and financial liabilities other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on a different basis, where the assets or liabilities are managed and their performance evaluated on a fair value basis, or where a financial asset or financial liability contains one or more embedded derivatives which are not closely related to the host contract.
Financial assets and financial liabilities classified as fair value through profit or loss are initially recognised at fair value and transaction costs are taken directly to the income statement. Gains and losses arising from changes in fair value are included directly in the income statement.
Derivative financial instruments, trading assets and liabilities and financial assets and liabilities designated at fair value are classified as fair value through profit or loss.
b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments, that are not quoted in an active market and which are not classified as available-for-sale or fair value through profit or loss. They arise when the Santander UK group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. Loans and receivables consist of loans and advances to banks, loans and advances to customers, and loans and receivables securities.
c) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and are not categorised into any of the other categories described. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value of available-for-sale securities are recognised in other comprehensive income until sale or until determined to be impaired when the cumulative gain or loss or impairment losses are transferred to the income statement. Where the financial asset is interest-bearing, interest is determined using the effective interest method.
Income on investments in equity shares, debt instruments and other similar interests is recognised in the income statement as and when dividends are declared and interest is accrued. Impairment losses and foreign exchange translation differences on monetary items are recognised in the income statement.
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Financial review
d) Held to maturity investments
Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity, are initially recognised at fair value and are subsequently valued at amortised cost, using the effective interest method. The Santander UK group does not hold any held to maturity financial assets.
e) Borrowings
Borrowings (which include deposits by banks, deposits by customers, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost or fair value through profit or loss dependent on designation at initial recognition.
Preference shares which carry a contractual obligation to transfer economic benefits are classified as financial liabilities and are presented in subordinated liabilities. The coupon on these preference shares is recognised in the income statement as interest expense on an amortised cost basis using the effective interest method.
f) Other financial liabilities
All other financial liabilities are initially recognised at fair value net of transaction costs incurred. They are subsequently stated at amortised cost, using the effective interest method.
Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits. The principal products are Capital Guaranteed/Protected Products which give the customers a limited participation in the upside growth of an equity index. In the event the index falls in price, a cash principal element is guaranteed/protected. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers. These products are accounted for as deposits by customers at amortised cost. The embedded derivatives are separated from the host instrument and are separately accounted for as derivative financial instruments.
g) Sale and repurchase agreements (including stock borrowing and lending)
Securities sold subject to a commitment to repurchase them at a predetermined price (‘repos’)(repos) under which substantially all the risks and rewards of ownership are retained by the Santander UK group remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse repos’)(reverse repos) are not recognised on the balance sheet and the consideration paid is recorded as an asset. The difference between the sale and repurchase price is treated as trading income in the income statement, except where the repo is not treated as part of the trading book, in which case the difference is recorded in interest income or expense.
Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities or cash advanced or received. Securities lent or borrowed are not reflected on the balance sheet. Collateral in the form of cash received or advanced is recorded as a deposit or a loan. Collateral in the form of securities is not recognised.
h) Day One profits adjustments
The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, sometimes the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When such evidence exists, the Santander UK group recognises a trading gain or loss at inception (day 1 gain or loss), being the difference between the transaction price and the fair value. When significant unobservable parameters are used, the entire day 1 gain or loss is deferred and is recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or the Santander UK group enters into an offsetting transaction.
Derivative financial instruments
Derivative financial instruments (‘derivatives’)(derivatives) are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures, and equity index options.
Derivatives are held for trading or for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described within ‘hedge accounting’ below.
Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are obtained using valuation techniques, including discounted cash flow and option pricing models.
Derivatives may be embedded in other financial instruments, such as the conversion option in a convertible bond. Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Contracts containing embedded derivatives are not subsequently reassessed for separation unless either there has been a change in the terms of the contract which significantly modifies the cash flows (in which case the contract is reassessed at the time of modification) or the contract has been reclassified (in which case the contract is reassessed at the time of reclassification).
All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, except where netting is permitted. The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments and, if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement, and included within net trading and other income.
Annual Report 2015
Financial statements
Offsetting financial assets and liabilities
Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. The Santander UK group is party to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.
Hedge accounting
Santander UK plc group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of its risk management strategies. Derivatives are used to hedge exposures to interest rates, exchange rates and certain indices such as retail price indices.
At the time a financial instrument is designated as a hedge (i.e., at the inception of the hedge), the Santander UK group formally documents the relationship between the hedging instrument(s) and hedged item(s), its risk management objective and strategy for undertaking the hedge. The documentation includes the identification of each hedging instrument and respective hedged item, the nature of the risk being hedged (including the benchmark interest rate being hedged in a hedge of interest rate risk) and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk is to be assessed. Accordingly, the Santander UK group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been and will be highly effective in offsetting changes in the fair value attributable to the hedged risk during the period that the hedge is designated. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Santander UK group can expect, and actual results indicate, that changes in the fair value or cash flow of the hedged items are effectively offset by changes in the fair value or cash flow of the hedging instrument. If at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.
Where derivatives are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the derivatives may be designated as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (‘fair(fair value hedges’)hedges); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (‘cash(cash flow hedges’)hedges); or (iii) a hedge of a net investment in a foreign operation (‘net(net investment hedges’)hedges). The Santander UK group applies fair value hedge accounting and cash flow hedge accounting but not hedging of a net investment in a foreign operation.
a) Fair value hedge accounting
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Where the hedged item is measured at amortised cost, the fair value changes due to the hedged risk adjust the carrying amount of the hedged asset or liability. Changes in the fair value of portfolio hedged items are presented separately in the consolidated balance sheet position in Macro hedge of interest rate risk and recognised in the income statement as income or expenses on financial assetswithin Net trading and liabilities held for trading.other income. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. For fair value hedges of interest rate risk, the cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity. For portfolio hedged items, the cumulative adjustment is amortised to the income statement using the straight line method over the period to maturity.
b) Cash flow hedge accounting
The effective portion of changes in the fair value of qualifying cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
The Santander UK group is exposed to cash flow interest rate risk on its floating rate assets and foreign currency risk on its fixed rate debt issuances denominated in foreign currency. Cash flow hedging is used to hedge the variability in cash flows arising from both these risks.
Securitisation transactions
The Santander UK group has entered into certain arrangements where undertakings have issued mortgage-backed and other asset-backed securities or have entered into funding arrangements with lenders in order to finance specific loans and advances to customers. As the Santander UK group has retained substantially all the risks and rewards of the underlying assets, such financial instruments continue to be recognised on the balance sheet, and a liability recognised for the proceeds of the funding transaction.
Impairment of financial assets
At each balance sheet date the Santander UK group assesses whether, as a result of one or more events occurring after initial recognition, there is objective evidence that a financial asset or group of financial assets classified as loans and advances, loans and receivables securities or available-for-sale financial assets have become impaired. Evidence of impairment varies across different portfolios and may include indications that the borrower or group of borrowers have defaulted, are experiencing significant financial difficulty, or the debt has been restructured potentially reducing the burden to the borrower. Impairment losses are recorded as charges in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an impairment loss allowance. Impairment loss allowances are maintained at the level that management deems sufficient to absorb incurred losses. Losses expected from future events are not recognised.
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Financial review
a) Loans and advances
Impairment loss allowances for loans and advances, less amounts released and recoveries of amounts written off are charged to the line item ‘Impairment losses on loans and advances’ in the income statement. The impairment loss allowances are deducted from the ‘Loans and advances to banks’, ‘Loans and advances to customers’ and ‘Loans and receivables securities’ line items on the balance sheet.
i) Retail assets
Retail customers are assessed either individually or collectively for impairment. Potential indicators of loss events which may be evidence of impairment for retail borrowers may include:
- | missed payments of capital or interest; |
- | the borrower notifying the Santander UK group of current or likely financial |
- | request from a borrower to change contractual terms as a result of the borrower’s financial difficulty (i.e. forbearance) |
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Individual assessment
For individually assessed assets, the Santander UK group measures the amount of the loss as the difference between the carrying amount of the asset and the present value of the estimated future cash flows from the asset discounted at the asset’s original effective interest rate.
Collective assessment
In making a collective assessment for impairment, financial assets are grouped together according to their credit risk characteristics. These can include grouping by product, loan-to-value, brand, geography, type of customer and previous insolvency events. For each such portfolio or sub-segment of the portfolio, future cash flows are estimated through the use of historical loss experience. The historical loss experience is adjusted to include the effects of changes in current economic, behavioural and other conditions that cannot be successfully depicted solely from historical experience. The loss is discounted at the effective interest rate, except where portfolios meet the criteria for short-term receivables. The unwind of the discount over time is reported through interest and other similar income within the income statement, with an increase to the impairment loss allowances on the balance sheet. Loans for which evidence of potential loss have been specifically identified are group together for the purpose of calculating an allowance for observed losses. Loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an allowance for incurred but nonot observed (‘IBNO’)(IBNO) losses. Such losses will only be individually identified in the future.
Observed impaired loss allowance
An impairment loss allowance for observed losses is established for all non-performing loans which are typically three months or more past due, where it is increasingly probable that some of the capital or interest will not be repaid or recovered through enforcement of any applicable security. The allowance for observed losses is determined on a collective (or ‘portfolio’)portfolio) basis for groups of loans with similar credit risk characteristics.
The length of time before an asseta loan is regarded as beingnon-performing is typically when the customer fails to make payments when contractually due for three months or longer, although there can be additional qualifying criteria depending upon the product. For additional information on the definition of non-performing loans (NPLs), see ‘Credit risk management – risk measurement and control’ in default depends on whether the assetRisk review.
For mortgages and other secured advances, the allowance for observed losses is securedcalculated as the product of the account outstanding balance (exposure) at the reporting date, the estimated proportion that will be repossessed (the loss propensity) and the naturepercentage of exposure which will result in a loss (the loss ratio). The loss propensities for the collateralobserved segment (i.e. where the loan is classified as non-performing) represents the percentage that secureswill ultimately be written off, or repossessed for secured advances. Loss propensities are based on recent historical experience, typically covering a period of no more than the advances. On advances securedmost recent twelve months in the year under review. The loss ratio is based on actual cases which have been repossessed and sold using the most recent twelve month average data, segmented by residential or commercial property,LTV, and is then discounted using the default period is three months. effective interest rate.
For advances secured by consumer goods such as cars or computers, the default period is less than three months, the exact period being dependent on the particular type of loan. On unsecured advances, such as unsecured personal term loans, the default period is generally three months. Exceptions to the general rule exist with respect to revolving facilities, such as bankcredit cards and overdrafts, which are placed on default upon a breach of the contractual terms governing the applicable account.
The allowance for observed losses is calculated as the product of the number of accounts in the portfolio, the estimated proportion of accounts that will be written off, or repossessed in the case of mortgage loans (the ‘loss propensity’), the estimated proportion of such cases that will result in a loss (the ‘loss factor’)loss factor) and the average loss incurred (the ‘lossloss per case’)case).
The loss propensities for the observed segment (i.e. where the loan is classified as non-performing) represents the percentage that will ultimately be written off. Loss propensities are based on recent historical experience, typically covering a period of no more than the most recent twelve months in the year under review.
The loss per case is based on actual cases using the most recent six month average data of losses that have been incurred, during the most recent month for which data is available in the year under review (typically December), and is then discounted using the effective interest rate.
Based on historical experience, the gross loss ratio or gross loss per case is realised in cash several months after the customer first defaults, during which time interest and fees and charges continue to accrue on the account. The future fees and charges included in the gross loss ratio or gross loss per case are removed and the balance discounted so as to calculate the present value of the loss ratio or loss per case. The discounted loss ratio or loss per case for accounts where a payment has already been missed is higher than for accounts that are up to date because the discounting effect is lower reflecting the fact that the process to recover the funds is further advanced.
IBNO impairment loss allowances
An allowance for IBNO losses is established for loans which are either:
Performing and no evidence of loss has been specifically identified on an individual basis but because the loans that are not yet past due |
In |
The impairment loss calculation resembles the one explained above for the observed segment except that for the IBNO segment:
| Where the account is currently up to date, the loss propensity represents the percentage of such cases that are expected to miss a payment in the appropriate emergence period and which will ultimately be written |
| Where the account is delinquent, the loss propensity represents the percentage of such cases that will ultimately be written off. |
Annual Report 2015
Financial review
Emergence period
This is the period which the Santander UK group’s statistical analysis shows to be the period in which losses that had been incurred but have not been separately identified at the balance sheet date, become evident as the loans turn into past due. The emergence period is taken into consideration when determining the loss propensities for performing IBNO segment. Based on the Santander UK group’s statistical analysis, the emergence period is six months for unsecured lending and twelve months for secured lending. The longer emergence period for secured lending reflects the fact that a customer is more likely to default on unsecured debt before defaulting on secured lending. The factors considered in determining the length of the emergence period for unsecured lending are recent changes in customers’ debit/credit payment profiles and credit scores. The factors considered for secured lending are the frequency and duration of exceptions from adherence to the contractual payment schedule.
ii) Corporate assets
Impairment losses are assessed individually for corporate assets that are individually significant and collectively for corporate assets that are not individually significant.
Individual assessment
At each balance sheet data,date, the Santander UK group conducts impairment reviews to assess whether there is objective evidence of impairment for individually significant corporate assets. A specific observed impairment is established for all individually significant loans that have experienced a loss event such as:as where:
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In such situations the asset is transferred to the Commercial Banking Restructuring & Recoveries team. As part of their impairment reviews, an assessment is undertaken of the expected future cash flows (including, where appropriate, cash flows through enforcement of any applicable security held) in relation to the relevant asset, discounted at the loan’s original effective interest rate. The result is compared to the current carrying value of the asset. Any shortfall evidenced as a result of such a review will be assessed and recorded as an observed specific impairment loss allowance.
Collective assessment
Observed impairment loss allowances
A collective impairment loss allowance is established for loans which are not individually significant and have suffered a loss event. These non-individually significant loans are grouped together according to their credit risk characteristics and the allowance for observed losses is determined on a collective basis by applying loss rates (i.e. estimated loss given default) derived from analysis of historical loss data of observed losses.
IBNO impairment loss allowances
Loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an IBNO allowance for incurred inherent losses. Such losses will only be individually identified in the future. As soon as information becomes available which identifies incurred losses on individual loans within the group, those loans are removed from the group and assessed on an individual basis for impairment or included in the observed collective assessment above depending on their individual significance.
The allowance for IBNO losses)losses is determined on a portfolio basis using the following factors:
| Historical loss experience in portfolios of similar credit risk characteristics (for example, by product) |
| The estimated period between an impairment event occurring and the loss being identified and evidenced by the establishment of an observed loss allowance against the individual loan (known as the emergence period, as discussed below) |
| Management’s judgement as to whether current economic and credit conditions are such that the actual level of incurred inherent losses at the balance sheet date is likely to be greater or less than that suggested by historical experience. |
Emergence period
This is the period in which losses that had been incurred but have not been separately identified become evident. The emergence period spans between six to twelve months according to the corporate portfolio being assessed and is estimated having regard to historic experience and loan characteristics across the portfolio. The factors considered in determining the length of the emergence period include the frequency of the management information received or any change in account utilisation behaviour.
Financial review
iii) Assets subject to forbearance
To support Retail and Corporate customers that encounter actual or apparent financial difficulties, the Santander UK group may grant a concession, whether temporary or permanent, to amend contractual amounts or timings where a customer’s financial distress indicates a potential that satisfactory repayment may not be made within the original terms and conditions of the contract. These arrangements are known as forbearance. There are different risk characteristics associated with loans that are subject to forbearance as compared to loans that are not. A range of forbearance arrangements may be entered into by the Santander UK group, reflecting the different risk characteristics of such loans. The Santander UK group’s forbearance programmes are described in the credit risk section in the Risk Review.
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Retail assets
Mortgages
The main types of forbearance offered are capitalisation, under the forms of payment arrangements,a term extension or an interest only concession, subject to customer negotiation and vetting. SuchThese accounts are classified in the ‘collections’ category and, if they are in arrears, continue to be reported in arrears until the arrears are capitalised, at which point the accounts will be transferred to the ‘performing’ category. However, accounts which were classified as ‘non-performing’ at the point forbearance is agreed continue to be reported as ‘non-performing’ until all arrears priorthe payments received post forbearance equate to the forbearance have been paid.amount of arrears outstanding at the point of forbearance. The impairment provision on these accounts is based on the delinquency cycle in which the account was classified when it entered forbearance, unless the account’s status has further deteriorated since then, in which case the impairment provision will be based on the current status.
The impairment loss allowances on these accounts are calculated in the same manner as on any other account, using the Santander UK group’s collective assessment methodology. In making a collective assessment for impairment, loans thataccounts are subject to forbearance are grouped together according to their credit risk characteristics.
Separate assessments are performed for loans in forbearance that are performing (and have never been in arrears), performing (and previously were in arrears) and non-performing, and for each type of forbearance applied, to reflect their differing risk profiles. The loss propensities are based on recent historical experience of each sub category, typically covering a period of no more than the most recent twelve months in the year under review. For each sub category of loans, in forbearance, theaccounts are individually assigned a loss propensity factorbased on a defined behavioural scorecard which reflects any history of forbearance. The loss propensity applied in the collective assessment calculation is higher for forborne accounts than for other performing loans reflecting the higher risk of default attached to these accounts. Similarly, for each sub category of loans in forbearance the loss factor applied is higher reflecting the higher risk of loss attached to these accounts.
Unsecured personal loans (UPLs)
The main typestype of forbearance offered areis reduced repayments and reduced settlementrepayment arrangements. Where accounts undergoing forbearance are in arrears, these continue to be reported in the delinquency cycle, until all arrears are capitalised or paid up, at which point the accounts will be transferred to the ‘performing’ category. The impairment provision on these accounts is based on the delinquency cycle in which the account was classified when it entered forbearance, unless the account’s status has further deteriorated since then, in which case the impairment provision will be based on the current status. Where the accounts reside in the ‘performing’ category as a result of forbearance, the impairment allowance requirements are based on default probability that take account of the higher inherent risk in the forborne asset relative to other performing assets.
Other unsecured (credit cards &and overdrafts)
The main typestype of forbearance offered areis reduced repayment arrangements and, for credit cards, reduced settlement arrangements. Reduced settlement arrangements have no impact on the provisioning level as the agreed remaining balance is written off at the point of settlement. Reduced payment arrangements are treated for impairment purposes in the same way as UPLs above.
Corporate assets
For corporate borrowers, the main types of forbearance offered are term extensions or interest only concessions and in limited circumstances, other forms of forbearance options (including debt-for-equity swaps), subject to customer negotiation and vetting. If such accounts were classified in the ‘non-performing’ loan category prior to the forbearance, they continue to be classified as non-performing until evidence of compliance with the new terms is demonstrated (typically over a period of at least three months) before being reclassified as ‘substandard’. If the account was categorised as performing at the time the revised arrangements were agreed, the case is reclassified to ‘substandard’ upon completion of the forbearance agreement.
Once a substandard asset has demonstrated continued compliance with the new terms and the risk profile is deemed to have improved it may be reclassified as a ‘performing asset’. Until then, impairment loss allowances for such loans are assessed individually, taking into account the value of collateral held as confirmed by third party professional valuations and the available cash flow to service debt over the period of the forbearance. These impairment loss allowances are assessed and reviewed regularly. In the case of a debt for equity conversion, the converted debt is written off against the existing impairment loss allowance at the point forbearance is granted.
iv) Reversals of impairment
If in a subsequent period, the amount of an impairment loss reduces and the reduction can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the impairment loss allowance accordingly. The write-back is recognised in the income statement.
v) Write-off
For secured loans, a write-off is only made when all collection procedures have been exhausted and the security has been sold or from claiming on any mortgage indemnity guarantee or other insurance. In the corporate portfolio, there may be occasions where a write-off occurs for other reasons, for example, following a consensual restructure or refinancing of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than the face value of the debt.
There is no threshold based on past due status beyond which all secured loans are written off as there can be significant variations in the time needed to enforce possession and sale of the security, especially due to the different legal frameworks that apply in different regions of the UK. For unsecured loans, a write-off is only made when all internal avenues of collecting the debt have been exhausted and the debt is passed over to external collection agencies. A past due threshold is applied to unsecured debt where accounts that are 180 days past due are written off unless there is a dispute awaiting resolution. Contact is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried out only when the steps described above have been undertaken without success.
All write-offs are on a case-by-case basis, taking account of the exposure at the date of write-off, after accounting for the value from any collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once full investigations have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established impairment loss allowances.
vi) Recoveries
Recoveries of impairment losses are not included in the impairment loss allowance, but are taken to income and offset against impairment losses. Recoveries of impairment losses are classified in the income statement as ‘Impairment losses on loans and advances’.
Annual Report 2015
Financial review
b) Loans and receivables securities
Loans and receivables securities are assessed individually for impairment. An impairment loss is incurred if there is objective evidence that a loss event has occurred since initial recognition of the assets that has an impact on the estimated future cash flows of the loans and receivables securities. Potential indicators of loss events include significant financial distress of the issuer and default or delinquency in interest and principal payments (breach of contractual terms).
Loans and receivables securities are monitored for potential impairment through a detailed expected cash flow analysis taking into account the structure and underlying assets of each individual security. Once specific events give rise to a reasonable expectation that future anticipated cash flows may not be received, the asset originating these doubtful cash flows will be deemed to be impaired with the impairment loss being measured as the difference between the expected future cash flows discounted at the original effective interest rate and the carrying value of the loans and receivable securities.
c) Available-for-sale financial assets
The Santander UK group assesses at each balance sheet date whether there is objective evidence that aan available-for-sale financial asset is impaired. In addition to the criteria for loans and advances and loans and receivables securities set out above, the assessment involves reviewing the financial circumstances (including creditworthiness) and future prospects of the issuer, assessing the future cash flows expected to be realised and, in the case of equity shares, considering whether assets are impaired,there has been a significant or prolonged decline in the fair value of the security below its cost is considered evidence.cost. The cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously reported in the income statement and is removed from other comprehensive income and recognised in the income statement. For impaired debt instruments, further impairment losses are recognised where there has been a further negative impact on expected future cash flows.
If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase is due to an event occurring after the impairment loss was recognised in the income statement (with objective evidence to support this), the impairment loss is reversed through the income statement.
If, in a subsequent period, the fair value of an equity instrument classified as available-for-sale increases, all such increases in the fair value are treated as a revaluation, and are recognised in other comprehensive income. Impairment losses recognised on equity instruments are not reversed through the income statement.
Impairment of non-financial assets
At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment (including operating lease assets) and intangible assets (including goodwill) are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review.
The impairment review comprises a comparison of the carrying amount of the asset or cash generating unit with its recoverable amount: the higher of the asset’s or cash-generating unit’s fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at which non-financial assets including goodwill is monitored for internal management purposes and is not larger than an operating segment.
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Value in use is calculated by discounting management’s expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre tax basis. The recoverable amounts of goodwill have been based on value in use calculations.
The carrying values of property, plant and equipment, goodwill and other intangible assets are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss relating to property, plant and equipment may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the property, plant and equipment’s recoverable amount. The carrying amount of the property, plant and equipment will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.
Leases
a) The Santander UK group as lessor
Operating lease assets are recorded at cost and depreciated over the life of the asset after taking into account anticipated residual values. Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset. Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Santander UK group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Santander UK group’s net investment outstanding in respect of the leases and hire purchase contracts.
Financial review
b) The Santander UK group as lessee
The Santander UK group enters into operating leases for the rental of equipment or real estate. Payments made under such leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
If the lease agreement transfers the risk and rewards of the asset, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease payments or fair value and depreciated over the lower of the estimated useful life and the life of the lease. The corresponding rental obligations are recorded as borrowings. The aggregate benefit of incentives, if any, is recognised as a reduction of rental expense over the lease term on a straight-line basis.
220 Santander UK plc
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Income taxes, including deferred taxes
The tax expense represents the sum of the income tax currently payable and deferred income tax.
Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Current taxes associated with the repurchase of equity instruments are reported directly in equity.
Deferred income tax is the tax expected to be payable or recoverable on income tax losses available to carry forward and on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the assets may be utilised as they reverse. Such deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Deferred tax assets and liabilities are not recognised from the initial recognition of other assets (other than in a business combination) and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on rates enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Santander UK group is able to control reversal of the temporary difference and it is probable that it will not reverse in the foreseeable future. The Santander UK group reviews the carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax relating to actuarial gains and losses on defined benefits is recognised in other comprehensive income. Deferred tax relating to fair value re-measurements of available-for sale investments and cash flow hedging instruments is charged or credited directly to other comprehensive income and is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks and short-term investments in securities.
Balances with central banks represent amounts held at the Bank of England and the US Federal Reserve as part of the Santander UK group’s liquidity management activities. In addition, it includes certain minimum cash balances held for regulatory purposes required to be maintained with the Bank of England.
Provisions
Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefits will be necessary to settle the obligation, and it can be reliably estimated.
Conduct provisions are made for the estimated cost of making redress payments with respect to the past sales of products, based on conclusions regarding the number of claims that will be received, including the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main features.
When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.
Provision is made for irrevocable loan commitments, other than those classified as held for trading, within impairment loss allowances if it is probable that the facility will be drawn and the resulting loan will be recognised at a value less than the cash advanced.
Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.
Financial guarantee contracts
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. The Santander UK group accounts for guarantees that meet the definition of a financial guarantee contract at fair value on initial recognition. In subsequent periods, these guarantees are measured at the higher of the initial fair value less cumulative amortisation and the amount that would be recognised as a provision in accordance with IAS 37.
Share capital
a) Share issue costs
Incremental external costs directly attributable to the issue of new shares are deducted from equity net of related income taxes.
b) Dividends
Dividends on ordinary shares are recognised in equity in the period in which the right to receive payment is established.
Annual Report 2015
Financial review
CRITICAL ACCOUNTING POLICIES AND AREAS OF SIGNIFICANT MANAGEMENT JUDGEMENT
The preparation of the Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the date of the financial statementsConsolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The following accounting estimates and judgements are considered important to the portrayal of the Santander UK group’s financial results and financial condition because: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates, and (ii) any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group’s future financial results and financial condition.
In calculating each estimate, a range of outcomes was calculated based principally on management’s conclusions regarding the input assumptions relative to historic experience. The actual estimates were based on what management concluded to be the most probable assumptions within the range of reasonably possible assumptions.
Valuation of financial instruments and goodwill impairment are no longer considered to be significant management judgements. In respect of financial instruments held at fair value, valuation techniques have remained constant and there would need to be a significant change in the input to fair value adjustments to cause a material misstatement. In respect of goodwill impairment, management expects the underlying businesses to which the goodwill relates to remain profitable and does not believe that the effect of changes in assumptions to those that are reasonably possible would have a material impact on the Santander UK group’s future financial results and financial condition.
a) Impairment loss allowances for loans and advances to customers
The Santander UK group estimates impairment losses for loans and advances to customers, loans and receivables securities, and loans and advances to banks as described in the accounting policy ‘Impairment of financial assets’. Management’s assumptions about impairment losses are based on past performance, past customer behaviour, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.
At 31 December 2014,2015, impairment allowances held against loans and advances to customers totalled £1,157m (2014: £1,439m, (2013: £1,555m, 2012: £1,802m)2013: £1,555m). The net impairment loss (i.e. after recoveries) for loans and advances to customers recognised in 20142015 was £66m (2014: £258m, (2013: £475m, 2012: £988m)2013: £475m). In calculating impairment loss allowances, a range of outcomes was calculated, either for each individual loan or by portfolio taking account of the uncertainty relating to economic conditions. For retail lending, the range was based on different management assumptions as to loss propensity loss factor and loss per caseratio relative to historic experience. For corporate lending, the range reflects different realisation assumptions in respect of collateral held.
If management had used different assumptions, a larger or smaller impairment loss allowance would have resulted that could have had a material impact on the Santander UK group’s reported profit before tax. Specifically, if management’s conclusions were different, but within the range of what management deemed to be reasonably possible, the impairment loss for loans and advances could have decreased by £221m (2014: £471m, (2013: £325m, 2012: £165m)2013: £325m), with a consequential increase in profit before tax, or increased by £167m (2014: £212m, (2013: £135m, 2012: £104m)2013: £135m), with a consequential decrease in profit before tax. Of the possible decrease in the impairment loss allowance for loans and advances to customers in 2014, £116m represents the amount that the impairment loss allowance would have decreased by had management incorporated the full effect of house price increases in that year. In determining the actual charge for
During the year, management consideredenhanced the models that are used to calculate the positive trends in 2014 house prices were unlikely to continue and, therefore, excluded their effect when assessing the level of loss propensities.
b) Valuation of financial instruments
The Santander UK group trades in a wide variety of financial instruments in the major financial markets. When estimating the value of its financial instruments, including derivatives where quoted market pricesmortgage provision. These changes, which are not available, management therefore considers a range of interest rates, volatility, exchange rates, counterparty credit ratings, valuation adjustments and other similar inputs, all of which vary across maturity bands. These are chosen to best reflect the particular characteristics of each transaction baseddiscussed on observable inputs and adjustment to these inputs for Level 2 instruments or unobservable inputs for Level 3 instruments. See Note 44 for further details.
Had management used different assumptions, a larger or smaller change in the valuation of financial instruments including derivatives where quoted market prices are not available would have resulted that could have had a material impact on the Santander UK group’s reported profit before tax.
Detailed disclosures on financial instruments, including sensitivities, can be found in Note 44. Further information about sensitivities to market risk (including VaR) arising from financial instrument trading activities can be found in the Market Risk sectionpage 65 of the Risk Review.review, significantly reduced the number and scale of model overlays that were required when applying the old models. There was no significant change to the mortgage provision under the new models as compared to the adjusted old models.
c) Goodwill impairment
No goodwill impairment was recognised in 2014, 2013 or 2012. The carrying amount of goodwill was £1,834m at 31 December 2014 (2013: £1,834m). The Santander UK group evaluates whether the carrying value of goodwill is impaired and performs impairment testing annually or more frequently if there are impairment indicators present. Details of the Santander UK group’s approach to identifying and quantifying impairment of goodwill are set out in Note 24. Assumptions about the measurement of the estimated recoverable amount of goodwill are based on management’s estimates of future cash flows, discount rates and growth rates of the cash-generating units. Assumptions about estimated future cash flows and growth rates are based on management’s view of future business prospects at the time of the assessment and are subject to a high degree of uncertainty.
Had management used different assumptions, a larger or smaller goodwill impairment loss would have resulted that could have had a material impact on the Santander UK group’s reported profit before tax. Detailed disclosures on the assumptions used, including sensitivities, can be found in Note 24.
Financial review
d)b) Provision for conduct remediation
The provision charge for conduct remediation relating to past activities and products sold recognised in 20142015 was a charge of £500m (2014: charge of £140m, (2013:2013: credit of £45m, 2012: charge of £232m)£45m) before tax. The balance sheet provision amounted to £637m (2014: £291m, (2013: £387m, 2012: £658m)2013: £387m). Detailed disclosures on the provision for conduct remediation can be found in Note 35.33.
The provision represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including related costs. It requires significant judgement by management in determining appropriate assumptions, which include the level of complaints expected to be received, of those, the number that will be upheld and redressed, as well as the redress costs for each of the different populations of customers identified. Based on these factors, management determines its best estimate of the anticipated costs of redress and expected operating costs.
In the case of conduct risk projects where significant progress has been made in terms of customer communications sent, complaints received and redress paid, the assumptions are based on the actual data observed to date along with any expected developments. For projects which are still at an early stage, the assumptions are based on the outcomes of previous similar customer contact exercises conducted and quality control checks.
Had management used different assumptions, a larger or smaller provision charge would have resulted that could have had a material impact on the Santander UK group’s reported profit before tax. Detailed disclosures on the assumptions used, including sensitivities, can be found in Note 35.33.
e)c) Pensions
The Santander UK group operates a number of defined benefit pension schemes as described in Note 3634 and estimates their position as described in the accounting policy ‘Pensions and other post retirement benefits’.
The defined benefit pension schemes which were in a net asset position had a surplus of £315m (2013:£556m (2014: surplus of £118m)£315m) and the defined benefit pension schemes which were in a net liability position had a deficit of £199m (2013:£110m (2014: deficit of £672m)£199m).
Accounting for defined benefit pension schemes requires management to make assumptions, principally about mortality, but also about price inflation, discount rates, pension increases, and earnings growth. Management’s assumptions are based on past experience and current economic trends, which are not necessarily an indication of future experience.
Detailed disclosures on the current year service cost and deficit, including sensitivities and the date of the last formal actuarial valuations of the assets and liabilities of the schemes can be found in Note 36.
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2. SEGMENTS
The principal activity of the Santander UK group is financial services. The Santander UK group’s business is managed and reported on the basis of the following segments:
Retail |
Commercial |
Global Corporate Banking (formerly known as Corporate & Institutional |
Corporate Centre. |
FollowingAs part of a strategic review,rebrand across the segmental financial information reportedBanco Santander group, Corporate & Institutional Banking (the UK segment of Santander Global Banking & Markets) has been branded as Global Corporate Banking, to reflect the Board (Santander UK’s chief operating decision maker)build out of a corporate client franchise, and the refinement of the customer centred strategy.
The internal UK transfer pricing mechanism used to calculate the cost and risks associated with funding and liquidity in each business segment was revisedrefined in the fourth quarter of 2014, and prior periods restated, principally to designate three distinct customer business segments, which reflect how we now manage and operate:2015 for Retail Banking, Commercial Banking and Corporate & Institutional Banking;Centre to reflect the current market environment and allocate indirect income, expenses and charges previously held at the Corporate Centre, which can be attributed to the other customer segments. This included a review of the internal transfer pricing policy, which resulted in a further allocation of funding and liquidity costs, central operating expenses and other provisions such as conduct, branch de-duplication, the UK Bank Levy and FSCS charges.
With the allocation of indirect income, expenses and charges from the Corporate Centre and with the other distinct customer business segments at differing stages of commercial maturity, we are now able to identify better and drive with greater granularity the key drivers of our business performance. This enables a more targeted apportionment of capital and other resources in line with the individual strategies and objectives of each business segment.rates. The segmental analyses for prior yearsRetail Banking and Corporate Centre have been adjusted to reflect these changes.changes for prior years.
The Santander UK group’s segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Santander UK group has four segments:
Retail Banking |
Commercial Banking |
Global Corporate |
Corporate Centre predominantly consists of the non-core corporate and treasury legacy |
The segment information below is presented on the basis used by the Board to evaluate performance and allocate resources. The Board reviews discrete financial information for each segment of the business, including measures of operating results, assets and liabilities. The segment information reviewed by the Board is prepared on a statutory basis of accounting.
Transactions between the business segments are on normal commercial terms and conditions. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Internal charges and internal UK transfer pricing adjustments have been reflected in the performance of each segment. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on the Santander UK group’s cost of wholesale funding.
Interest income and interest expense have not been reported separately. The majority of the revenues from the segments presented below are interest income in nature and the Board relies primarily on net interest income to both assess the performance of the segment and to make decisions regarding allocation of segmental resources.
Annual Report 2015
Financial statements
| 2014 | Retail Banking £m | Commercial £m | Corporate & £m | Corporate Centre £m | Total £m | |||||||||||||||||||||||||||||||||||
Net interest income/(expense) | 3,092 | 373 | 75 | (106) | 3,434 | |||||||||||||||||||||||||||||||||||
| 2015 | Retail Banking £m | Commercial Banking £m | Global Corporate £m | Corporate Centre £m | Total £m | |||||||||||||||||||||||||||||||||||
Net interest income | 2,985 | 460 | 72 | 58 | 3,575 | |||||||||||||||||||||||||||||||||||
Non-interest income | 560 | 112 | 277 | 87 | 1,036 | 521 | 109 | 307 | 61 | 998 | ||||||||||||||||||||||||||||||
Total operating income/(expense) | 3,652 | 485 | 352 | (19) | 4,470 | |||||||||||||||||||||||||||||||||||
Administration (expenses)/recoveries | (1,543) | (260) | (231) | 119 | (1,915) | |||||||||||||||||||||||||||||||||||
Depreciation, amortisation and impairment | (210) | (60) | (6) | (206) | (482) | |||||||||||||||||||||||||||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (1,753) | (320) | (237) | (87) | (2,397) | |||||||||||||||||||||||||||||||||||
Total operating income | 3,506 | 569 | 379 | 119 | 4,573 | |||||||||||||||||||||||||||||||||||
Operating expenses before impairment losses, provisions and (charges/(releases) | (1,783) | (332) | (287) | 2 | (2,400) | |||||||||||||||||||||||||||||||||||
Impairment (losses)/releases on loans and advances | (187) | (92) | 4 | 17 | (258) | (76) | (39) | 13 | 36 | (66) | ||||||||||||||||||||||||||||||
Provisions for other liabilities and charges | (395) | (12) | (9) | - | (416) | |||||||||||||||||||||||||||||||||||
Total operating impairment losses, provisions and charges | (582) | (104) | (5) | 17 | (674) | |||||||||||||||||||||||||||||||||||
Profit/(loss) from continuing operations before tax | 1,317 | 61 | 110 | (89) | 1,399 | |||||||||||||||||||||||||||||||||||
Loss from discontinued operations after tax | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Provisions for other liabilities and (charges)/releases | (727) | (24) | (14) | 3 | (762) | |||||||||||||||||||||||||||||||||||
Total operating impairment losses, provisions and (charges)/releases | (803) | (63) | (1) | 39 | (828) | |||||||||||||||||||||||||||||||||||
Profit from continuing operations before tax | 920 | 174 | 91 | 160 | 1,345 | |||||||||||||||||||||||||||||||||||
Revenue from external customers | 4,595 | 674 | 405 | (1,204) | 4,470 | 4,435 | 720 | 437 | (1,019) | 4,573 | ||||||||||||||||||||||||||||||
Inter-segment revenue | (943) | (189) | (53) | 1,185 | - | (929) | (151) | (58) | 1,138 | - | ||||||||||||||||||||||||||||||
Total operating income/(expense) | 3,652 | 485 | 352 | (19) | 4,470 | |||||||||||||||||||||||||||||||||||
Total operating income | 3,506 | 569 | 379 | 119 | 4,573 | |||||||||||||||||||||||||||||||||||
Customer loans | 158,515 | 18,637 | 5,224 | 8,276 | 190,652 | 164,830 | 20,943 | 5,470 | 7,391 | 198,634 | ||||||||||||||||||||||||||||||
Total assets(1) | 163,430 | 18,637 | 38,301 | 55,609 | 275,977 | 171,847 | 20,943 | 36,593 | 52,023 | 281,406 | ||||||||||||||||||||||||||||||
Customer deposits | 129,584 | 15,327 | 2,325 | 5,174 | 152,410 | 137,332 | 18,102 | 3,013 | 3,808 | 162,255 | ||||||||||||||||||||||||||||||
Total liabilities | 132,541 | 15,327 | 36,359 | 77,557 | 261,784 | 140,131 | 18,102 | 32,290 | 75,224 | 265,747 | ||||||||||||||||||||||||||||||
Average number of staff(2) | 17,564 | 1,834 | 709 | 156 | 20,263 | 17,495 | 2,005 | 898 | 7 | 20,405 | ||||||||||||||||||||||||||||||
| 2013(3) | ||||||||||||||||||||||||||||||||||||||||
| 2014 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | 2,947 | 373 | 75 | 39 | 3,434 | |||||||||||||||||||||||||||||||||||
Non-interest income | 560 | 89 | 300 | 87 | 1,036 | |||||||||||||||||||||||||||||||||||
Total operating income | 3,507 | 462 | 375 | 126 | 4,470 | |||||||||||||||||||||||||||||||||||
Operating expenses before impairment losses, provisions and charges | (1,753) | (297) | (260) | (87) | (2,397) | |||||||||||||||||||||||||||||||||||
Impairment (losses)/releases on loans and advances | (187) | (92) | 4 | 17 | (258) | |||||||||||||||||||||||||||||||||||
Provisions for other liabilities and charges | (395) | (12) | (9) | - | (416) | |||||||||||||||||||||||||||||||||||
Total operating impairment losses, provisions and (charges)/releases | (582) | (104) | (5) | 17 | (674) | |||||||||||||||||||||||||||||||||||
Profit from continuing operations before tax | 1,172 | 61 | 110 | 56 | 1,399 | |||||||||||||||||||||||||||||||||||
Revenue from external customers | 4,537 | 620 | 432 | (1,119) | 4,470 | |||||||||||||||||||||||||||||||||||
Inter-segment revenue | (1,030) | (158) | (57) | 1,245 | - | |||||||||||||||||||||||||||||||||||
Total operating income | 3,507 | 462 | 375 | 126 | 4,470 | |||||||||||||||||||||||||||||||||||
Customer loans | 158,515 | 18,637 | 5,224 | 8,276 | 190,652 | |||||||||||||||||||||||||||||||||||
Total assets(1) | 163,430 | 18,637 | 38,301 | 55,609 | 275,977 | |||||||||||||||||||||||||||||||||||
Customer deposits | 129,584 | 15,327 | 2,325 | 5,174 | 152,410 | |||||||||||||||||||||||||||||||||||
Total liabilities | 132,541 | 15,327 | 36,359 | 77,557 | 261,784 | |||||||||||||||||||||||||||||||||||
Average number of staff(2) | 17,682 | 1,849 | 724 | 8 | 20,263 | |||||||||||||||||||||||||||||||||||
| 2013 | ||||||||||||||||||||||||||||||||||||||||
Net interest income/(expense) | 2,738 | 284 | 65 | (124) | 2,963 | 2,663 | 284 | 65 | (49) | 2,963 | ||||||||||||||||||||||||||||||
Non-interest income | 599 | 113 | 280 | 74 | 1,066 | 599 | 91 | 302 | 74 | 1,066 | ||||||||||||||||||||||||||||||
Total operating income/(expense) | 3,337 | 397 | 345 | (50) | 4,029 | |||||||||||||||||||||||||||||||||||
Administration expenses | (1,555) | (231) | (160) | (1) | (1,947) | |||||||||||||||||||||||||||||||||||
Depreciation, amortisation and impairment | (195) | (49) | (4) | - | (248) | |||||||||||||||||||||||||||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (1,750) | (280) | (164) | (1) | (2,195) | |||||||||||||||||||||||||||||||||||
Total operating income | 3,262 | 375 | 367 | 25 | 4,029 | |||||||||||||||||||||||||||||||||||
Operating expenses before impairment losses, provisions and charges | (1,750) | (258) | (186) | (1) | (2,195) | |||||||||||||||||||||||||||||||||||
Impairment losses on loans and advances | (359) | (107) | - | (9) | (475) | (359) | (107) | - | (9) | (475) | ||||||||||||||||||||||||||||||
Provisions for other liabilities and charges | (226) | (17) | (7) | - | (250) | (226) | (17) | (7) | - | (250) | ||||||||||||||||||||||||||||||
Total operating impairment losses, provisions and charges | (585) | (124) | (7) | (9) | (725) | (585) | (124) | (7) | (9) | (725) | ||||||||||||||||||||||||||||||
Profit/(loss) from continuing operations before tax | 1,002 | (7) | 174 | (60) | 1,109 | 927 | (7) | 174 | 15 | 1,109 | ||||||||||||||||||||||||||||||
Loss from discontinued operations after tax | - | - | - | (8) | (8) | - | - | - | (8) | (8) | ||||||||||||||||||||||||||||||
Revenue from external customers | 4,546 | 532 | 386 | (1,435) | 4,029 | 4,488 | 487 | 408 | (1,354) | 4,029 | ||||||||||||||||||||||||||||||
Inter-segment revenue | (1,209) | (135) | (41) | 1,385 | - | (1,226) | (112) | (41) | 1,379 | - | ||||||||||||||||||||||||||||||
Total operating income/(expense) | 3,337 | 397 | 345 | (50) | 4,029 | |||||||||||||||||||||||||||||||||||
Total operating income | 3,262 | 375 | 367 | 25 | 4,029 | |||||||||||||||||||||||||||||||||||
Customer loans | 155,613 | 16,933 | 5,142 | 9,360 | 187,048 | 155,613 | 16,933 | 5,142 | 9,360 | 187,048 | ||||||||||||||||||||||||||||||
Total assets(1) | 160,512 | 16,934 | 37,851 | 54,989 | 270,286 | 160,512 | 16,934 | 37,851 | 54,989 | 270,286 | ||||||||||||||||||||||||||||||
Customer deposits | 123,189 | 13,788 | 2,637 | 6,830 | 146,444 | 123,189 | 13,788 | 2,637 | 6,830 | 146,444 | ||||||||||||||||||||||||||||||
Total liabilities | 128,106 | 13,838 | 35,797 | 79,955 | 257,696 | 128,106 | 13,838 | 35,797 | 79,955 | 257,696 | ||||||||||||||||||||||||||||||
Average number of staff(2) | 17,764 | 1,525 | 615 | 160 | 20,064 | 17,779 | 1,587 | 692 | 8 | 20,066 | ||||||||||||||||||||||||||||||
| (1) | Includes customer loans, net of impairment loss allowances. |
| (2) | Full-time equivalents. |
|
| 2012(3) | Retail Banking £m | Commercial £m | Corporate & £m | Corporate £m | Total £m | |||||||||||||||
Net interest income/(expense) | 2,519 | 228 | 29 | (42) | 2,734 | |||||||||||||||
Non-interest income | 632 | 179 | 417 | 721 | 1,949 | |||||||||||||||
Total operating income | 3,151 | 407 | 446 | 679 | 4,683 | |||||||||||||||
Administration expenses | (1,504) | (187) | (180) | (2) | (1,873) | |||||||||||||||
Depreciation, amortisation and impairment | (192) | (45) | (4) | - | (241) | |||||||||||||||
Total operating expenses excluding impairment losses, provisions and charges | (1,696) | (232) | (184) | (2) | (2,114) | |||||||||||||||
Impairment losses on loans and advances | (420) | (109) | - | (459) | (988) | |||||||||||||||
Provisions for other liabilities and charges | (312) | (47) | (8) | (62) | (429) | |||||||||||||||
Total operating impairment losses, provisions and charges | (732) | (156) | (8) | (521) | (1,417) | |||||||||||||||
Profit from continuing operations before tax | 723 | 19 | 254 | 156 | 1,152 | |||||||||||||||
Profit from discontinued operations after tax | - | - | - | 62 | 62 | |||||||||||||||
Revenue from external customers | 4,174 | 883 | 501 | (875) | 4,683 | |||||||||||||||
Inter-segment revenue | (1,023) | (476) | (55) | 1,554 | - | |||||||||||||||
Total operating income | 3,151 | 407 | 446 | 679 | 4,683 | |||||||||||||||
Customer loans | 164,126 | 15,390 | 4,215 | 11,002 | 194,733 | |||||||||||||||
Total assets(1) | 168,305 | 15,390 | 48,373 | 60,950 | 293,018 | |||||||||||||||
Customer deposits | 127,178 | 10,464 | 2,348 | 8,582 | 148,572 | |||||||||||||||
Total liabilities | 128,404 | 10,464 | 42,263 | 98,845 | 279,976 | |||||||||||||||
Average number of staff(2) | 18,264 | 1,872 | 646 | 165 | 20,947 | |||||||||||||||
|
|
|
Revenue by products and services
Details of revenue by product or service are disclosed in Notes 3 to 5.
Geographical information
A geographical analysis of total operating income is presented below:
| Group | ||||||||||||
2014 £m | 2013 £m | 2012 £m | ||||||||||
United Kingdom | 4,437 | 3,988 | 4,640 | |||||||||
Other | 33 | 41 | 43 | |||||||||
| 4,470 | 4,029 | 4,683 | ||||||||||
A geographical analysis of total assets other than financial instruments, current and deferred tax assets and post-employment benefit assets is presented below:
|
| |||||||||||
2014 £m | 2013 £m | |||||||||||
United Kingdom | 3,913 | 3,936 | ||||||||||
Other | 3 | 2 | ||||||||||
| 3,916 | 3,938 | |||||||||||
| Geographical analysis of total operating income: | 2015 £m | 2014 £m | 2013 £m | |||||||||
United Kingdom | 4,561 | 4,437 | 3,988 | |||||||||
Other | 12 | 33 | 41 | |||||||||
| 4,573 | 4,470 | 4,029 | ||||||||||
Geographical analysis of total assets other than financial instruments, current and deferred tax assets, post-employment benefit assets and other assets (excluding prepayments): | 2015 £m | 2014 £m | ||||||||||
United Kingdom | 3,963 | 3,913 | ||||||||||
Other | - | 3 | ||||||||||
| 3,963 | 3,916 | |||||||||||
224 Santander UK plc
| Independent | Primary financial | Notes to the | ||||||||||||
| Auditor’s Report | statements | financial statements | ||||||||||||
Financial statements
3. NET INTEREST INCOME
| Group | Group | |||||||||||||||||||||||
2014 £m | 2013 £m | 2012 £m | 2015 £m | 2014 £m | 2013 £m | |||||||||||||||||||
Interest and similar income: | ||||||||||||||||||||||||
Loans and advances to banks | 141 | 150 | 177 | 115 | 141 | 150 | ||||||||||||||||||
Loans and advances to customers | 6,548 | 6,940 | 7,177 | 6,491 | 6,548 | 6,940 | ||||||||||||||||||
Other interest-earning financial assets | 108 | 80 | 78 | 89 | 108 | 80 | ||||||||||||||||||
Total interest and similar income | 6,797 | 7,170 | 7,432 | 6,695 | 6,797 | 7,170 | ||||||||||||||||||
Interest expense and similar charges: | ||||||||||||||||||||||||
Deposits by banks | (81) | (188) | (187) | (63) | (81) | (188) | ||||||||||||||||||
Deposits by customers | (2,072) | (2,658) | (2,924) | (1,979) | (2,072) | (2,658) | ||||||||||||||||||
Debt securities in issue | (1,032) | (1,230) | (1,399) | (926) | (1,032) | (1,230) | ||||||||||||||||||
Subordinated liabilities | (151) | (106) | (174) | (138) | (151) | (106) | ||||||||||||||||||
Other interest-bearing financial liabilities | (27) | (25) | (14) | (14) | (27) | (25) | ||||||||||||||||||
Total interest expense and similar charges | (3,363) | (4,207) | (4,698) | (3,120) | (3,363) | (4,207) | ||||||||||||||||||
Net interest income | 3,434 | 2,963 | 2,734 | 3,575 | 3,434 | 2,963 | ||||||||||||||||||
Interest and similar income includes £81m (2014: £103m, 2013: £115m) on impaired loans.
4. NET FEE AND COMMISSION INCOME
| Group | Group | |||||||||||||||||||||||
2014 £m | 2013 £m | 2012 £m | 2015 £m | 2014 £m | 2013 £m | |||||||||||||||||||
Fee and commission income: | ||||||||||||||||||||||||
Retail and corporate products | 960 | 894 | 861 | 1,043 | 1,021 | 966 | ||||||||||||||||||
Insurance products | 74 | 92 | 135 | 72 | 74 | 92 | ||||||||||||||||||
Asset management | 61 | 72 | 90 | |||||||||||||||||||||
Total fee and commission income | 1,095 | 1,058 | 1,086 | 1,115 | 1,095 | 1,058 | ||||||||||||||||||
Fee and commission expense: | ||||||||||||||||||||||||
Other fees paid | (356) | (300) | (225) | (400) | (356) | (300) | ||||||||||||||||||
Total fee and commission expense | (356) | (300) | (225) | (400) | (356) | (300) | ||||||||||||||||||
Net fee and commission income | 739 | 758 | 861 | 715 | 739 | 758 | ||||||||||||||||||
5. NET TRADING AND OTHER INCOME
| Group | Group | |||||||||||||||||||||||
2014 £m | 2013 £m | 2012 £m | 2015 £m | 2014 £m | 2013 £m | |||||||||||||||||||
Net trading and funding of other items by the trading book | 310 | 247 | 513 | 252 | 310 | 247 | ||||||||||||||||||
Net income from operating lease assets | 42 | 42 | 54 | 46 | 42 | 42 | ||||||||||||||||||
Net gains on assets designated at fair value through profit or loss | 267 | 43 | 271 | 33 | 267 | 43 | ||||||||||||||||||
Net losses on liabilities designated at fair value through profit or loss | (123) | (139) | (180) | (65) | (123) | (139) | ||||||||||||||||||
Net (losses)/gains on derivatives managed with assets/liabilities held at fair value through profit or loss | (203) | 155 | (439) | |||||||||||||||||||||
Net share of profit/(loss) from associates and joint ventures | 6 | 4 | (4) | |||||||||||||||||||||
Net gains/(losses) on derivatives managed with assets/liabilities held at fair value through profit or loss | 26 | (203) | 155 | |||||||||||||||||||||
Net share of profit from associates and joint ventures | 10 | 6 | 4 | |||||||||||||||||||||
Net profit on sale of available-for-sale assets | 4 | 46 | 24 | 2 | 4 | 46 | ||||||||||||||||||
Net gains/(losses) on sale of property, plant and equipment and intangible fixed assets | 2 | (2) | - | |||||||||||||||||||||
Net (losses)/gains on sale of property, plant and equipment and intangible fixed assets | (4) | 2 | (2) | |||||||||||||||||||||
Hedge ineffectiveness and other | (8) | (121) | 144 | (17) | (8) | (121) | ||||||||||||||||||
Profit on repurchase of debt issuance | - | 33 | 705 | - | - | 33 | ||||||||||||||||||
| 297 | 308 | 1,088 | 283 | 297 | 308 | |||||||||||||||||||
‘Net trading and funding of other items by the trading book’ includes fair value losses of £5m (2014: £22m, (2013: £58m, 2012: £149m)2013: £58m) on embedded derivatives bifurcated from certain equity index-linked deposits, as described in the derivative financial instruments section of the Accounting Policies.derivatives accounting policy in Note 1. The embedded derivatives are economically hedged internally with the equity derivatives trading desk. These transactions are managed as part of the overall positions of the equity derivatives trading desk, the results of which are also included in this line item, and amounted to gains of £7m (2014: £24m, (2013: £59m, 2012: £150m)2013: £59m). As a result, the net fair value movements recognised on the equity index-linked deposits and the related economic hedges were net gains of £2m (2013: £1m, 2012:(2014: £2m, 2013: £1m).
In July 2012,June 2015, as part of a capital management exercise, Santander UK plc purchased certain of its debt capital instruments pursuant to a tender offer. The netThis had no significant impact ofon the purchase and crystallisation of mark-to-market positions on associated derivatives resulted in a pre-tax gain of £705m.income statement. A further but smallersimilar capital management exercise was carried out in 2013, generating a pre-tax gain of £33m.
Annual Report 2015
Financial statements
6. ADMINISTRATIONOPERATING EXPENSES BEFORE IMPAIRMENT LOSSES, PROVISIONS AND CHARGES
| Group | Group | |||||||||||||||||||||||
2014 £m | 2013 £m | 2012 £m | 2015 £m | 2014 £m | 2013 £m | |||||||||||||||||||
Staff costs: | ||||||||||||||||||||||||
Wages and salaries | 689 | 631 | 643 | 723 | 689 | 631 | ||||||||||||||||||
Performance-related payments: - cash | 147 | 124 | 131 | 142 | 147 | 124 | ||||||||||||||||||
- shares | 22 | 16 | 19 | 21 | 22 | 16 | ||||||||||||||||||
Social security costs | 90 | 78 | 82 | 92 | 90 | 78 | ||||||||||||||||||
Pensions costs: - defined contribution plans | 52 | 38 | 34 | 50 | 52 | 38 | ||||||||||||||||||
- defined benefit plans: | ||||||||||||||||||||||||
- past service credit | (230) | - | - | 2 | (230) | - | ||||||||||||||||||
- other | 26 | 29 | 29 | 27 | 26 | 29 | ||||||||||||||||||
Other share-based payments | 6 | 5 | 1 | (5) | 6 | 5 | ||||||||||||||||||
Other personnel costs | 58 | 57 | 52 | 63 | 58 | 57 | ||||||||||||||||||
| 860 | 978 | 991 | 1,115 | 860 | 978 | |||||||||||||||||||
Other administration expenses: | ||||||||||||||||||||||||
Information technology expenses | 351 | 430 | 418 | |||||||||||||||||||||
Property, plant and equipment expenses | 189 | 177 | 179 | 176 | 189 | 177 | ||||||||||||||||||
Information technology expenses | 430 | 418 | 341 | |||||||||||||||||||||
Other administration expenses | 436 | 374 | 362 | |||||||||||||||||||||
Other | 463 | 436 | 374 | |||||||||||||||||||||
| 1,915 | 1,947 | 1,873 | 2,105 | 1,915 | 1,947 | |||||||||||||||||||
Depreciation, amortisation and impairment: | ||||||||||||||||||||||||
Depreciation and impairment of property, plant and equipment | 254 | 221 | 198 | |||||||||||||||||||||
Amortisation and impairment of intangible assets | 41 | 261 | 50 | |||||||||||||||||||||
| 295 | 482 | 248 | ||||||||||||||||||||||
| 2,400 | 2,397 | 2,195 | ||||||||||||||||||||||
During the year,In 2014, a net gain of £218m arose as a result of scheme changes that limit future defined benefit pension entitlements and provide for the longer term sustainability of our staff pension arrangement, as set out in Note 36.34. The net gain comprised a past service credit of £230m, partially offset by a one-off contribution to the defined contribution scheme for affected members of £10m, both classified in pensions costs, and implementation costs of £2m classified in other administration expenses.
’Performance-related‘Performance-related payments – shares’ consist of bonuses paid in the form of shares and awards granted under the Long-Term Incentive Plan, as described in Note 41.40. Included in ’performance-related payments – shares’ is £21m (2014: £22m, (2013: £16m, 2012: £19m)2013: £16m) which arose from equity-settled share-based payments, none of which related to option-based schemes. ’Other share-based payments’ consist of options granted under the Employee Sharesave scheme, as described in Note 41,40, which comprise the Santander UK group’s cash-settled share-based payments.
Performance-related payments above include amounts related to deferred performance awards as follows:
| Costs recognised in 2014 | Costs expected to be recognised in 2015 or later | Costs recognised in 2015 | Costs expected to be recognised in 2016 or later | |||||||||||||||||||||||||||||||||||||||||||||||||
Arising from awards in current year | Arising from awards in prior year | Total | Arising from awards in current year | Arising from awards in prior year | Total | Arising from awards in current year | Arising from awards in prior year | Total | Arising from awards in current year | Arising from awards in prior year | Total | |||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||||
Cash | 6 | 8 | 14 | 12 | 6 | 18 | 4 | 12 | 16 | 8 | 7 | 15 | ||||||||||||||||||||||||||||||||||||||||
Shares | 5 | 6 | 11 | 12 | 3 | 15 | 5 | 7 | 12 | 11 | 6 | 17 | ||||||||||||||||||||||||||||||||||||||||
| 11 | 14 | 25 | 24 | 9 | 33 | 9 | 19 | 28 | 19 | 13 | 32 | |||||||||||||||||||||||||||||||||||||||||
The following table shows the amount of bonus awarded to employees for the performance year 2014.2015. In the case of deferred cash and share awards, the final amount paid to an employee is influenced by forfeiture provisions and any performance conditions to which these awards are subject. The deferred share award amount is based on the fair value of these awards at the date of grant.
| Expenses charged in the year | Expenses deferred to future periods | Total | Expenses charged in the year | Expenses deferred to future periods | Total | |||||||||||||||||||||||||||||||||||||||||||
2014 £m | 2013 £m | 2014 £m | 2013 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2015 £m | 2014 £m | 2015 £m | 2014 £m | |||||||||||||||||||||||||||||||||||||
Cash award - not deferred | 133 | 116 | - | - | 133 | 116 | 126 | 133 | - | - | 126 | 133 | ||||||||||||||||||||||||||||||||||||
- deferred | 14 | 8 | 18 | 15 | 32 | 23 | 16 | 14 | 15 | 18 | 31 | 32 | ||||||||||||||||||||||||||||||||||||
Shares award - not deferred | 11 | 5 | - | - | 11 | 5 | 9 | 11 | - | - | 9 | 11 | ||||||||||||||||||||||||||||||||||||
- deferred | 11 | 11 | 15 | 9 | 26 | 20 | 12 | 11 | 17 | 15 | 29 | 26 | ||||||||||||||||||||||||||||||||||||
Total discretionary bonus | 169 | 140 | 33 | 24 | 202 | 164 | 163 | 169 | 32 | 33 | 195 | 202 | ||||||||||||||||||||||||||||||||||||
7. DEPRECIATION, AMORTISATION AND IMPAIRMENT
| Group | ||||||||||||
2014 £m | 2013 £m | 2012 £m | ||||||||||
Depreciation of property, plant and equipment | 221 | 198 | 210 | |||||||||
Amortisation and impairment of intangible assets | 261 | 50 | 31 | |||||||||
| 482 | 248 | 241 | ||||||||||
AmortisationThere was no impairment in 2015 and 2013. In 2014, amortisation and impairment of intangible assets in 2014 included £206m in respect of the impairment of software, as set out in Note 24. There was no impairment in 2013 and 2012.
226 Santander UK plc
| Independent | Primary financial | Notes to the | ||||||||||||
| Auditor’s Report | statements | financial statements | ||||||||||||
Financial statements
8.7. AUDIT AND OTHER SERVICES
The fees for audit and other services payable to the Company’s auditor, Deloitte LLP, are analysed as follows:
| Group | Group | |||||||||||||||||||||||
2014 £m | 2013 £m | 2012 £m | 2015 £m | 2014 £m | 2013 £m | |||||||||||||||||||
Audit fees: | ||||||||||||||||||||||||
Fees payable to the Company’s auditor and its associates for the audit of the Santander UK group’s annual accounts | 3.5 | 3.4 | 3.0 | 3.6 | 3.5 | 3.4 | ||||||||||||||||||
Fees payable to the Company’s auditor and its associates for other services to the Santander UK group: | ||||||||||||||||||||||||
- The audit of the Santander UK group’s subsidiaries | 1.8 | 1.7 | 1.8 | 1.8 | 1.8 | 1.7 | ||||||||||||||||||
Total audit fees | 5.3 | 5.1 | 4.8 | 5.4 | 5.3 | 5.1 | ||||||||||||||||||
Non-audit fees: | ||||||||||||||||||||||||
Audit-related assurance services | 2.5 | 2.5 | 1.7 | |||||||||||||||||||||
Audit-related services | 2.7 | 2.5 | 2.5 | |||||||||||||||||||||
Other taxation advisory services | 0.3 | 0.3 | 0.1 | 0.2 | 0.3 | 0.3 | ||||||||||||||||||
Other assurance services | 1.2 | 0.8 | 1.9 | |||||||||||||||||||||
Other services | 1.7 | 1.2 | 0.8 | |||||||||||||||||||||
Total non-audit fees | 4.0 | 3.6 | 3.7 | 4.6 | 4.0 | 3.6 | ||||||||||||||||||
Audit-related assurance services of relate to services performed in connection with the statutory and regulatory filings of the Company and its associates. Of this category £1.2m (2014: £1.3m, (2013: £1.3m, 2012: £0.5m)2013: £1.3m) accords with the definition of ‘Audit fees’ per US Securities and Exchange Commission (‘SEC’)(SEC) guidance. The remaining £1.5 m (2014: £1.2m, (2013: £1.2m, 2012:2013: £1.2m) accords with the definition of ‘Audit related fees’ per that guidance and relates to services performed in connection with securitization, debt issuance and related work and assurance reporting to prudential and conduct regulators which is in accordance with the definition ‘Audit related fees’ per SEC guidance. Taxation compliance services accord with the SEC definition of ‘Tax fees’ and relate to compliance services performed in respect of Foreign Account Tax complianceCompliance Act (‘FATCA’)(FATCA) and other similar tax compliance services. Other assurance services accord with the SEC definition of ‘All other fees’ and include assurance services performed in respect of Santander UK’s preparation for MiFiDII and IFRS 9 implementation. 2014 included services in relation to the ECB’s asset quality review.
No information technology, internal audit, valuation and actuarial, litigation, recruitment and remuneration or corporate finance services were provided by the external auditor during these years. A framework for ensuring auditor’s independence has been adopted which defines unacceptable non-audit assignments, pre-approval of acceptable non-audit assignments and procedures for approval of acceptable non-audit assignments by the Santander UK plc Board Audit Committee. Services provided by the Santander UK group’s external auditor are subject to approval by the Santander UK plc Board Audit Committee. No services were provided pursuant to contingent fee arrangements.
9.8. IMPAIRMENT LOSSES AND PROVISIONS
| Group | ||||||||||||
2014 £m | 2013(1) £m | 2012(1) £m | ||||||||||
Impairment losses on loans and advances: | ||||||||||||
- loans and advances to customers (Note 18) | 369 | 576 | 1,053 | |||||||||
- loans and advances to banks (Note 17) | - | - | - | |||||||||
- loans and receivables securities (Note 21) | - | - | - | |||||||||
Recoveries of loans and advances (Note 18) | (111) | (101) | (65) | |||||||||
| 258 | 475 | 988 | ||||||||||
Impairment losses on available-for-sale financial assets (Note 22) | - | - | - | |||||||||
Provisions for other liabilities and charges: (Note 35) | ||||||||||||
- New and increased allowances | 416 | 295 | 432 | |||||||||
- Provisions released | - | (45) | (3) | |||||||||
| 416 | 250 | 429 | ||||||||||
Total impairment losses and provisions charged to the income statement | 674 | 725 | 1,417 | |||||||||
|
| Group | ||||||||||||
2015 £m | 2014 £m | 2013 £m | ||||||||||
Impairment losses on loans and advances: | ||||||||||||
- loans and advances to customers (Note 16) | 156 | 369 | 576 | |||||||||
- loans and advances to banks (Note 15) | - | - | - | |||||||||
- loans and receivables securities (Note 19) | - | - | - | |||||||||
Recoveries of loans and advances (Note 16) | (90) | (111) | (101) | |||||||||
| 66 | 258 | 475 | ||||||||||
Impairment losses on available-for-sale financial assets (Note 20) | - | - | - | |||||||||
Provisions for other liabilities and charges: (Note 33) | ||||||||||||
- New and increased allowances | 762 | 416 | 295 | |||||||||
- Provisions released | - | - | (45) | |||||||||
| 762 | 416 | 250 | ||||||||||
Total impairment losses and provisions charged to the income statement | 828 | 674 | 725 | |||||||||
Annual Report 2015
Financial statements
10.9. TAXATION
| Group | ||||||||||||
2014 £m | 2013(1) £m | 2012(1) £m | ||||||||||
Current tax: | ||||||||||||
UK corporation tax on profit for the year | 273 | 143 | 151 | |||||||||
Adjustments in respect of prior years | (16) | (70) | (113) | |||||||||
Total current tax | 257 | 73 | 38 | |||||||||
Deferred tax: | ||||||||||||
Origination and reversal of temporary differences | 41 | 113 | 126 | |||||||||
Change in rate of UK corporation tax | (4) | (15) | 4 | |||||||||
Adjustments in respect of prior years | (5) | 40 | 103 | |||||||||
Total deferred tax | 32 | 138 | 233 | |||||||||
Tax on profit on continuing operations | 289 | 211 | 271 | |||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
| Group | ||||||||||||
| Grio | 2015 £m | 2014 £m | 2013 £m | |||||||||
Current tax: | ||||||||||||
UK corporation tax on profit for the year | 346 | 273 | 143 | |||||||||
Adjustments in respect of prior years | (16) | (16) | (70) | |||||||||
Total current tax | 330 | 257 | 73 | |||||||||
Deferred tax: | ||||||||||||
Origination and reversal of temporary differences | 45 | 41 | 113 | |||||||||
Change in rate of UK corporation tax | 9 | (4) | (15) | |||||||||
Adjustments in respect of prior years | (3) | (5) | 40 | |||||||||
Total deferred tax | 51 | 32 | 138 | |||||||||
Tax on profit from continuing operations | 381 | 289 | 211 | |||||||||
UK corporation tax is calculated at 20.25% (2014: 21.5% (2013: 23.25%, 2012: 24.5%2013: 23.25%) of the estimated assessable profits for the year. The standard rate of UK corporation tax was reduced from 23%21% to 21%20% with effect from 1 April 2014.2015. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
The Finance Act 2013, which provides for a reduction in the main rate of UK corporation tax to 21% effective from 1 April 2014 and 20% effective from 1 April 2015 was enacted on 17 July 2013. As the changes in rates were substantively enacted prior to 31 December 2014, they have been reflected in the deferred tax balance sheet position at 31 December 2014. The Finance (No.2) Act 2015 introduces further reductions in the corporation tax rate from 20% to 19% by 2017 and to 18% by 2020. In addition, an 8% surcharge will apply to banking companies from 1 January 2016 and there will be a reduction in the rate of the UK Bank Levy applicable in future periods. These changes were substantively enacted on 26 October 2015. As these changes were substantively enacted prior to 31 December 2015, the effects are included in the deferred tax balances at 31 December 2015.
The effective tax rate for 2014,2015, based on profit before tax, was 28.3% (2014: 20.7% (2013: 19.0%, 2012: 23.5%2013: 19.0%). The tax on profit before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows:
| Group | ||||||||||||
2014 £m | 2013(1) £m | 2012(1) £m | ||||||||||
Profit on continuing operations before tax | 1,399 | 1,109 | 1,152 | |||||||||
Tax calculated at a tax rate of 21.5% (2013: 23.25%, 2012: 24.5%) | 301 | 258 | 282 | |||||||||
Non deductible preference dividends paid | 7 | 7 | 7 | |||||||||
Non deductible UK Bank Levy | 16 | 14 | 12 | |||||||||
Other non-equalised items | (6) | (17) | (12) | |||||||||
Effect of non-UK profits and losses | (1) | (3) | (4) | |||||||||
Utilisation of capital losses for which credit was not previously recognised | (3) | (3) | (8) | |||||||||
Effect of change in tax rate on deferred tax provision | (4) | (15) | 4 | |||||||||
Adjustment to prior year provisions | (21) | (30) | (10) | |||||||||
Tax expense | 289 | 211 | 271 | |||||||||
(1) Adjusted to reflect the adoption of IFRIC 21, as described in Note 1.
| Group | ||||||||||||
2015 £m | 2014 £m | 2013 £m | ||||||||||
Profit from continuing operations before tax | 1,345 | 1,399 | 1,109 | |||||||||
Tax calculated at a tax rate of 20.25% (2014: 21.5%, 2013: 23.25%) | 272 | 301 | 258 | |||||||||
Non-deductible preference dividends paid | 6 | 7 | 7 | |||||||||
Non-deductible UK Bank Levy | 20 | 16 | 14 | |||||||||
Non-deductible conduct remediation | 90 | - | - | |||||||||
Other non-equalised items | 8 | (6) | (17) | |||||||||
Effect of non-UK profits and losses | (1) | (1) | (3) | |||||||||
Utilisation of capital losses for which credit was not previously recognised | (4) | (3) | (3) | |||||||||
Effect of change in tax rate on deferred tax provision | 9 | (4) | (15) | |||||||||
Adjustment to prior year provisions | (19) | (21) | (30) | |||||||||
Tax charge | 381 | 289 | 211 | |||||||||
In addition to the corporation tax expense charged to profit or loss, tax of £97m (2014: £132m, (2013: £151m, 2012: £45m)2013: £151m) has been charged in other comprehensive income in the year, as follows:
| Group | ||||||||||||||||||||||||||||
| 2015 | 2015 | Before tax amount £m | Total tax £m | After tax amount £m | ||||||||||||||||||||||||
Remeasurement of defined benefit pension obligations | Remeasurement of defined benefit pension obligations | 319 | (89) | 230 | ||||||||||||||||||||||||
Movements in available-for-sale financial assets: | - Gains due to changes in fair value | 14 | 6 | 20 | ||||||||||||||||||||||||
| - Losses transferred to profit or loss | 42 | (8) | 34 | |||||||||||||||||||||||||
Movements in cash flow hedge: | - Losses due to changes in fair value | (307) | 56 | (251) | ||||||||||||||||||||||||
| - Losses transferred to profit or loss | 305 | (62) | 243 | |||||||||||||||||||||||||
Exchange differences on translation of foreign operations | (5) | - | (5) | |||||||||||||||||||||||||
Other comprehensive income | Other comprehensive income | 368 | (97) | 271 | ||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||
| 2014 | 2014 | Before tax amount £m | Total tax £m | After tax amount £m | 2014 | |||||||||||||||||||||||
Remeasurement of defined benefit pension obligations | Remeasurement of defined benefit pension obligations | 132 | (27) | 105 | Remeasurement of defined benefit pension obligations | 132 | (27) | 105 | ||||||||||||||||||||
Movements in available-for-sale financial assets: | - Gains due to changes in fair value | (208) | 45 | (163) | - Gains due to changes in fair value | 235 | (51) | 184 | ||||||||||||||||||||
| - Gains transferred to profit or loss on sale | 235 | (51) | 184 | - Gains transferred to profit or loss | (208) | 45 | (163) | |||||||||||||||||||||
Movements in cash flow hedge | 471 | (99) | 372 | |||||||||||||||||||||||||
Movements in cash flow hedge: | - Gains due to changes in fair value | 44 | (9) | 35 | ||||||||||||||||||||||||
| - Losses transferred to profit or loss | 427 | (90) | 337 | |||||||||||||||||||||||||
Exchange differences on translation of foreign operations | (4) | - | (4) | (4) | - | (4) | ||||||||||||||||||||||
Other comprehensive income | Other comprehensive income | 626 | (132) | 494 | Other comprehensive income | 626 | (132) | 494 | ||||||||||||||||||||
| 2013 | 2013 | |||||||||||||||||||||||||||
Remeasurement of defined benefit pension obligations | Remeasurement of defined benefit pension obligations | (564) | 113 | (451) | Remeasurement of defined benefit pension obligations | (564) | 113 | (451) | ||||||||||||||||||||
Movements in available-for-sale financial assets: | - Gains due to changes in fair value | 15 | (4) | 11 | - Gains due to changes in fair value | 15 | (4) | 11 | ||||||||||||||||||||
| - Gains transferred to profit or loss on sale | (46) | 11 | (35) | - Losses transferred to profit or loss | (46) | 11 | (35) | |||||||||||||||||||||
Movements in cash flow hedge | (141) | 31 | (110) | |||||||||||||||||||||||||
Other comprehensive income | (736) | 151 | (585) | |||||||||||||||||||||||||
| 2012 | ||||||||||||||||||||||||||||
Remeasurement of defined benefit pension obligations | (183) | 42 | (141) | |||||||||||||||||||||||||
Movements in available-for-sale financial assets: | - Gains due to changes in fair value | 6 | (1) | 5 | ||||||||||||||||||||||||
Movements in cash flow hedge: | - Losses due to changes in fair value | (207) | 46 | (161) | ||||||||||||||||||||||||
| - Gains transferred to profit or loss on sale | (17) | 4 | (13) | - Losses transferred to profit or loss | 66 | (15) | 51 | |||||||||||||||||||||
Other comprehensive income | Other comprehensive income | (194) | 45 | (149) | (736) | 151 | (585) | |||||||||||||||||||||
The total tax charge included above for 2015 includes £13m in respect of the impact of changes in the UK corporation tax rate.
228 Santander UK plc
| Independent | Primary financial | Notes to the | ||||||||||||
| Auditor’s Report | statements | financial statements | ||||||||||||
Financial statements
Current tax assets and liabilities
Movements on current tax assets and liabilities during the year were as follows:
| Group | Company | Group | Company | |||||||||||||||||||||||||||||
2014 £m | 2013 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2015 £m | 2014 £m | |||||||||||||||||||||||||
Assets | 114 | 50 | 423 | 240 | - | 114 | 208 | 423 | ||||||||||||||||||||||||
Liabilities | (4) | (4) | - | - | (69) | (4) | - | - | ||||||||||||||||||||||||
At 1 January | 110 | 46 | 423 | 240 | (69) | 110 | 208 | 423 | ||||||||||||||||||||||||
Income statement | (257) | (73) | (248) | 46 | (330) | (257) | (175) | (248) | ||||||||||||||||||||||||
Other comprehensive income | (78) | 31 | (6) | - | 10 | (78) | 10 | (6) | ||||||||||||||||||||||||
Corporate income tax paid | 149 | 118 | 59 | 87 | 419 | 149 | 132 | 59 | ||||||||||||||||||||||||
Other movements | 7 | (12) | (20) | 50 | 18 | 7 | 23 | (20) | ||||||||||||||||||||||||
| (69) | 110 | 208 | 423 | 48 | (69) | 198 | 208 | |||||||||||||||||||||||||
Assets | - | 114 | 208 | 423 | 49 | - | 198 | 208 | ||||||||||||||||||||||||
Liabilities | (69) | (4) | - | - | (1) | (69) | - | - | ||||||||||||||||||||||||
At 31 December | (69) | 110 | 208 | 423 | 48 | (69) | 198 | 208 | ||||||||||||||||||||||||
The Santander UK group has proactively engaged with HM Revenue & Customs to resolve a number of outstanding legacy tax matters. It has not however been possible to satisfactorily resolve all of these matters through this engagement and as a result litigation proceedings have commenced in 2014 in relation to a small number of remaining issues. The litigation was concluded during 2015. All of these items relate to periods prior to Santander UK’s adoption of the Code of Practice on Taxation for Banks in 2010. A provision for the full amount of tax insubject to dispute hasas part of this litigation had been made through the tax charge in previous years.
Further information about deferred tax is presented in Note 26.24.
11.10. DISCONTINUED OPERATIONS
Santander UK plc sold its co-brand credit cards business in 2013. The results, and loss on sale,from discontinued operations after tax of £8m in 2013 comprised the profit before tax of the discontinued operations were as follows:of £nil, a loss on sale before tax of £10m, and a tax credit of £2m.
| Group | ||||||||||||
2014 £m | 2013 £m | 2012 £m | ||||||||||
Total operating income | - | 76 | 218 | |||||||||
Total operating expenses excluding impairment losses, provisions and charges | - | (39) | (108) | |||||||||
Impairment losses on loans and advances | - | (12) | (21) | |||||||||
Provisions for other liabilities and charges | - | (25) | (5) | |||||||||
Profit of discontinued operations before tax | - | - | 84 | |||||||||
Taxation charge on discontinued operations | - | - | (22) | |||||||||
Loss on sale of discontinued operations | - | (10) | - | |||||||||
Taxation credit on loss on sale on discontinued operations | - | 2 | - | |||||||||
(Loss)/profit from discontinued operations (after tax) | - | (8) | 62 | |||||||||
12.11. DIVIDENDS
a) Ordinary dividendsshare capital
Dividends on ordinary shares declared and authorised during the year were as follows:
| Group and Company | Group and Company | |||||||||||||||||||||||
2014 Pence per share | 2013 Pence per share | 2012 Pence per share | 2014 £m | 2013 £m | 2012 £m | |||||||||||||||||||
Ordinary shares (equity): | ||||||||||||||||||||||||
In respect of current year – first interim | 0.76 | 0.69 | - | 237 | 215 | - | ||||||||||||||||||
In respect of current year – second interim | 0.81 | 0.68 | 1.45 | 250 | 210 | 450 | ||||||||||||||||||
| 1.57 | 1.37 | 1.45 | 487 | 425 | 450 | |||||||||||||||||||
| Group and Company | Group and Company | |||||||||||||||||||||||
2015 Pence per share | 2014 Pence per share | 2013 Pence per share | 2015 £m | 2014 £m | 2013 £m | |||||||||||||||||||
In respect of current year – first interim | 1.05 | 0.76 | 0.69 | 325 | 237 | 215 | ||||||||||||||||||
– second interim | 0.33 | 0.81 | 0.68 | 102 | 250 | 210 | ||||||||||||||||||
| 1.38 | 1.57 | 1.37 | 427 | 487 | 425 | |||||||||||||||||||
In addition,b) Other equity instruments
The annual dividend of £21m (2014: £21m, 2013: £21m) on the Step-Up Callable Perpetual Reserve Capital Instruments was paid on 14 February 2015; the annual dividend of £0.4m (2014: £0.4m, 2013: £17m) on the £300m Step-up Callable Perpetual Preferred Securities was paid on 22 March 2015; and the annual dividend of £2m (2014: £19m, (2013: £19m, 2012:2013: £19m) of dividends were declared and paid on the £300m fixed/floating rate non-cumulative callable preference shares £21m (2013: £21m, 2012: £21m)was paid on 24 May 2015.
The quarterly dividends of dividends£24m, £8m, £8m and £8m (2014: £nil) on the £500m Perpetual Capital Securities were declared and paid on 24 March, 24 June, 24 September and 24 December 2015, respectively; the £300m Step-up Callable Perpetual Reserve Capital Instrumentsquarterly dividends of £7m, £6m, £6m, and £0.4m (2013: £17m, 2012: £17m) of dividends were declared and paid£6m, (2014: £nil) on the £300m Step-up Callable Perpetual Preferred Securities.
Annual Report 2015
Financial statements
13. CASH AND BALANCES AT CENTRAL BANKS
| Group | Company | |||||||||||||||
2014 £m | 2013 £m | 2014 £m | 2013 £m | |||||||||||||
Cash in hand | 1,458 | 1,214 | 1,458 | 1,150 | ||||||||||||
Balances with central banks | 21,104 | 25,160 | 16,644 | 20,249 | ||||||||||||
| 22,562 | 26,374 | 18,102 | 21,399 | |||||||||||||
Balances with central banks above represent amounts held at the Bank of England and the US Federal Reserve as part of the Santander UK group’s liquidity management activities. This is described further in the Risk Review. In addition, it includes certain minimum cash balances held for regulatory purposes required to be maintained with the Bank of England. At 31 December 2014, these amounted to £318m (2013: £315m) for the Santander UK group and £281m (2013: £277m) for the Company.
14.12. TRADING ASSETS
| Group | ||||||||
2014 £m | 2013 £m | |||||||
Loans and advances to banks - securities purchased under resale agreements | 785 | 4,219 | ||||||
- other(1) | 5,151 | 5,107 | ||||||
Loans and advances to customers - securities purchased under resale agreements | 2,200 | 4,210 | ||||||
- other(1) | 807 | 194 | ||||||
Debt securities | 7,981 | 7,859 | ||||||
Equity securities | 4,776 | 705 | ||||||
| 21,700 | 22,294 | |||||||
(1) Total ‘other’ comprises short-term loans of £816m (2013: £195m) and cash collateral of £5,142m (2013: £5,106m).
| Group | ||||||||
2015 £m | 2014 £m | |||||||
Loans and advances to banks - securities purchased under resale agreements | 992 | 785 | ||||||
- other(1) | 4,441 | 5,151 | ||||||
Loans and advances to customers - securities purchased under resale agreements | 4,352 | 2,200 | ||||||
- other(1) | 1,608 | 807 | ||||||
Debt securities | 5,462 | 7,981 | ||||||
Equity securities | 7,106 | 4,776 | ||||||
| 23,961 | 21,700 | |||||||
| (1) | Total ‘other’ comprises short-term loans of £665m (2014: £816m) and cash collateral of £5,384m (2014: £5,142m). |
Debt securities can be analysed by type of issuer as follows:
| Group | ||||||||
2014 £m | 2013 £m | |||||||
Issued by public bodies: | ||||||||
- Government securities | 7,002 | 6,631 | ||||||
Issued by other issuers: | ||||||||
- Fixed and floating rate notes(1):- Government guaranteed | 979 | 1,081 | ||||||
- Other | - | 147 | ||||||
| 7,981 | 7,859 | |||||||
(1) The FRNs are rated 43% AA+, 57% AA- (2013: 25% AAA, 39% AA+ and 36% AA-).
| Group | ||||||||
2015 £m | 2014 £m | |||||||
Issued by public bodies: | ||||||||
- Government securities | 4,494 | 7,002 | ||||||
Issued by other issuers: | ||||||||
- Fixed and floating rate notes(1): - Government guaranteed | 968 | 979 | ||||||
| 5,462 | 7,981 | |||||||
| (1) | The FRNs are rated 43% AA+ and 57% AA- (2014: 43% AA+, and 57% AA-). |
Debt securities and equity securities can be analysed by listing status as follows:
| Group | ||||||||
2014 £m | 2013 £m | |||||||
Debt securities: | ||||||||
- Listed in the UK | 1,315 | 1,489 | ||||||
- Listed elsewhere | 1,906 | 1,582 | ||||||
- Unlisted(1) | 4,760 | 4,788 | ||||||
| 7,981 | 7,859 | |||||||
Equity securities: | ||||||||
- Listed in the UK | 3,169 | 642 | ||||||
- Listed elsewhere | 1,607 | 63 | ||||||
| 4,776 | 705 | |||||||
(1) These largely represent Japanese Treasury bonds for which there is no financial listing.
| Group | ||||||||
2015 £m | 2014 £m | |||||||
Debt securities: | ||||||||
- Listed in the UK | 966 | 1,315 | ||||||
- Listed elsewhere | 1,818 | 1,906 | ||||||
- Unlisted(1) | 2,678 | 4,760 | ||||||
| 5,462 | 7,981 | |||||||
Equity securities: | ||||||||
- Listed in the UK | 3,144 | 3,169 | ||||||
- Listed elsewhere | 3,962 | 1,607 | ||||||
| 7,106 | 4,776 | |||||||
| (1) | These largely represent Japanese Treasury bonds for which there is no financial listing. |
At 31 December 20142015 and 2013,2014, the Company had no trading assets. Included in the above balances are amounts owed to the Santander UK group bydue from Banco Santander S.A.SA and other subsidiaries of Banco Santander S.A.SA outside the Santander UK group of £48m (2013: £80m)£126m (2014: £48m) and £73m (2013: £32m)£91m (2014: £73m) respectively.
230 Santander UK plc
| Independent | Primary financial | Notes to the | ||||||||||||
| Auditor’s Report | statements | financial statements | ||||||||||||
Financial statements
15.13. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value is derived from the price of one or more underlying items such as equities, equity indices, interest rates, foreign exchange rates, property indices, commodities and credit spreads. Derivatives enable users to manage exposure to credit or market risks. The Santander UK group sells derivatives to its customers and uses derivatives to manage its own exposure to credit and market risks.
a) Use of derivatives
The Santander UK group transacts derivatives for four primary purposes:
| - |
| - |
| - |
| - |
Under IAS 39, all derivatives are classified as ‘held for trading’ (except for derivatives which are designated as effective hedging instruments in accordance with the detailed requirements of IAS 39) even if this is not the purpose of the transaction. The held for trading classification therefore includes two types of derivatives:
| - |
| - |
|
|
|
|
The following table summarises the activities undertaken, the related risks associated with such activities and the types of derivatives used in managing such risks. These risks may also be managed using on-balance sheet instruments as part of an integrated approach to risk management.
| Activity | Risk | Type of derivative | ||
Management of the return on variable rate assets financed by shareholders’ funds and net non-interest-bearing liabilities. | Reduced profitability due to falls in interest rates. | Receive fixed interest rate swaps. | ||
Management of the basis between administered rate assets and liabilities and wholesale market rates. | Reduced profitability due to adverse changes in the basis spread. | Basis swaps. | ||
Management of repricing profile of wholesale funding. | Reduced profitability due to adverse movement in wholesale interest rates when large volumes of wholesale funding are repriced. | Forward rate agreements. | ||
Fixed rate lending and investments. | Sensitivity to increases in interest rates. | Pay fixed interest rate swaps. | ||
Fixed rate retail and wholesale funding. | Sensitivity to falls in interest rates. | Receive fixed interest rate swaps. | ||
Equity-linked retail funding. | Sensitivity to increases in equity market indices. | Receive equity swaps. | ||
Management of other net interest income on retail activities. | Sensitivity of income to changes in interest rates. | Interest rate swaps. | ||
Issuance of products with embedded equity options. | Sensitivity to changes in underlying index and index volatility causing option exercise. | Interest rate swaps combined with equity options. | ||
Lending and investments. | Sensitivity to weakening credit quality. | Purchase credit default swaps and total return swaps. | ||
Borrowing funds in foreign | Sensitivity to changes in foreign exchange | Cross currency | ||
Lending and issuance of products with embedded interest rate options. | Sensitivity to changes in underlying rate and rate volatility causing option exercise. | Interest rate swaps plus caps/floors. | ||
Investment in, and issuance of, bonds with put/call features. | Sensitivity to changes in rates causing option exercise. | Interest rate swaps combined with swaptions(1) and other matched options. | ||
| Management of the cost of offering sharesave schemes to employees. | Reduced profitability due to increases in the Banco Santander SA share price. | Equity options and equity forwards. |
| (1) | A swaption is an option on a swap that gives the holder the right but not the obligation to buy or sell a swap. |
The Santander UK group’s derivative activities do not give rise to significant open positions in portfolios of derivatives. Any residual position is managed to ensure that it remains within acceptable risk levels, with matching deals being utilised to achieve this where necessary. When entering into derivative transactions, the Santander UK group employs the same credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending.
The hedging classification consists of derivatives that the Santander UK group has chosen to designate as in a hedging relationship because they meet the specific criteria in IAS 39.
All derivatives are required to be held at fair value through profit or loss, and shown in the balance sheet as separate totals of assets and liabilities. A description of how the fair values of derivatives are derived is set out in Note 44. This is described in more detail in the accounting policies ‘Derivative financial instruments’ and ‘Hedge accounting’. Derivative assets and liabilities on different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off or netting exists and the cash flows are intended to be settled on a net basis.
Annual Report 2015
Financial statements
b) Trading derivatives
Most of the Santander UK group’s derivative transactions relate to sales activities and derivative contracts that represent the closing-out of existing positions through the use of matching deals. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Limited positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume; positioning means managing market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and profiting from price differentials between markets and products.
Trading derivatives include interest rate, cross currency, equity, property and other index related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures and options and equity index options.
Commercial Banking and Global Corporate & Institutional Banking deal with customers who wish to enter into derivative contracts. Any market risk arising from such transactions is hedged by Global Corporate & Institutional Banking. Global Corporate & Institutional Banking is responsible for implementing Santander UK group derivative hedging with the external market together with its own trading activities. For trading activities, its objectives are to gain value by:
Marketing derivatives to end users and hedging the resulting exposures |
The management of trading exposure reflected on the Santander UK group’s balance sheet. |
As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives (economic hedges), ineffective hedging derivatives and any components of hedging derivatives that are excluded from assessing hedge effectiveness, derivatives managed in conjunction with financial instruments designated at fair value and derivative contracts that represent the closing-out of existing positions through the use of matching deals.
c) Hedging derivatives
The Santander UK group uses derivatives (principally interest rate swaps and cross-currency swaps) for hedging purposes in the management of its own asset and liability portfolios, including fixed-rate lending, fixed-rate asset purchases, medium-term note issues, capital issues, and structural positions. This enables the Santander UK group to optimise the overall cost to it of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.
The accounting for these derivatives is described in the accounting policy ‘Hedge accounting’ in Note 1. Such risks may also be managed using natural offsets within other on-balance sheet instruments as part of an integrated approach to risk management.
Derivative products which are combinations of more basic derivatives (such as swaps with embedded option features), or which have leverage features, may be used in circumstances where the underlying position being hedged contains the same risk features. In such cases, the derivative used will be structured to match the risks of the underlying asset or liability. Exposure to market risk on such contracts is therefore hedged.
The fair values of derivative instruments classified as held for trading and hedging purposes are set out in the following tables. The tables show the contract or underlying principal amounts, and positive and negative fair values of derivatives analysed by contract. The contract/notional amounts of derivatives in the tables below indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent actual exposures. The fair values represent the price that would be received to sell the derivative asset or paid to transfer the derivative liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions.
As described above, derivatives classified as held for trading consist of those used in sales and trading activities, and those used for risk management purposes, either for which the Santander UK group does not elect to claim hedge accounting or which do not meet the qualifying criteria for hedge accounting. Derivatives classified as held for hedging in the table below consist of those that have been designated as in a hedging relationship in accordance with IAS 39.
Financial statements
| Group | ||||||||||||||||||||||||||
| 2015 | 2014 | |||||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||||
| Derivatives held for trading | Notional amount £m | Assets £m | Liabilities £m | Notional amount £m | Assets £m | Liabilities £m | ||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 124,025 | 3,907 | 4,364 | 113,977 | 2,227 | 3,077 | ||||||||||||||||||||
- Foreign exchange swaps, options and forwards | 37,879 | 358 | 572 | 44,786 | 1,097 | 542 | ||||||||||||||||||||
| 161,904 | 4,265 | 4,936 | 158,763 | 3,324 | 3,619 | |||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 579,985 | 10,828 | 10,584 | 589,182 | 12,782 | 12,341 | ||||||||||||||||||||
- Caps, floors and swaptions | 49,325 | 1,943 | 1,712 | 53,341 | 2,087 | 1,996 | ||||||||||||||||||||
- Futures (exchange traded) | 38,633 | - | 1 | 68,434 | 4 | 8 | ||||||||||||||||||||
- Forward rate agreements | 70,328 | 3 | 47 | 91,353 | 3 | 42 | ||||||||||||||||||||
| 738,271 | 12,774 | 12,344 | 802,310 | 14,876 | 14,387 | |||||||||||||||||||||
Equity and credit contracts: | ||||||||||||||||||||||||||
- Equity index swaps and similar products | 19,547 | 1,377 | 1,621 | 26,667 | 1,859 | 2,451 | ||||||||||||||||||||
- Equity index options (exchange traded) | 17,742 | 88 | 2 | 10,681 | 149 | 1 | ||||||||||||||||||||
- Credit default swaps and similar products | 56 | 5 | 2 | 66 | 25 | 2 | ||||||||||||||||||||
| 37,345 | 1,470 | 1,625 | 37,414 | 2,033 | 2,454 | |||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||
- Swaps | - | - | - | 18 | 2 | 2 | ||||||||||||||||||||
| - | - | - | 18 | 2 | 2 | |||||||||||||||||||||
Total derivatives held for trading | 937,520 | 18,509 | 18,905 | 998,505 | 20,235 | 20,462 | ||||||||||||||||||||
| Derivatives held for hedging | ||||||||||||||||||||||||||
Derivatives designated as fair value hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 3,213 | 78 | 113 | 2,405 | 80 | 82 | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 68,905 | 1,234 | 1,288 | 80,976 | 1,600 | 1,564 | ||||||||||||||||||||
| 72,118 | 1,312 | 1,401 | 83,381 | 1,680 | 1,646 | |||||||||||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 22,727 | 989 | 1,146 | 20,047 | 1,008 | 577 | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 8,407 | 97 | 56 | 6,987 | 98 | 47 | ||||||||||||||||||||
Equity derivative contracts: | ||||||||||||||||||||||||||
- Equity derivatives | 21 | 4 | - | - | - | - | ||||||||||||||||||||
| 31,155 | 1,090 | 1,202 | 27,034 | 1,106 | 624 | |||||||||||||||||||||
Total derivatives held for hedging | 103,273 | 2,402 | 2,603 | 110,415 | 2,786 | 2,270 | ||||||||||||||||||||
Total derivatives | 1,040,793 | 20,911 | 21,508 | 1,108,920 | 23,021 | 22,732 | ||||||||||||||||||||
232 Santander UK plc
| Group | ||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||||
| Derivatives held for trading | Notional amount £m | Assets £m | Liabilities £m | Notional amount £m | Assets £m | Liabilities £m | ||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 113,977 | 2,227 | 3,077 | 110,425 | 1,282 | 2,027 | ||||||||||||||||||||
- Foreign exchange swaps, options and forwards | 44,786 | 1,097 | 542 | 41,849 | 1,133 | 417 | ||||||||||||||||||||
| 158,763 | 3,324 | 3,619 | 152,274 | 2,415 | 2,444 | |||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 589,182 | 12,782 | 12,333 | 512,101 | 10,739 | 9,972 | ||||||||||||||||||||
- Caps, floors and swaptions | 53,341 | 2,087 | 1,996 | 56,230 | 1,912 | 1,891 | ||||||||||||||||||||
- Futures (exchange traded) | 68,434 | 4 | 16 | 31,137 | 11 | 36 | ||||||||||||||||||||
- Forward rate agreements | 91,353 | 3 | 42 | 29,379 | 1 | 1 | ||||||||||||||||||||
| 802,310 | 14,876 | 14,387 | 628,847 | 12,663 | 11,900 | |||||||||||||||||||||
Equity and credit contracts: | ||||||||||||||||||||||||||
- Equity index swaps and similar products | 26,667 | 1,859 | 2,451 | 32,196 | 2,009 | 2,947 | ||||||||||||||||||||
- Equity index options (exchange traded) | 10,681 | 149 | 1 | 13,115 | 312 | 1 | ||||||||||||||||||||
- Credit default swaps and similar products | 66 | 25 | 2 | 158 | 32 | 3 | ||||||||||||||||||||
| 37,414 | 2,033 | 2,454 | 45,469 | 2,353 | 2,951 | |||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||
- OTC swaps | 18 | 2 | 2 | 54 | 2 | 2 | ||||||||||||||||||||
| 18 | 2 | 2 | 54 | 2 | 2 | |||||||||||||||||||||
Total derivative assets and liabilities held for trading | 998,505 | 20,235 | 20,462 | 826,644 | 17,433 | 17,297 | ||||||||||||||||||||
Derivatives held for hedging | ||||||||||||||||||||||||||
Derivatives designated as fair value hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 2,405 | 80 | 82 | 2,524 | 46 | 47 | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 80,976 | 1,600 | 1,564 | 105,138 | 1,578 | 1,066 | ||||||||||||||||||||
| 83,381 | 1,680 | 1,646 | 107,662 | 1,624 | 1,113 | |||||||||||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 20,047 | 1,008 | 577 | 15,507 | 990 | 445 | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 6,987 | 98 | 47 | 3,856 | 2 | 8 | ||||||||||||||||||||
| 27,034 | 1,106 | 624 | 19,363 | 992 | 453 | |||||||||||||||||||||
Total derivative assets and liabilities held for hedging | 110,415 | 2,786 | 2,270 | 127,025 | 2,616 | 1,566 | ||||||||||||||||||||
Total recognised derivative assets and liabilities | 1,108,920 | 23,021 | 22,732 | 953,669 | 20,049 | 18,863 | ||||||||||||||||||||
| Company | ||||||||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||||
| Derivatives held for trading | Notional amount £m | Assets £m | Liabilities £m | Notional amount £m | Assets £m | Liabilities £m | ||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 2,239 | 804 | 771 | 2,460 | 574 | 549 | ||||||||||||||||||||
- Foreign exchange swaps, options and forwards | 2,451 | 37 | 38 | 1,729 | 23 | 24 | ||||||||||||||||||||
| 4,690 | 841 | 809 | 4,189 | 597 | 573 | |||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 51,832 | 1,908 | 789 | 60,652 | 1,226 | 793 | ||||||||||||||||||||
- Caps, floors and swaptions | 1,328 | 5 | 13 | 1,323 | 8 | 25 | ||||||||||||||||||||
- Futures (exchange traded) | - | - | 8 | - | - | - | ||||||||||||||||||||
| 53,160 | 1,913 | 810 | 61,975 | 1,234 | 818 | |||||||||||||||||||||
Equity and credit contracts: | ||||||||||||||||||||||||||
- Equity index swaps and similar products | 731 | 45 | 222 | 673 | 69 | 235 | ||||||||||||||||||||
| 731 | 45 | 222 | 673 | 69 | 235 | |||||||||||||||||||||
Total derivative assets and liabilities held for trading | 58,581 | 2,799 | 1,841 | 66,837 | 1,900 | 1,626 | ||||||||||||||||||||
Derivatives held for hedging | ||||||||||||||||||||||||||
Derivatives designated as fair value hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 1,414 | 301 | - | 1,354 | 184 | 59 | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 7,593 | 312 | 313 | 4,214 | 377 | 118 | ||||||||||||||||||||
Total derivative assets and liabilities held for hedging | 9,007 | 613 | 313 | 5,568 | 561 | 177 | ||||||||||||||||||||
Total recognised derivative assets and liabilities | 67,588 | 3,412 | 2,154 | 72,405 | 2,461 | 1,803 | ||||||||||||||||||||
The Company has no derivatives designated as cash flow hedges.
| Independent | Primary financial | Notes to the | ||||||||||||
financial statements
| Company | ||||||||||||||||||||||||||
| 2015 | 2014 | |||||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||||
| Derivatives held for trading | Notional amount £m | Assets £m | Liabilities £m | Notional amount £m | Assets £m | Liabilities £m | ||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 6,301 | 966 | 1,340 | 2,239 | 804 | 771 | ||||||||||||||||||||
- Foreign exchange swaps, options and forwards | 2,550 | 40 | 39 | 2,451 | 37 | 38 | ||||||||||||||||||||
| 8,851 | 1,006 | 1,379 | 4,690 | 841 | 809 | |||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 61,936 | 1,474 | 795 | 51,832 | 1,908 | 789 | ||||||||||||||||||||
- Caps, floors and swaptions | 1,930 | 4 | 13 | 1,328 | 5 | 13 | ||||||||||||||||||||
- Futures (exchange traded) | - | - | - | - | - | 8 | ||||||||||||||||||||
| 63,866 | 1,478 | 808 | 53,160 | 1,913 | 810 | |||||||||||||||||||||
Equity and credit contracts: | ||||||||||||||||||||||||||
- Equity index swaps and similar products | 607 | 41 | 236 | 731 | 45 | 222 | ||||||||||||||||||||
| 607 | 41 | 236 | 731 | 45 | 222 | |||||||||||||||||||||
Total derivatives held for trading | 73,324 | 2,525 | 2,423 | 58,581 | 2,799 | 1,841 | ||||||||||||||||||||
| Derivatives held for hedging | ||||||||||||||||||||||||||
Derivatives designated as fair value hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 1,284 | 321 | - | 1,414 | 301 | - | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 46,330 | 337 | 592 | 7,593 | 312 | 313 | ||||||||||||||||||||
| 47,614 | 658 | 592 | 9,007 | 613 | 313 | |||||||||||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
Exchange rate contracts: | ||||||||||||||||||||||||||
- Cross-currency swaps | 2,493 | 97 | - | - | - | - | ||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||
- Interest rate swaps | 2,229 | 18 | 13 | - | - | - | ||||||||||||||||||||
Equity derivative contracts: | ||||||||||||||||||||||||||
- Equity derivatives | 21 | 4 | - | - | - | - | ||||||||||||||||||||
| 4,743 | 119 | 13 | - | - | - | |||||||||||||||||||||
Total derivatives held for hedging | 52,357 | 777 | 605 | 9,007 | 613 | 313 | ||||||||||||||||||||
Total derivatives | 125,681 | 3,302 | 3,028 | 67,588 | 3,412 | 2,154 | ||||||||||||||||||||
Included in the above balances are amounts owed to the Santander UK group bydue from Banco Santander S.A.SA and other subsidiaries of Banco Santander S.A.SA outside the Santander UK group of £2,063m (2013 £2,058m)£1,320m (2014: £2,063m) and £475m (2013: 166m)£458m (2014: 475m), respectively, and amounts owed by the Santander UK groupdue to Banco Santander S.A.SA and other subsidiaries of Banco Santander S.A.SA outside the Santander UK group of £1,730m (2013: £1,950m)£1,502m (2014: £1,730m) and £485m (2013: £191m)£427m (2014: £485m), respectively. The net exposures after collateral to the ultimate parent undertaking and fellow subsidiaries at 31 December 20142015 amounted to £nil (2013:(2014: £nil) and £nil (2013:(2014: £nil) respectively, with collateral held exceeding the net position.
Derivative assets and liabilities are reported on a gross basis on the balance sheet unless there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Further information about offsetting is presented in Note 44.
In addition, in the ordinary course of business, the Santander UK group entered into long-term interest rate contracts as economic hedges with fivetwo investment vehicles whose underlying assets comprise debt securities, bank loans and energy and infrastructure financings. Although the vehicles themselves are not externally rated, the counterparty exposure ranks super-senior to the most senior notes issued by the vehicles and these notes are rated AAA or AA. The total mark-to-market exposure at 31 December 20142015 was £18m (2013: £34m)£11m (2014: £18m). These long-term interest rate contracts are included within ‘derivatives held for trading - interest rate contracts’ shown above.
The table below analyses the notional and fair values of derivatives by trading and settlement method.
| Notional | Asset | Liability | Notional | Asset | Liability | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traded over the counter | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | Traded on recognised exchanges £m | Settled by central counterparties £m | Not settled by central counterparties £m | Total £m | Traded on recognised exchanges £m | Traded over the counter £m | Traded on recognised exchanges £m | Traded over the counter £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | - | - | 187,844 | 187,844 | - | 5,333 | - | 6,195 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 38,633 | 529,471 | 247,479 | 815,583 | - | 14,105 | 1 | 13,687 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | 17,742 | - | 19,624 | 37,366 | 88 | 1,385 | 2 | 1,623 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commodity contracts | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traded over the counter | 56,375 | 529,471 | 454,947 | 1,040,793 | 88 | 20,823 | 3 | 21,505 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traded on recognised exchanges | Settled by central counterparties | Not settled by central | Total | Traded on recognised exchanges | Traded over the | Traded on recognised exchanges | Traded over the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | - | - | 181,215 | 181,215 | - | 4,412 | - | 4,278 | - | - | 181,215 | 181,215 | - | 4,412 | - | 4,278 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 68,434 | 519,273 | 302,566 | 890,273 | 4 | 16,570 | 16 | 15,982 | 68,434 | 519,273 | 302,566 | 890,273 | 4 | 16,570 | 8 | 15,990 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | 10,681 | - | 26,733 | 37,414 | 149 | 1,884 | 1 | 2,453 | 10,681 | - | 26,733 | 37,414 | 149 | 1,884 | 1 | 2,453 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commodity contracts | - | - | 18 | 18 | - | 2 | - | 2 | - | - | 18 | 18 | - | 2 | - | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 79,115 | 519,273 | 510,532 | 1,108,920 | 153 | 22,868 | 17 | 22,715 | 79,115 | 519,273 | 510,532 | 1,108,920 | 153 | 22,868 | 9 | 22,723 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | - | - | 170,305 | 170,305 | - | 3,451 | - | 2,936 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 31,137 | 307,814 | 398,890 | 737,841 | 11 | 14,232 | 36 | 12,938 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | 13,115 | - | 32,354 | 45,469 | 312 | 2,041 | 1 | 2,950 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commodity contracts | - | - | 54 | 54 | - | 2 | - | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 44,252 | 307,814 | 601,603 | 953,669 | 323 | 19,726 | 37 | 18,826 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Annual Report 2015
Financial statements
Net gains or losses arising from fair value and cash flow hedges included in net trading and other income
| Group | Group | Company | ||||||||||||||||||||||||||||||||||
2014 £m | 2013 £m | 2012 £m | 2015 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2013 £m | ||||||||||||||||||||||||||||
Fair value hedging: | ||||||||||||||||||||||||||||||||||||
- Losses on hedging instruments | (297) | (281) | (294) | |||||||||||||||||||||||||||||||||
- Gains on hedged items attributable to hedged risks | 379 | 350 | 464 | |||||||||||||||||||||||||||||||||
- Gains/(losses) on hedging instruments | (26) | (297) | (281) | 14 | (125) | (244) | ||||||||||||||||||||||||||||||
- Gains/(losses) on hedged items attributable to hedged risks | 87 | 379 | 350 | (14) | 118 | 299 | ||||||||||||||||||||||||||||||
Fair value hedging ineffectiveness | 82 | 69 | 170 | 61 | 82 | 69 | - | (7) | 55 | |||||||||||||||||||||||||||
Cash flow hedging ineffectiveness | (94) | (176) | - | (81) | (94) | (176) | 13 | - | - | |||||||||||||||||||||||||||
| (12) | (107) | 170 | (20) | (12) | (107) | 13 | (7) | 55 | ||||||||||||||||||||||||||||
The Santander UK group hedges its exposures to various risks, including interest rate risk and foreign currency risk, in connection with certain mortgage assets, covered bond issuances, and subordinated and senior debt securities in issue. The gains or losses arising on these assets and liabilities are presented in the table above on a combined basis.
Hedged cash flows
The following tables show when the Santander UK group’s hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges.
| Group | Group | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | Up to 1 year £m | 1 - 2 years £m | 2 - 3 years £m | 3 - 4 years £m | 4 - 5 years £m | 5 - 10 years £m | 10 - 20 years £m | 20 - 30 £m | Total £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged forecast cash flows expected to occur: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast receivable cash flows | 303 | 354 | 355 | 335 | 285 | 696 | 213 | 149 | 2,690 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast payable cash flows | (4,260) | (3,446) | (2,308) | (3,158) | (3,936) | (6,321) | (493) | (358) | (24,280) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged forecast cash flows affect profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast receivable cash flows | 307 | 357 | 350 | 330 | 273 | 675 | 211 | 148 | 2,651 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast payable cash flows | (4,249) | (3,438) | (2,278) | (3,134) | (3,914) | (6,234) | (488) | (353) | (24,088) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Up to 1 year | 1 - 2 years | 2 - 3 years | 3 - 4 years | 4 - 5 years | 5 - 10 years | 10 - 20 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged forecast cash flows expected to occur: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast receivable cash flows | 201 | 235 | 258 | 229 | 192 | 456 | 60 | 1,631 | 201 | 235 | 258 | 229 | 192 | 456 | 60 | - | 1,631 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast payable cash flows | (2,169) | (3,319) | (1,854) | (2,034) | (2,844) | (6,324) | (332) | (18,876) | (2,169) | (3,319) | (1,854) | (2,034) | (2,844) | (6,324) | (332) | - | (18,876) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged forecast cash flows affect profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast receivable cash flows | 183 | 235 | 258 | 229 | 192 | 456 | 60 | 1,613 | 183 | 235 | 258 | 229 | 192 | 456 | 60 | - | 1,613 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast payable cash flows | (2,018) | (3,312) | (1,854) | (2,034) | (2,844) | (6,324) | (332) | (18,718) | (2,018) | (3,312) | (1,854) | (2,034) | (2,844) | (6,324) | (332) | - | (18,718) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Company | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | Up to 1 year £m | 1 - 2 years £m | 2 - 3 years £m | 3 - 4 years | 4 - 5 years £m | 5 - 10 years | 10 - 20 years £m | 20 - 30 years £m | Total £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged forecast cash flows expected to occur: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast receivable cash flows | 177 | 211 | 267 | 283 | 229 | 681 | 97 | 1,945 | 42 | 50 | 57 | 61 | 62 | 241 | 165 | 149 | 827 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast payable cash flows | (3,305) | (4,229) | (1,924) | (1,180) | (2,017) | (4,834) | (367) | (17,856) | (716) | (72) | (89) | (72) | (897) | (592) | (190) | (358) | (2,986) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Hedged forecast cash flows affect profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast receivable cash flows | 177 | 210 | 266 | 279 | 224 | 671 | 96 | 1,923 | 42 | 51 | 57 | 61 | 62 | 240 | 165 | 148 | 826 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Forecast payable cash flows | (3,300) | (4,182) | (1,913) | (1,174) | (1,985) | (4,776) | (362) | (17,692) | (716) | (72) | (89) | (71) | (893) | (582) | (189) | (353) | (2,965) | |||||||||||||||||||||||||||||||||||||||||||||||||||
In 2014, the Company had no derivatives designated as cash flow hedges.
There was one cash flow hedge of equity price risk for which hedge accounting ceased during the year ended 31 December 2015 as a result of the cash flows no longer being expected to occur. There were no transactions for which cash flow hedge accounting had to be ceased during the yearsyear ended 31 December 2014 and 2013 as a result of the highly probable cash flows no longer being expected to occur.
During the year, gains and losses transferred from the cash flow hedging reserve to net interest income were a net gain of £112m (2013:£157m (2014: gain of £47m, 2012: £nil)£112m, 2013: gain of £47m) and to net trading and other income were a net loss of £539m (2013:£462m (2014: loss of £113m, 2012:£539m, 2013: loss of £113m).
During the year, the Company transferred gains from the cash flow hedging reserve to net interest income of £5m (2014: £nil) and to net trading and other income of £76m (2014: £nil).
234 Santander UK plc
| Independent | Primary financial | Notes to the | ||||||||||||
| Auditor’s Report | statements | financial statements | ||||||||||||
Financial statements
16.14. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE
| Group | Company | |||||||||||||||
2014 £m | 2013 £m | 2014 £m | 2013 £m | |||||||||||||
Loans and advances to customers | 2,259 | 2,219 | - | 1 | ||||||||||||
Debt securities | 622 | 528 | 83 | - | ||||||||||||
| 2,881 | 2,747 | 83 | 1 | |||||||||||||
Financial assets are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis, or where the assets are managed and their performance evaluated on a fair value basis, or where a contract contains one or more embedded derivatives which would otherwise require bifurcation and separate recognition as derivatives.
| Group | Company | |||||||||||||||
2015 £m | 2014 £m | 2015 £m | 2014 £m | |||||||||||||
Loans and advances to customers | 1,891 | 2,259 | - | - | ||||||||||||
Debt securities | 507 | 622 | 60 | 83 | ||||||||||||
| 2,398 | 2,881 | 60 | 83 | |||||||||||||
The following assets have been designated at fair value through profit or loss:
Loans and advances to customers, representing loans to housing associations secured on residential property of |
Loans to housing associations secured on residential property of |
Other loans of |
Debt securities, representing holdings of asset-backed securities of |
Mortgage-backed securities of |
Other asset-backed securities of |
Included in the above balances are amounts owed to the Santander UK group bydue from Banco Santander S.A.SA and other subsidiaries of Banco Santander S.A.SA outside the Santander UK group of £nil (2013:(2014: £nil) and £54m (2013: £56m)£nil (2014: £54m) respectively.
The maximum exposure to credit risk on loans and advances designated as held at fair value through profit or loss at the balance sheet date was mitigated by the Santander UK group having a charge over the residential properties in respect of lending to housing associations. See ‘Maximum exposure and net exposure to credit risk’ in the ‘Credit Risk Review’risk review’ section of the Risk Review.review.
The net gain during the year attributable to changes in credit risk for loans and advances designated at fair value was £39m (2014: net gain of £10m, (2013:2013: net loss of £98m, 2012: net loss of £99m)£98m). The cumulative net loss attributable to changes in credit risk for loans and advances designated at fair value at 31 December 20142015 was £248m (2013:£209m (2014: cumulative net loss of £258m)£248m).
Debt securities can be analysed by type of issuer as follows:
| Group | Company | Group | Company | |||||||||||||||||||||||||||||
2014 £m | 2013 £m | 2014 £m | 2013 £m | 2015 £m | 2014 £m | 2015 £m | 2014 £m | |||||||||||||||||||||||||
Mortgage-backed securities | 226 | 229 | - | - | 209 | 226 | - | - | ||||||||||||||||||||||||
Other asset-backed securities | 134 | 87 | 42 | - | 62 | 134 | 30 | 42 | ||||||||||||||||||||||||
| 360 | 316 | 42 | - | 271 | 360 | 30 | 42 | |||||||||||||||||||||||||
Other securities | 262 | 212 | 41 | - | 236 | 262 | 30 | 41 | ||||||||||||||||||||||||
| 622 | 528 | 83 | - | 507 | 622 | 60 | 83 | |||||||||||||||||||||||||
Debt securities can be analysed by listing status as follows:
| Group | Company | |||||||||||||||
2014 £m | 2013 £m | 2014 £m | 2013 £m | |||||||||||||
Listed in the UK | 302 | 218 | 83 | - | ||||||||||||
Listed elsewhere | 92 | 88 | - | - | ||||||||||||
Unlisted(1) | 228 | 222 | - | - | ||||||||||||
| 622 | 528 | 83 | - | |||||||||||||
2015 £m 2014 £m 2015 £m 2014 £m Listed in the UK Listed elsewhere Unlisted(1) (1) Group Company 263 302 60 83 31 92 - - 213 228 - - 507 622 60 83
| (1) | Includes Social Housing.
Annual Report 2015
Financial statements
During the years ended 31 December 2015, 2014 Loans and advances to banks are repayable as follows:
Loans and advances to banks can be analysed by the geographical location of the issuer or counterparty as follows:
Loans and advances to banks can be analysed by the credit rating of the issuer or counterparty as follows:
236 Santander UK plc
Movement in impairment loss allowances:
Annual Report 2015 Financial statements
Loans and advances to customers have the following interest rate structures:
Recoveries:
238 Santander UK plc
Finance lease and hire purchase contract receivables may be analysed as follows:
The net investment in finance leases and hire purchase contracts represents amounts recoverable as follows:
At 31 December 2015 and 2014, the Company had no finance lease and hire purchase contract receivables. The Santander UK group enters into finance leasing arrangements primarily for the financing of motor vehicles and a range of assets to its corporate customers. Included in the carrying value of net investment in finance leases and hire purchase contracts is Finance lease receivable balances are secured over the asset leased. The Santander UK group is not permitted to sell or repledge the asset in the absence of default by the lessee. The Directors consider that the carrying amount of the finance lease receivables approximates to their fair value. Included within loans and advances to customers are advances assigned to bankruptcy remote structured entities and Abbey Covered Bonds LLP. These loans provide security to issues of covered bonds and asset or mortgage backed securities made by the Santander UK group. See Note
Annual Report 2015 Financial statements
The Santander UK group uses Loans and advances to customers include portfolios of residential mortgage loans, and receivables derived from credit agreements with retail customers for the purchases of financed vehicles, which are subject to non-recourse finance arrangements. These loans and receivables have been purchased by, or assigned to, structured entities or Abbey Covered Bonds LLP, and have been funded primarily through the issue of mortgage-backed securities, a) Securitisations The balances of loans and advances to customers subject to securitisation at 31 December
i) Master Trust Structures The Santander UK group makes use of a type of securitisation known as a master trust structure. In this structure, a pool of assets is assigned to a trust company by the asset originator. A funding entity acquires a beneficial interest in the pool of assets held by the trust company with funds borrowed from qualifying structured entities, which at the same time issue asset-backed securities to third-party investors or the Santander UK group. The trust company holds the pool of assets on trust for the funding entity and the originator. The originator holds a beneficial interest over the share of the pool of assets not purchased by the funding entity, known as the seller share. The Company and its subsidiaries are under no obligation to support any losses that may be incurred by the securitisation companies or holders of the securities and do not intend to provide such further support. Holders of the securities are only entitled to obtain payment of principal and interest to the extent that the resources of the securitisation companies are sufficient to support such payments, and the holders of the securities have agreed in writing not to seek recourse in any other form. Santander UK plc and its subsidiaries receive payments from the securitisation companies in respect of fees for administering the loans, and payment of deferred consideration for the sale of the loans. Santander UK plc and its subsidiaries have no right or obligation to repurchase any securitised loan, except if certain representations and warranties given by Santander UK plc or its subsidiaries at the time of transfer are breached and, in certain cases, if there is a product switch. Holmes Outstanding balances of assets securitised and notes in issue (non-recourse finance)
240 Santander UK plc
Using a master trust structure, Santander UK plc has assigned portfolios of residential mortgages and their related security to Holmes Trustees Limited, a trust company that holds the portfolios of mortgages on trust for Santander UK plc and Holmes Funding Limited. Proceeds from notes issued to third party investors or the Santander UK group by Holmes Funding Limited has a beneficial interest of In Fosse Outstanding balances of assets securitised and notes in issue (non-recourse finance)
The Fosse Master Trust securitisation structure was established in 2006. Notes were issued by Fosse Master Issuer plc to third party investors and the proceeds loaned to Fosse Funding (No. 1) Limited, which in turn used the funds to purchase beneficial interests in mortgages held by Fosse Trustee Limited. Both Fosse Funding Fosse Master Issuer plc has cash deposits totalling In
Langton Outstanding balances of assets securitised and notes in issue (non-recourse finance)
The Langton Master Trust securitisation structure was established on 25 January 2008. Notes were issued by the Langton Securities Both Langton Funding In Annual Report 2015 Financial statements ii) Other securitisation structures
Motor Outstanding balances of assets securitised and notes in issue (non-recourse finance)
In 2015, £0.8bn (2014: £1bn) of asset-backed notes were issued from Motor 2015 plc. Asset-backed notes totalling £0.9bn (2014: £1bn) equivalent were redeemed during the year. Auto ABS Loans UK As part of the acquisition of PSA Finance UK Limited in the first half of 2015, as described in Note 46, the Santander UK group recognised £1.2bn notes issued through Auto ABS Loans UK plc. Outstanding balances of assets securitised and notes in issue (non-recourse finance) at 31 December 2015 and 2014 were:
In 2015, £35m of asset-backed notes were issued from Auto ABS Loans UK plc. No asset-backed notes were redeemed during the year. b) Covered Bonds The Santander UK group also issues covered bonds. In this structure, Abbey National Treasury Services plc (the Outstanding balances of loans and advances assigned to the covered bond programme at 31 December 2015 and 2014
For further information on the Euro 35bn Global Covered Bond Programme, see Note
242 Santander UK plc
The Santander UK group enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to structured entities. These transfers may give rise to the full or partial derecognition of the financial assets concerned.
Financial assets that do not qualify for derecognition consist of (i) securities held by counterparties as collateral under repurchase agreements, (ii) securities lent under securities lending agreements, and (iii) loans that have been securitised under arrangements by which the Santander UK group retains a continuing involvement in such transferred assets. As the substance of the sale and repurchase and securities lending transactions is secured borrowings, the asset collateral continues to be recognised in full and the related liability reflecting the Santander UK group’s obligation to repurchase the transferred assets for a fixed price at a future date is recognised in deposits from banks or customers, as appropriate. As a result of these transactions, the Santander UK group is unable to use, sell or pledge the transferred assets for the duration of the transaction. The Santander UK group remains exposed to interest rate risk and credit risk on these pledged instruments. The counterparty’s recourse is not limited to the transferred assets. The Santander UK group securitisation transfers do not qualify for derecognition. The Santander UK group remains exposed to credit risks arising from the mortgage loans and has retained control of the transferred assets. Circumstances in which the Santander UK group has continuing involvement in the transferred assets may include retention of servicing rights over the transferred assets, entering into a derivative transaction with the securitisation vehicle, retaining an interest in the securitisation vehicle or providing a cash reserve fund. Where the Santander UK group has continuing involvement it continues to recognise the transferred assets to the extent of its continuing involvement and recognises an associated liability. The net carrying amount of the transferred assets and associated liabilities reflects the rights and obligations that the Santander UK group has retained. The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:
Annual Report 2015 Financial statements
Included in the above balances are amounts owed to the Santander UK group by Banco Santander
244 Santander UK plc
a) Interests in subsidiaries Interests in subsidiaries are eliminated during the preparation of the Consolidated Financial Statements. Interests in subsidiaries in the Company unconsolidated financial statements are held at cost subject to impairment. The movement in interests in subsidiaries in the Company unconsolidated financial statements was as follows:
On 3 February 2015, the Santander UK group through Santander Consumer (UK) plc (SCUK) purchased 50% of the shares of PSA Finance UK Limited, a company that offers a range of consumer finance and insurance products and services for individuals, businesses and distribution networks in the automotive industry. For further details on the acquisition, see Note 46. PSA Finance UK Limited has been consolidated as SCUK has obtained control through its ability to direct the activities that most significantly affect SCUK’s return. In
The Santander UK group consists of a parent company, Santander UK plc, incorporated in the United Kingdom and a number of subsidiaries and associates held directly and indirectly by Santander UK plc.
Santander UK holds directly or indirectly 100% of the issued ordinary share capital of its principal subsidiaries. All companies operate principally in their country of incorporation or registration. Abbey National Treasury Services plc also has a branch office in the US and the Cayman Islands. Santander UK plc has branches in the Isle of Man and in Jersey. On 1 June 2015, the deposit taking business of Abbey National International Limited (ANIL) was transferred to Santander UK plc Jersey branch. This followed the sanctioning by the Royal Court of Jersey on 8 May 2015 of a transfer scheme prepared under Article 48D of, and the Schedule to the Banking Business (Jersey) Law 1991. From that date, ANIL was no longer considered a principal subsidiary. Details of subsidiary undertakings, joint ventures and associates are set out in the Shareholder Information section and form an integral part of the financial statements. Subsidiaries with significant non-controlling interests The only subsidiary with significant non-controlling interests is PSA Finance UK Limited. For more information see Note 46.
Annual Report 2015 Financial statements Interests in consolidated structured entities Structured entities are formed by Santander UK to accomplish specific and well-defined objectives. Santander UK consolidates these structured entities when the substance of the relationship indicates control, as described in Note 1. In addition to the structured entities disclosed in Note
i) Guaranteed Investment Products 1 PCC GIP is a Guernsey-incorporated, closed-ended, protected cell company. The objective of each cell is to achieve capital growth for retail investors. In order to achieve the investment objective, GIP, on behalf of the respective cells, has entered into transactions with Santander UK. Santander Guarantee Company, a Santander UK group company, also guarantees the shareholders of cells a fixed return on their investment and/or the investment amount. GIP has no third party assets. Although the share capital is owned by the retail investors, Santander UK continues to have exposure to variable risks and returns through Santander Guarantee Company’s guarantee and has therefore consolidated this entity. ii) Santander UK Foundation Limited Santander UK Foundation Limited supports disadvantaged people throughout the UK through the charitable priorities of education and financial capability. The entity was set up by Santander UK and all its revenue arise through donations from Santander UK, and its third party assets are minimal, comprising of available-for-sale assets of b) Interests in associates Santander UK does not have any individually material interests in associates. As set out in the accounting policies in Note 1, interests in associates are accounted for using the equity method. In the year ended 31 December c) Interests in joint ventures Santander UK does not have any individually material interests in joint ventures. As set out in the accounting policies in Note 1, interests in joint ventures are accounted for using the equity method. In the year ended 31 December d) Interests in unconsolidated structured entities Structured entities sponsored by the Santander UK group Santander UK has interests in structured entities which it sponsors but does not control. Santander UK considers itself a sponsor of a structured entity when it facilitates the establishment of the structured entity. The structured entities sponsored but not consolidated by Santander UK are as follows. Other than as set out below, no significant judgements were required with respect to control or significant influence. i)
In 2008, a common investment fund was established to hold the assets of the Santander UK Group Pension Scheme. The Santander (UK) Common Investment Fund is not consolidated by Santander UK, but its assets of
The trust preferred entities, Abbey National Capital Trust I and Abbey National Capital LP I are 100% owned finance subsidiaries (as defined in Regulation S-X under the US Securities Act 1933, as amended) of Santander UK plc which were set up by Santander UK solely for the issuance of trust preferred securities to third parties and lend the funds on to other Santander UK companies. On 7 February 2000, Abbey National Capital Trust I issued US$1bn of 8.963% Non-cumulative Trust Preferred Securities, which have been registered under the US Securities Act of 1933, as amended. Abbey National Capital Trust I serves solely as a passive vehicle holding the partnership preferred securities issued by Abbey National Capital LP I and each has passed all the rights relating to such partnership preferred securities to the holders of trust preferred securities issued by Abbey National Capital Trust I. All of the trust preferred securities and the partnership preferred securities have been fully and unconditionally guaranteed on a subordinated basis by Santander UK plc. The terms of the securities do not include any significant restrictions on the ability of Santander UK plc to obtain funds, by dividend or loan, from any subsidiary. The trust preferred entities are not consolidated by Santander UK as Santander UK plc is not exposed to variability of returns from the entities. Structured entities not sponsored by the Santander UK group The Santander UK group also has interests in structured entities which it does not sponsor or control. These largely relate to the legacy Treasury asset portfolio and consist of holdings of mortgage and other asset-backed securities issued by entities that were established and/or sponsored by other unrelated financial institutions. Details of these securities are set out in Note
246 Santander UK plc
a) Goodwill
Impairment of goodwill During The cash flow projections for each CGU are based on the five year plan prepared for regulatory purposes, based on Santander UK’s 3-Year Plan and approved by the Santander UK plc Board. The assumptions included in the expected future cash flows for each CGU take into consideration the UK economic environment and financial outlook within which the CGU operates. Key assumptions include projected GDP growth rates, the level of interest rates and the level and change in unemployment rates in the UK. The discount rate used to discount the cash flows is based on a pre-tax rate that reflects the weighted average cost of capital allocated by Santander UK to investments in the business division in which the CGUs operates. The growth rate used reflects management’s five-year forecasts, with a terminal growth rate for each year applied thereafter, in line with the estimated long-term average UK GDP growth rate. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment of goodwill to be recognised. The following CGUs include in their carrying values goodwill that comprises the goodwill reported by Santander UK. The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives. 2015
In Annual Report 2015 Financial statements b) Other intangibles
Other intangible assets consist of computer software. The assessment of whether an asset is exhibiting indicators of impairment as well as the calculation of impairment, which requires the estimate of future cash flows and fair values less costs to sell, also requires the preparation of cash flow forecasts and fair values for assets that may not be regularly bought and sold. In 2014, an impairment charge of £206m was recognised in respect of software write-offs. The write-offs were for the decommissioning of redundant systems following the implementation of our new digital platform and the completion of our product simplification programme.
248 Santander UK plc
At 31 December 2015, capital expenditure contracted but not provided for in respect of property, plant and equipment was £46m (2014: £23m). Of the carrying value at the balance sheet date, £98m (2014: £209m) related to assets under construction. Operating lease assets The Santander UK group’s operating lease assets consist of motor vehicles and other assets leased to its corporate customers. The Company has no operating lease assets. Future minimum lease receipts under non-cancellable operating leases are due over the following periods:
Contingent rent income of £4m (2014: £5m) was recognised in the year. 24. DEFERRED TAX Deferred taxes are calculated on temporary differences under the liability method using the tax rates expected to apply when the liability is settled or the asset is realised.
Deferred tax balances are presented in the balance sheet after offsetting assets and liabilities where the Santander UK group and Company has the legal right to
The deferred tax (liabilities)/assets scheduled above have been recognised in both Santander UK plc and the Santander UK group on the basis that sufficient future taxable profits are forecast within the foreseeable future, in excess of the profits arising from the reversal of existing taxable temporary differences, to allow for the utilisation of the assets as they reverse. Based on the conditions at the balance sheet date, management Annual Report 2015 Financial statements determined that a reasonably possible change in any of the key assumptions underlying the estimated future taxable profits in the Santander UK group’s five year plan (described in Note
At 31 December
26. DEPOSITS BY BANKS
In 2015, the intercompany funding arrangements between Santander UK plc and its subsidiary Abbey National Treasury Services plc
250 Santander UK plc
Savings accounts and time deposits are interest-bearing.
At 31 December
When quoted market prices are unavailable, the own debt security in issue is valued using valuation techniques, the inputs for which are either based upon quoted prices in an inactive market for the instrument, or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to the Santander UK group’s liabilities. The change in fair value of issued debt securities attributable to the Santander UK group’s own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer or credit default swaps. Each security is then valued using discounted cash flows, incorporating a LIBOR-based discount curve. The difference in the valuations is attributable to the Santander UK group’s own credit spread. This methodology is applied consistently across all securities where it is believed that counterparties would consider the Santander UK group’s creditworthiness when pricing trades. Annual Report 2015 Financial statements At 31 December Gains and losses arising from changes in the credit spread of liabilities issued by the Santander UK group reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount. The net At 31 December US$10bn Euro Commercial Paper Programme Abbey National Treasury Services plc may from time to time issue commercial paper under the US$10bn Euro Commercial Paper Programme that may be denominated in any currency as agreed between Abbey National Treasury Services plc and the relevant dealer. The commercial paper ranks at least pari passu with all other unsecured and unsubordinated obligations of Abbey National Treasury Services plc. The payments of all amounts due in respect of the commercial paper have been unconditionally and irrevocably guaranteed by Santander UK plc. The commercial paper is issued in bearer form, subject to a minimum maturity of 1 day and a maximum maturity of 364 days. The commercial paper may be issued on a discounted basis or may bear fixed or floating rate interest or a coupon calculated by reference to an index or formula. The maximum aggregate nominal amount of all commercial paper outstanding from time to time under the Programme will not exceed US$10bn (or its equivalent in other currencies). The commercial paper is not listed on any stock exchange. US$
The maximum aggregate nominal amount of all notes outstanding under the programme may not exceed US$ Euro 10bn Note, Certificate and Warrant Programme and Global Structured Solutions Programme Abbey National Treasury Services plc may from time to time issue structured notes and redeemable certificates (together the The Structured Securities Programmes provide for the issuance of commodity linked N&C Securities, credit-linked N&C Securities, currency-linked Securities, equity-linked Securities, equity index-linked Securities, fixed rate N&C Securities, floating rate N&C Securities, fund-linked Securities, inflation-linked Securities, property-linked Securities, zero-coupon/discount N&C Securities and any other structured Securities as agreed between Abbey National Treasury Services plc and the relevant dealers. Securities issued under the Structured Securities Programmes are governed by English law. The maximum aggregate outstanding nominal amount of all N&C Securities and the aggregate issue prices of outstanding warrants from time to time issued under the Structured Securities Programmes will not exceed euro 10bn (or its equivalent in other currencies). Warrants programme Abbey National Treasury Services plc established a warrants programme (the In 2012, Abbey National Treasury Services plc discontinued the issue of new warrants under the Warrants Programme as new issuances are being made under the Structured Securities Programmes. The payments of all amounts due in respect of the previously issued warrants have been unconditionally and irrevocably guaranteed by Santander UK plc.
252 Santander UK plc
Included in the above balances are amounts Euro 35bn Global Covered Bond Programme Abbey National Treasury Services plc issues covered bonds under the euro 35bn Global Covered Bond Programme that may be denominated in any currency as agreed between Abbey National Treasury Services plc and the relevant dealers. The programme provides that covered bonds may be listed or admitted to trading, on the official list of the UK Listing Authority and on the London Stock Exchange’s Regulated Market or any other stock exchanges or regulated or unregulated markets. Abbey National Treasury Services plc may also issue unlisted covered bonds and/or covered bonds not admitted to trading on any regulated or unregulated market. The payments of all amounts due in respect of the covered bonds have been unconditionally guaranteed by Santander UK plc. Abbey Covered Bonds LLP (the Covered bonds may be issued in bearer or registered form. The maximum aggregate nominal amount of all covered bonds from time to time outstanding under the programme will not exceed euro 35bn (or its equivalent in other currencies), subject to any modifications in accordance with the programme. On 11 November 2008, Abbey National Treasury Services plc was admitted to the register of issuers and the programme and the covered bonds issued previously under the programme were admitted to the register of regulated covered bonds, pursuant to Regulation 14 of the Regulated Covered Bonds Regulations 2008 (SI 2008/346). US$40bn Euro Medium Term Note Programme In January 2009, it was decided that no further issuance would be made under the US$40bn Euro Medium Term Note Programme. Alliance & Leicester plc issued both senior notes and subordinated notes and from time to time issued notes denominated in any currency as agreed with the relevant dealer under the US$40bn Euro Medium Term Note Programme. The Programme provided for issuance of fixed rate Notes, floating rate notes, index linked notes, dual currency notes and zero-coupon notes. The notes are listed on the London Stock Exchange or may be listed on any other or further stock exchange(s) or may be unlisted, as agreed. The notes were issued in bearer form. The maximum aggregate nominal amount of all notes from time to time outstanding under the Programme did not exceed US$40bn (or its equivalent in other currencies), subject to any modifications in accordance with the terms of the Programme agreement. The notes were direct, unsecured and unconditional obligations of Alliance & Leicester plc. The notes transferred to Santander UK plc with effect from 28 May 2010 under a business transfer scheme under Part VII of the Financial Services and Markets Act 2000. As a result, the notes are now direct, unsecured and unconditional obligations of Santander UK plc. US SEC registered debt shelf – Abbey National Treasury Services plc Abbey National Treasury Services plc issues notes in the US from time to time pursuant to a shelf registration statement on Form F-3 filed with the US Securities and Exchange Annual Report 2015 Financial statements US$20bn Commercial Paper Programme On 1 July 2015, Abbey National Abbey National Treasury Services plc, US Branch from time to time
Euro 5bn Guaranteed French Certificates of Deposit Programme
Certificates of deposit
Securitisation programmes The Santander UK group has provided prime retail mortgage-backed securitised products and other asset-backed securitised products to a diverse investor base through its mortgage and other asset-backed funding programmes, as described in Note Funding has historically been raised via mortgage-backed notes, both issued to third parties and retained. In addition, the Santander UK group has provided other asset-backed securitised products to investors through the securitisation of auto loan receivables. An analysis of the above debt securities in issue by issue currency, interest rate and maturity is as follows:
254 Santander UK plc
The above securities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination of specific subordinated liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preference shares and preferred securities are generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the dated subordinated liabilities. The subordination of the preference shares and preferred securities ranks equally with that of the £300m fixed/floating rate non-cumulative callable preference shares, £300m Step-up Callable Perpetual Preferred Securities and £300m Step-up Callable Perpetual Reserve Capital Instruments classified as The Santander UK group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during the year Included in the above balances are amounts £325m Sterling Preference Shares Holders of sterling preference shares are entitled to receive a bi-annual non-cumulative preferential dividend payable in sterling out of the distributable profits of Santander UK plc. The rate per annum will ensure that the sum of the dividend payable on such date and the associated tax credit (as defined in the terms of the sterling preference shares) represents an annual rate of 8 5/8% per annum of the nominal amount of shares issued in 1997, and an annual rate of 10 3/8% for shares issued in 1995 and 1996. On a return of capital or on a distribution of assets on a winding up, the sterling preference shares shall rank pari passu with any other shares that are expressed to rank pari passu therewith as regards participation in assets, and otherwise in priority to any other share capital of Santander UK plc. On such a return of capital or winding up, each sterling preference share shall, out of the surplus assets of Santander UK plc available for distribution amongst the members after payment of Santander UK plc’s liabilities, carry the right to receive an amount equal to the amount paid up or credited as paid together with any premium paid on issue and the full amount of any dividend otherwise due for payment. Other than as set out above, no sterling preference share confers any right to participate on a return of capital or a distribution of assets of Santander UK plc. Holders of the sterling preference shares are not entitled to receive notice of or attend, speak and vote at general meetings of Santander UK plc unless the business of the meeting includes the consideration of a resolution to wind up Santander UK plc or any resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the sterling preference shares or if the dividend on the sterling preference shares has not been paid in full for the three consecutive dividend periods immediately prior to the relevant general meeting. In any such case, the sterling preference shareholders are entitled to receive notice of and attend the general meeting at which such resolution is proposed and will be entitled to speak and vote on such a resolution but not on any other resolution. £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities The Tier One Preferred Income Capital Securities were issued on 9 August 2002 by Santander UK plc and have no fixed redemption date. Santander UK plc has the right to redeem the Tier One Preferred Income Capital Securities whole but not in part on 9 February 2018 or on any coupon payment date thereafter, subject to the prior approval of the PRA. The Tier One Preferred Income Capital Securities bear interest at a rate of 6.984% per annum, payable semi-annually in arrears. From (and including) 9 February 2018, the Tier One Preferred Income Capital Securities will bear interest, at a rate reset semi-annually of 1.86% per annum above the six-month sterling LIBOR rate, payable semi-annually in arrears. Interest payments may be deferred in limited circumstances, such as when the payment would cause Santander UK plc to become insolvent or breach applicable Capital Regulations. The Tier One Preferred Income Capital Securities are not redeemable at the option of the holders and the holders do not have any rights against other Santander UK group companies. Where interest payments have been deferred, Santander UK plc may not declare or pay dividends on or redeem or repurchase any junior securities until it next makes a scheduled payment on the Tier One Preferred Income Capital Securities and the Reserve Capital Instruments. The Tier One Preferred Income Capital Securities are unsecured securities of Santander UK plc and are subordinated to the claims of unsubordinated creditors and subordinated creditors holding loan capital of Santander UK plc. Upon the winding up of Santander UK plc, holders of Tier One Preferred Income Capital Securities will rank pari passu with the holders of the most senior class or classes of preference shares (if any) of Santander UK plc then in issue and in priority to all other Santander UK plc shareholders. As part of a capital management exercise, 99% of the then outstanding Tier One Preferred Income Capital Securities were re-purchased on 11 June 2015.
Annual Report 2015 Financial statements
Undated subordinated liabilities
The 10.0625% exchangeable subordinated capital securities are exchangeable into fully paid 10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of Santander UK plc. Exchange may take place on any interest payment date providing that between 30 and 60 days notice has been given to the holders. The holders will receive one new sterling preference share for each £1 principal amount of capital securities held. The 5.56% Subordinated guaranteed notes are redeemable at par, at the option of Santander UK plc, on 31 January 2015 and each fifth anniversary thereafter. During The 5.50% Subordinated guaranteed notes are redeemable at par, at the option of Santander UK plc, on 27 June 2015 and each fifth anniversary thereafter. During 2015, Santander UK plc exercised its options to call these notes and the notes were fully redeemed. The Fixed/Floating Rate Subordinated notes are redeemable at par, at the option of Santander UK plc, on 27 December 2016 and each interest payment date (quarterly) thereafter. The 10 Year step-up perpetual callable subordinated notes are redeemable at par, at the option of Santander UK plc, on 28 September 2010 and each fifth anniversary thereafter. The coupon payable on the notes The 7.50% 15 Year step-up perpetual callable subordinated notes are redeemable at par, at the option of Santander UK plc, on 28 September 2015 and each fifth anniversary thereafter. During 2015, Santander UK plc exercised its options to call these notes and the notes were fully redeemed. The 7.375% 20 Year step-up perpetual callable subordinated notes are redeemable at par, at the option of Santander UK plc, on 28 September 2020 and each fifth anniversary thereafter. The 7.125% 30 Year step-up perpetual callable subordinated notes are redeemable at par, at the option of Santander UK plc, on 30 September 2030 and each fifth anniversary thereafter.
In common with other debt securities issued by Santander UK group companies, the undated subordinated liabilities are redeemable in whole at the option of Santander UK plc, on any interest payment date, in the event of certain tax changes affecting the treatment of payments of interest on the subordinated liabilities in the UK, at their principal amount together with any accrued interest. Dated subordinated liabilities
As part of a The dated subordinated liabilities are redeemable in whole at the option of Santander UK plc, on any interest payment date, in the event of certain tax changes affecting the treatment of payments of interest on the subordinated liabilities in the UK, at their principal amount together with any accrued interest. Each of the subordinated liabilities issued by Santander UK Group Holdings plc has been downstreamed to Santander UK plc by means of Santander UK plc issuing equivalent subordinated liabilities to Santander UK Group Holdings plc. Subordinated liabilities are repayable:
256 Santander UK plc
Included in the above balances are amounts
Annual Report 2015 Financial statements
a) Conduct remediation The amounts in respect of conduct remediation comprise the estimated cost of making redress payments, including related costs, with respect to the past sales or administration of products.
The provision for conduct remediation (i) Payment Protection Insurance (PPI) In August 2010, the FSA (now the FCA) published a policy statement entitled ‘The assessment and redress of Payment Protection Insurance complaints’ (the Policy Statement). The Policy Statement contained rules which altered the basis on which regulated firms must consider and deal with complaints in relation to the sale of PPI and potentially increased the amount of compensation payable to customers whose complaints are upheld. Having announced earlier in 2015 that it would gather evidence on current trends in PPI to assess the current process for PPI complaints and consider whether any new intervention is necessary, the FCA issued a consultation paper in November 2015 (the Consultation Paper) outlining its proposed approach to PPI in light of the 2014 decision of the Supreme Court in Plevin v Paragon Personal Finance Ltd (Plevin) and its proposal to set a two year deadline for PPI claims. In Plevin, the Supreme Court ruled that a failure to disclose a large commission payment on a single premium PPI policy sold in connection with a secured personal loan made the relationship between the lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. The FOS is also currently considering its position with respect to the impact of Plevin on PPI complaints. A provision for conduct remediation has been recognised in respect of the mis-selling of PPI policies. The provision is calculated based on a number of key assumptions which involve significant management judgement. These are:
The assumptions have been based on the following:
The assumptions are kept under review, and regularly reassessed and validated against actual customer data, e.g. claims received; uphold rates, the impact of any changes in approach to uphold rates, and any re-evaluation of the estimated population. The most critical factor in determining the level of provision is the volume of claims. The uphold rate is a reasonably consistent function of the sales process and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population. In setting the provision, management estimated the total claims that were likely to be received. Previous experience has indicated that claims could be received over a number of years. The table below sets out the key drivers of the provision balance and forecast assumptions used in calculating the provision, as well as the sensitivity of the provision to changes in the assumptions.
258 Santander UK plc
Number of PPI claims outstanding Movements in the number of PPI claims outstanding during the years ended 31 December 2015, 2014 and 2013 were as follows:
2015 compared to 2014 When assessing the adequacy of our provision, we have applied the November 2015 FCA consultation paper, including the Plevin case, to our current assumptions. This application has resulted in an additional £450m provision charge for the fourth quarter of 2015, which represents our best estimate of the remaining redress and costs. The additional provision is predicated on the probable two-year deadline by which customers would need to make their PPI complaints and the anticipated increase in claim volumes as a result of the finite claim period. Monthly utilisation, excluding pro-active customer contact, during 2015 was £10m per month (including related costs), against an average of £9m in 2014. While we saw a reduction in PPI redress costs in the first half of the year, we have seen an increase in the third quarter in line with industry trends, with the fourth quarter remaining flat. Although we are comfortable with our current position, we will continue to review our provision levels in respect of recent claims experiences and the observed impact of the two-year deadline. 2014 compared During 2014, the volume of PPI complaints decreased at a slower rate than in 2013. The provision was reassessed in light of this. A review of recent claims activity indicated that claims are expected to continue for longer than originally anticipated. As a result, the provision was increased by £95m. Monthly PPI redress costs, including related costs, including pro-active customer contact, decreased to an average of £11m per month in 2014, compared to a monthly average of £18m in 2013. Excluding pro-active customer contact, the average monthly redress costs in the fourth quarter of 2014 were £7m. The high proportion of invalid complaints also continued.
(ii)
Wealth and investment During 2012, the FCA A provision has been recognised in respect of the above sales for redress payments and related costs. The provision is calculated based on a number of factors and assumptions including:
At 31 December
(iii) Other products A provision
Annual Report 2015 Financial statements
b) Regulatory-related (i) Financial Services Compensation Scheme The FSCS is the UK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). The levies raised comprise both management expenses levies and, where necessary, compensation levies on authorised firms. Each deposit-taking institution contributes towards the management expenses levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March. In determining an appropriate accrual in respect of the management expenses levy, certain assumptions have been made, Following the default of a number of deposit takers since 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. The interest on the borrowings with HM Treasury, which are approximately £16bn, are now assessed at the higher of 12 month LIBOR plus Whilst it is expected that the substantial majority of the principal will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, to the extent that there remains a shortfall, the FSCS will recover any shortfall of the principal by levying the deposit-taking sector in instalments. The The FSCS and HM Treasury have agreed that the terms of the repayment of the borrowings will be reviewed every three years in light of market conditions and of the actual repayment from the estates of failed banks. The ultimate amount of any compensation levies to be charged in future years also depends on a number of factors including the level of protected deposits and the population of deposit-taking participants and will be determined at a later date. Dunfermline Building Society was the first deposit taker to be resolved under the Special Resolution Regime which came into force under the Banking Act 2009. Recoveries are paid to HM Treasury and the FSCS has an obligation to contribute to the costs of the resolution, subject to a statutory cap. For the year ended 31 December
(ii) UK Bank Levy The Finance Act 2011 introduced an annual bank levy in the UK. The UK Bank Levy is based on the total chargeable equity and liabilities as reported in the balance sheet of a Relevant Group at the end of a chargeable period. The Relevant Group for this purpose is a Foreign Banking Group whose ultimate parent is Banco Santander SA. The UK Bank Levy is calculated principally on the consolidated balance sheet of the UK sub-group parented by Santander UK Group Holdings plc, of which this Company is part. In determining the chargeable equity and liabilities the following amounts are excluded: adjusted Tier 1 capital; certain ‘protected deposits’ (for example those protected under the FSCS); liabilities that arise from certain insurance business within banking groups; liabilities in respect of currency notes in circulation; FSCS liabilities; liabilities representing segregated client money; and deferred tax liabilities, current tax liabilities, liabilities in respect of the UK Bank Levy, revaluation of property liabilities, liabilities representing the revaluation of business premises and defined benefit retirement liabilities. It is also permitted in specified circumstances to reduce certain liabilities: by netting them against certain assets; offsetting assets on the relevant balance sheets that would qualify as high quality liquid assets (in accordance with the PRA definition); and repo liabilities secured against sovereign and supranational debt. With effect from 1 April 2015, the Finance Act 2015 increased the rate to 0.21%. During The cost of the UK Bank Levy for In addition to the corporation tax changes the Finance (No.2) Act 2015, which was enacted on 18 November, reduces the UK Bank Levy
d) Other Other provisions principally comprise amounts in respect of
260 Santander UK plc
The amounts recognised in the balance sheet were as follows:
Remeasurement (gains)/losses recognised in other comprehensive income during the year were as follows:
a) Defined contribution pension schemes The Santander UK group operates a number of defined contribution pension schemes. The assets of the defined contribution pension schemes are held and administered separately from those of the Santander UK group. The Santander Retirement Plan, an occupational defined contribution scheme, is the plan into which eligible employees are enrolled automatically. The assets of the Santander Retirement Plan are held in separate trustee-administered funds. An expense of £50m (2014: £52m, b) Defined benefit pension schemes The Santander UK group operates a number of defined benefit pension schemes. The main pension scheme is the Santander (UK) Group Pension The corporate trustee of the Santander (UK) Group Pension Scheme is Santander (UK) Group Pension Scheme Trustee Limited, a private limited company incorporated in 1996 and a wholly-owned subsidiary of Santander UK plc. The principal duty of the trustees is to act in the best interests of the members of the schemes. The Trustee board comprises seven Directors selected by Santander UK plc, plus seven member-nominated Directors selected from eligible members who apply for the role. Formal actuarial valuation of the assets and liabilities of the defined benefit schemes are carried out on at least a triennial basis by independent professionally-qualified actuaries and valued for accounting purposes at each balance sheet date. The latest formal actuarial valuation for the Santander (UK) Group Pension scheme at 31 March 2013 was finalised in June 2014. The assets of the funded plans are held independently of the Santander UK group’s assets in separate trustee administered funds. Investment strategy across the schemes remains under regular review. Investment decisions are delegated by the Santander (UK) Group Pension Scheme Trustees to a common investment fund, managed by Santander (CF) Trustee Limited, a private limited company owned by seven Trustee directors, four appointed by Santander UK plc and three by Santander (UK) Group Pension Trustee Limited. The Trustee directors’ principal duty, within the investment powers delegated to them is to act in the best interest of the members of the Santander (UK) Group Pension Trustee. Ultimate responsibility for investment strategy rests with the Trustees of the schemes who are required under the Pensions Act 2004 to prepare a statement of investment principles. The Trustees of the Santander (UK) Group Pension Scheme have developed the following investment principles:
Annual Report 2015 Financial statements
The Santander UK group’s defined benefit pension schemes expose it to actuarial risks such as investment risk, interest rate risk, longevity risk, salary risk and inflation risk:
The Santander UK group does not hold insurance policies over the schemes, and has not entered into any significant transactions with the schemes. The total amount charged/(credited) to the income statement, including any amounts classified as redundancy costs and in discontinued operations was as follows:
The amounts recognised in other comprehensive income for each of the five years indicated were as follows:
262 Santander UK plc
Movements in the present value of defined benefit obligations during the year were as follows:
Costs of £6m (2014: £7m, The following tables provide information on the composition and fair value of the plan assets at 31 December 2015
Annual Report 2015 Financial statements
2015
Plan assets are stated at fair value based upon quoted prices in active markets with the exception of property funds and those classified under ‘Other’. The ‘Other’ category consists of asset-backed securities, annuities, funds (including private equity funds) and derivatives that are used to protect against exchange rate, equity market, inflation and interest rate movements. The property funds were valued using market valuations prepared by an independent expert. Of the assets in the ‘Other’ category, investments in absolute return funds and foreign exchange, equity and interest rate derivatives were valued by investment managers by reference to market observable data. Private equity funds were valued by reference to their latest published accounts whilst the insured annuities were valued by scheme actuaries based on the liabilities insured. The actual gains on scheme assets for the Santander UK group and the Company were £177m (2014: £1,402m, The Santander UK group’s pension schemes did not directly hold any equity securities of the Company or any of its related parties at 31 December The investment policy and performance of the scheme is monitored regularly by Santander UK plc and the Santander (CF) Trustee to ensure that the risk and return profile of investments meets objectives. Any changes to the investment policy are agreed with the Santander (UK) Group Pension Scheme Trustee and documented in the Statement of Investment Policy for the Common Investment Fund. The strategic asset allocation target is an asset mix based on 25% quoted equities, 50% debt instruments (including gilts, index-linked gilts, and corporate bonds) and 25% property and alternatives. A strategy is in place to manage interest rate and inflation risk relating to the liabilities. At 31 December Funding In June 2014 in compliance with the Pensions Act 2004, the trustees and the Santander UK group agreed to a new recovery plan (the Defined Benefit Deficit Repair Plan) and schedule of contributions following the finalisation of the 31 March 2013 actuarial valuation. The funding target for this actuarial valuation is for the schemes to have sufficient assets to make payments to members in respect of the accrued benefits as and when they fall due. In accordance with terms of the trustee agreement, the Santander UK group contributed Actuarial assumptions The principal actuarial assumptions used for the defined benefit schemes were as follows:
The rate used to discount the retirement benefit obligation is determined to reflect duration of the liabilities based on the annual yield at 31 December of the sterling 15+ year AA Corporate Bond iBoxx Index, representing the market yield of high quality corporate bonds on that date, adjusted to match the terms of the scheme liabilities. The inflation assumption is set based on the Bank of England projected inflation rates over the duration of scheme liabilities weighted by projected scheme cash flows.
264 Santander UK plc
As part of the Allowance was then made for expected future improvements to life expectancy based on the Continuous Mortality Investigation Table
Actuarial assumption sensitivities The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all assumptions constant.
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above sensitivity analyses, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the balance sheet. There was no change in the methods and assumptions used in preparing the sensitivity analyses from prior years. The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are:
The average duration of the defined benefit obligation at 31 December
Annual Report 2015 Financial statements
Where the items set out below can be reliably estimated, they are disclosed in the table above. Guarantees given by Santander UK plc to its subsidiaries Santander UK plc has fully and unconditionally guaranteed the obligations of each of Abbey National Treasury Services plc Capital Support Deed
Santander UK plc, Abbey National Treasury Services plc, and Cater Allen Limited Guarantees given to third parties Guarantees given to third parties consist primarily of letters of credit, bonds and guarantees granted as part of normal product facilities which are offered to customers. Formal standby facilities, credit lines and other commitments Standby facilities, credit lines and other commitments are also granted as part of normal product facilities which are offered to customers. Retail facilities comprise undrawn facilities granted on flexible mortgages, bank overdrafts and credit cards. On flexible mortgages, the credit limit is set at the point of granting the loan through property value and affordability assessments. Subsequent assessments are made to ensure that the limit remains appropriate considering any change in the security value or the customer’s financial circumstances. On bank accounts and credit cards, the facilities are granted based on new business risk assessment and are reviewed more frequently based on internal, as well as, external data. The delinquency status of the account would result in the withdrawal of the facility. Corporate facilities comprise standby facilities which are subject to ongoing compliance with covenants and the provision of agreed security. Failure to comply with these terms can result in the withdrawal of the unutilised facility headroom. FSCS As described in Note
In connection with the
things, the ownership of the loan by the relevant Santander UK group entity, absence of a material breach or default by the relevant borrower under the loan, the loan’s compliance with applicable laws and absence of material disputes with respect to the relevant borrower, asset and loan. The specific representations and warranties 266 Santander UK plc
In the event that there is a material breach of the representations and warranties given by Santander UK plc as seller of loans under the residential mortgage-backed securitisations or the covered bond transaction included in Note 17, or if such representations and warranties prove to be materially untrue as at the date when they were given (being the sale date of the relevant mortgage loans), Santander UK plc may be required to repurchase the affected mortgage loans (generally at their outstanding principal balance plus accrued interest). These securitisation and covered bond transactions are collateralised by prime residential mortgage loans. Santander UK plc is principally a retail prime lender and has no appetite or product offering for any type of sub-prime business.
In the case of a repurchase of a loan from the relevant securitisation or covered bond portfolio, the Santander UK group may bear any subsequent credit loss on Details of the outstanding balances under the securitisation and covered bond transactions originated by Santander UK group Regulatory The Santander UK group engages in discussion, and co-operates, with the FCA and other bodies in their supervision of the Santander UK group, including reviews exercised under statutory powers, regarding its interaction with past and present customers and policyholders, both as part of Consumer credit Santander UK group’s unsecured lending and other consumer credit business is governed by consumer credit law and related regulations. Claims brought by customers in relation to potential breaches of these requirements could result in costs to the Santander UK group where such potential breaches are not found to be de minimis. It is not possible to provide any meaningful estimate or range of the possible cost. Taxation The Santander UK group engages in discussion, and co-operates, with HM Revenue & Customs in their oversight of the Santander UK group’s tax matters. The Santander UK group adopted the UK’s Code of Practice on Taxation for Banks in 2010 and during 2013 re-confirmed its unconditional adoption of this code. Other As part of the sale of subsidiaries, and as is normal in such circumstances, the Santander UK group has given warranties and indemnities to the purchasers. Obligations under stock borrowing and lending agreements Obligations under stock borrowing and lending agreements represent contractual commitments to return stock borrowed. These obligations are offset by a contractual right to receive stock under other contractual agreements. See Note Other off-balance sheet commitments The Santander UK group has commitments to lend at fixed interest rates which expose it to interest rate risk. For further information, see the Risk Operating lease commitments
Under the terms of these leases, the Santander UK group has the opportunity to extend its occupation of properties by a minimum of three years subject to 12 months’ notice and lease renewal being available from external landlords during the term of the lease. At expiry, the Santander UK group has the option to reacquire the freehold of certain properties. Santander UK group rental expense comprises:
Annual Report 2015 Financial statements
a) Share capital
The Company has one class of ordinary shares which carries no right to fixed income. The Company’s £325m sterling preference shares are classified as Subordinated Liabilities as described in Note £300m Fixed/Floating Rate Non-Cumulative Callable Preference Shares The preference shares entitle the holders to a fixed non-cumulative dividend, at the discretion of Santander UK plc, of 6.22% per annum payable annually from 24 May 2010 until 24 May 2019 and quarterly thereafter at a rate of 1.13% per annum above three month sterling LIBOR. The preference shares are redeemable only at the option of Santander UK plc on 24 May 2019 or on each quarterly dividend payment date thereafter. No such redemption may be made without the consent of the PRA. As part of a capital management exercise, b) Other equity instruments £300m Step-up Callable Perpetual Reserve Capital Instruments The £300m Step-up Callable Perpetual Preferred Securities The £300m Step-up Callable Perpetual Preferred Securities are perpetual securities and pay a coupon on 22 March each year. At each payment date, Santander UK plc can decide whether to declare or defer the coupon indefinitely. If a coupon is deferred then Santander UK plc may not pay a dividend on any share until it next makes a coupon payment (including payment of any deferred coupons). Santander UK plc can be obliged to make payment in the event of winding up. The coupon is 5.827% per annum until 22 March 2016. Thereafter the coupon steps up to a rate, reset every five years, of 2.13% per annum above the gross redemption yield on a UK Government Treasury Security. The Perpetual Preferred securities are redeemable at the option of Santander UK plc on 22 March 2016 or on each payment date thereafter. No such redemption may be made without the consent of the PRA. Other equity instruments include AT1 securities issued by the Company in 2014 and 2015. The AT1 securities are perpetual securities with no fixed maturity and qualify as AT1 instruments under the CRD IV. The £500m and £300m Perpetual Capital Securities issued in 2014 and the £750m Perpetual Capital Securities issued in 2015 meet the CRD IV AT1 rules and are fully recognised as AT1 capital. 268 Santander UK plc
£750m Perpetual Capital Securities On 10 June 2015, the Company issued £750m Perpetual Capital Securities, of which 100% was subscribed by the Company’s immediate parent, Santander UK Group Holdings plc. The securities are perpetual and pay a distribution rate on 24 March, June, September and December, commencing from September 2015. At each distribution payment date, the Company can decide whether to pay the distribution rate, which is non-cumulative, in whole or in part. The distribution rate is 7.375% per annum until 24 June 2022; thereafter, the distribution rate resets every five years to a rate of 5.543% per annum above the then prevailing 5 year sterling mid swap rate. The Perpetual Capital Securities will be automatically written down should the Common Equity Tier 1 capital ratio of the Santander UK prudential consolidation group as defined in the PRA’s rules fall below 7%. The Perpetual Capital Securities are redeemable at the option of the Company on 24 June 2022 or on any reset date thereafter. No such redemption may be made without the consent of the PRA. £300m Perpetual Capital Securities On 2 December 2014, the Company issued £300m Perpetual Capital Securities to its immediate parent company, Santander UK Group Holdings plc. The securities are perpetual and pay a distribution rate on 24 March, June, September and December, commencing from March 2015. At each distribution payment date, the Company can decide whether to pay the distribution rate, which is non-cumulative, in whole or in part. The distribution rate is 7.60% per annum until 24 December 2019; thereafter, the distribution rate resets every five years to a rate 6.066% per annum above the then prevailing 5 year sterling mid swap rate. The Perpetual Capital Securities will be automatically written down and the investors will lose their entire investment in the securities should the Common Equity Tier 1 capital ratio of the Santander UK prudential consolidation group as defined in the PRA’s rules fall below 7%. The Perpetual Capital Securities are redeemable at the option of the Company on 24 December 2019 or on each distribution payment date thereafter. No such redemption may be made without the consent of the PRA. In turn, Santander UK Group Holdings plc issued a similar security. The issuance was 100% subscribed by Banco Santander SA. £500m Perpetual Capital Securities On 24 June 2014, the Company issued £500m Perpetual Capital Securities to its immediate parent company, Santander UK Group Holdings 37. NON-CONTROLLING INTERESTS
Non-controlling interests represent a 50% ordinary shareholding in PSA Finance UK Limited, see Note 46 for further information. Movements in non-controlling interests were as follows:
Annual Report 2015
38. CASH FLOW STATEMENT a) Reconciliation of profit after tax to net cash inflow/(outflow) from operating activities:
b) Analysis
c) Acquisition of subsidiaries Consideration paid in connection with the acquisition of PSA Finance UK Limited on 3 February 2015 that was satisfied by cash and cash equivalents is set out in Note 46. d) Sale of subsidiaries, associated undertakings and businesses, and discontinued operations In 2013, Santander UK plc sold its co-brand credit cards business for cash consideration of £660m. The net assets disposed of consisted of loans to customers of £670m. In
270 Santander UK plc
The following transactions are conducted under terms that are usual and customary to collateralised transactions, including, where relevant, standard securities lending and repurchase agreements. a) Assets charged as security for liabilities The financial assets below are analysed between those assets accounted for on balance sheet and off-balance sheet in accordance with IFRS.
The Santander UK group provides assets as collateral in the following areas of the business. Sale and repurchase agreements Subsidiaries of the Company enter into sale and repurchase agreements and similar transactions of equity and debt securities, which are accounted for as secured borrowings. Upon entering into such transactions, the subsidiaries provide collateral equal to 100%-131% of the borrowed amount. The carrying amount of assets that were so provided at 31 December Securitisations and covered bonds As described in Note A subsidiary of the Company has also established a covered bond programme, whereby securities are issued to investors and are secured by a pool of ring-fenced residential mortgages. At 31 December At 31 December Stock borrowing and lending agreements Asset balances under stock borrowing and lending agreements represent stock lent by the Santander UK group. These balances amounted to Derivatives business In addition to the arrangements described above, collateral is also provided in the normal course of derivative business to counterparties. At 31 December Annual Report 2015 Financial statements
b) Collateral accepted as security for assets The collateral held as security for assets below are analysed between those liabilities accounted for on the balance sheet and off-balance sheet in accordance with IFRS.
Purchase and resale agreements Subsidiaries of the Company also enter into purchase and resale agreements and similar transactions of equity and debt securities, which are accounted for as collateralised loans. Upon entering into such transactions, the subsidiaries receive collateral equal to 100%-105% of the loan amount. The level of collateral held is monitored daily and if required, further calls are made to ensure the market values of collateral remains at least equal to the loan balance. The subsidiaries are permitted to sell or repledge the collateral held in the absence of default. At 31 December Stock borrowing and lending agreements Obligations under stock borrowing and lending agreements represent contractual commitments to return stock borrowed. These obligations totalled Derivatives business In addition to the arrangements described above, collateral is also received from counterparties in the normal course of derivative business. At 31 December Lending activities In addition to the above collateral held as security for assets, the Santander UK group may obtain a charge over a customer’s property in connection with its lending activities. Details of these arrangements are set out in the ‘Credit
The Santander UK group operates share schemes and arrangements for eligible employees. The main current schemes are the Sharesave Schemes, the Long-Term Incentive Plan and the Deferred Shares Bonus Plan. The Santander UK group’s other current arrangement and scheme, respectively, are free shares awarded to eligible employees and partnership shares. All the share options and awards relate to shares in Banco Santander The amount charged to the income statement in respect of share-based payment transactions is set out in Note 6. The total carrying amount at the end of the year for liabilities arising from share-based payment transactions was The main schemes are: a) Sharesave Schemes The Santander UK group launched its
272 Santander UK plc
The fair value of each Sharesave option for 2015, 2014
With the exception of vesting conditions that include terms related to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating fair value. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of the employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the The following table summarises the movement in the number of share options during the year, together with the changes in weighted average exercise price over the same period.
The weighted average grant-date fair value of options granted under the The following table summarises the range of exercise prices and weighted average remaining contractual life of the options outstanding at 31 December
b) Long-Term Incentive Plan
The LTIP plans 2015 LTIP For the 2015 LTIP, the vested award will be deferred and payable in 2019 subject to Banco Santander SA’s continuing relative EPS performance to comparators, RoTE and other non-financial metrics such as Top 3 best bank to work for, Top 3 in customer satisfaction and loyal customers as well as continuing employment. The following table summarises the movement in the value of conditional awards in the 2015 LTIP during 2015:
Annual Report 2015 Financial statements In the case of 2015 LTIP, the Employees will be allocated an initial award determined in GBP in 2015. However, the actual level awarded will be calculated at the beginning of
Once the award has been made it will be
On a country level 100% vests if rated top 3 best banks to work for and top 3 in customer satisfaction. 100% vests if the target for loyal customers is met in December 2017 weighted equally between Retail and Corporate customers. For full vesting at the group level at least 6 of the 2014 LTIP For the 2014 LTIP, the vested award will be deferred and payable in equal tranches in 2016, 2017 and 2018 subject to Banco Santander
The following table summarises the movement in the value of conditional awards in the 2014 LTIP during 2015 and 2014:
In the case of 2014 LTIP, the TSR criterion will determine the percentage of shares to be delivered, based on the following scale and in accordance with Banco Santander Employees will be allocated an initial award determined in GBP in 2014. However, the actual level awarded will be calculated at the beginning of 2015 and
Once the award has been made it will be split into three equal amounts and deferred over three years. The amount that could vest each year will depend on
See Note
274 Santander UK plc
c) Deferred Shares Deferred incentive awards are designed to align employee performance with shareholder value and encourage increased retention of senior employees. During Code Staff are required to defer either 40% or 60% of any annual bonus (40% for d) Other arrangements and schemes
The Santander UK group also operates a Partnership Shares scheme for eligible employees under the Share Incentive Plan
a) Remuneration of Directors and Other Key Management Personnel The remuneration of the Directors and Other Key Management Personnel of the Santander UK group is set out in aggregate below.
In
UK and was paid a buy-out of £1,800,000 relating to a deferred performance related award in respect of his previous employment. b) Retirement benefits Defined benefit pension schemes are provided to certain employees. See Note Annual Report 2015 Financial statements c) Transactions with Directors, Other Key Management Personnel and each of their connected persons Directors, Other Key Management Personnel (Defined as the Board of the Company and the Executive Committee of Santander UK plc who served during the year) and their connected persons have undertaken the following transactions with the Santander UK group in the course of normal banking business.
During the year ended 31 December In Secured and unsecured loans are made to Directors, Other Key Management Personnel and their connected persons, in the ordinary course of business, with terms prevailing for comparable transactions and on the same terms and conditions as applicable to other employees within the Santander UK group. Such loans do not involve more than the normal risk of collectability or present any unfavourable features. Amounts deposited by Directors, Other Key Management Personnel and their connected persons earn interest at the same rates as those offered to the market or on the same terms and conditions applicable to other employees within the Santander UK group. Investments are entered into by Directors, Other Key Management Personnel and their connected persons on normal market terms and conditions, or on the same terms and conditions as applicable to other employees within the Santander UK group. In In d) Santander Long-Term Incentive Plan In In the case of the 2015 LTIP, employees were allocated an initial award determined in GBP in 2015 which was converted into shares in Banco Santander SA, in January 2016. The 2015 LTIP vested at 91.5% based on Banco Santander SA’s relative EPS and RoTE performance in 2015 versus a comparator group. The vested award will be deferred over three years and payable in 2019 subject to Banco Santander SA’s continuing relative performance to comparators of EPS, RoTE and other non-financial measures. In the case of the 2014 LTIP, employees were allocated an initial award determined in GBP in 2014 which was converted into shares in Banco Santander
276 Santander UK plc
a) Parent undertaking and controlling party
b) Transactions with related parties Transactions with related parties during the year and balances outstanding at the
In 2015, the Company issued £750m Perpetual Capital Securities, of which 100% was subscribed by the Company’s immediate parent, Santander UK Group Holdings plc. In 2014, the Company issued £800m Perpetual Capital Securities to its immediate parent company, Santander UK Group Holdings
Further information on balances due from/(to) other Banco Santander group companies is set out in the section ‘Balances with other Banco Santander group companies’ in the Risk
Annual Report 2015 Financial statements
a) Measurement basis of financial assets and liabilities Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following tables analyse financial instruments into those measured at fair value and those measured at amortised cost in the balance sheet:
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b) Valuation of financial instruments Financial instruments that are classified or designated at fair value through profit or loss, including those held for trading purposes, or available-for-sale, and all derivatives are stated at fair value. The fair value of such financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which Santander UK group has access at that date. The fair value of a liability reflects its non-performance risk. Changes in the valuation of such financial instruments, including derivatives, are included in the line item ‘Net trading and other income’ in the income statement or in ‘Other comprehensive income’ in the statement of comprehensive income as applicable. (i) Initial measurement The best evidence of the fair value of a financial instrument at initial recognition is the transaction price unless the valuation is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include significant data from observable markets. Any difference between the transaction price and the value based on a valuation technique where the inputs are not based on data from observable current markets is not recognised in profit or loss on initial recognition. Subsequent gains or losses are only recognised to the extent that they arise from a change in a factor that market participants would consider in setting a price. (ii) Subsequent measurement The Santander UK group applies the following fair value hierarchy that prioritises the inputs to valuation techniques used in measuring fair value. The hierarchy establishes three categories for valuing financial instruments, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three categories are: quoted prices in active markets (Level 1), internal models based on observable market data (Level 2) and internal models based on other than observable market data (Level 3). If the inputs used to measure an asset or a liability fall to different levels within the hierarchy, the classification of the entire asset or liability will be based on the lowest level input that is significant to the overall fair value measurement of the asset or liability. The Santander UK group categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as follows:
The Santander UK group assesses active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalisation for the instrument. The Santander UK group assesses active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity. The Santander UK group assesses active markets for exchange traded derivatives based on the average daily trading volume both in absolute terms and relative to the market capitalisation for the instrument. Market activity and liquidity is discussed in the relevant monthly Risk Forum as well as being part of the daily update given by each business at the start of the trading day. This information, together with the observation of active trading and the magnitude of the bid-offer spreads allow consideration of the liquidity of a financial instrument. Underlying assets and liabilities are reviewed to consider the appropriate adjustment to mark the mid-price reported in the trading systems to a fair value. This process takes into account the liquidity of the position in the size of the adjustment required. These liquidity adjustments are presented and discussed at the monthly Risk Forum.
The Santander UK group manages certain groups of financial assets and liabilities on the basis of its net exposure to either market risks or credit risk. As a result it has elected to use the exception under IFRS 13 which permits the fair value measurement of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position for a particular risk exposure or paid to transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. Financial instruments valued using observable market prices If a quoted market price in an active market is available for an instrument, the fair value is calculated as the current bid price multiplied by the number of units of the instrument held.
Annual Report 2015 Financial statements
Financial instruments valued using a valuation technique In the absence of a quoted market price in an active market, management uses internal models to make its best estimate of the price that the market would set for that financial instrument. In order to make these estimations, various techniques are employed, including extrapolation from observable market data and observation of similar financial instruments with similar characteristics. Wherever possible, valuation parameters for each product are based on prices directly observable in active markets or that can be derived from directly observable market prices. Chosen valuation techniques incorporate all the factors that market participants would take into account in pricing transactions. Unrecognised gains as a result of the use of valuation models using unobservable inputs The timing of recognition of deferred day one profit and loss is determined individually. It is deferred until either the instrument’s fair value can be determined using market observable inputs or is realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit and loss. Subsequent changes in fair value are recognised immediately in the c) Fair values of financial instruments carried at amortised cost The following tables analyse the fair value of the financial instruments carried at amortised cost at 31 December
The fair values and carrying values of loans and advances to customers may be further analysed, between those that are impaired and those that are not impaired, as follows:
There are no loans and advances to banks that are impaired, and there are no significant balances of loans and receivable securities that are impaired.
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The carrying value above of any financial assets and liabilities that are designated as hedged items in a portfolio (or macro) fair value hedge relationship excludes gains and losses attributable to the hedged risk, as this is presented as a single separate line item on the balance sheet.
Valuation methodology The fair value of financial instruments is the estimated price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. If a quoted market price is available for an instrument, the fair value is calculated based on the market price. Where quoted market prices are not available, fair value is determined using pricing models which use a mathematical methodology based on accepted financial theories, depending on the product type and its components. Further information on fair value measurement can be found in Note 1 and the valuation techniques Fair value management The fair value exposures set out in the tables above are managed by using a combination of hedging derivatives and offsetting on balance sheet positions. The approach to specific categories of financial instruments is described below. Assets: Cash and balances at central banks This consists of demand deposits with the Bank of England and the US Federal Reserve, together with cash in tills and ATMs. The carrying amount of cash and balances at central banks is deemed an appropriate approximation of the fair value. These have therefore been excluded from the table above. Annual Report 2015 Financial statements Loans and advances to banks These comprise secured loans, short-term placements with banks including collateral and unsettled financial transactions. The secured loans have been valued on the basis of spreads on credit default swaps for the term of the loans using Loans and advances to customers The approach to estimating the fair value of the principal products and portfolios of loans and advances to customers has been set out below. This is an area of considerable estimation and uncertainty as there is no observable market and values are significantly affected by customer behaviour. i) Mortgages The mortgage portfolio has been stratified into tranches by LTV; LTV being a significant driver of market pricing. The fair values have been estimated by comparing existing contractual interest rates over the weighted average lives with an estimation of new business interest rates based on competitor market information. Adjustments have also been made to:
ii) Other loans This consists of unsecured personal loans, credit cards, overdrafts and consumer credit (car loans). The weighted average lives of these portfolios are short, and the business was written relatively recently. As a result, contractual interest rates approximate new business interest rates, and therefore no mark-to-market surplus or deficit has been recorded with respect to the performing book with the exception of unsecured personal loans where a small surplus has been recognised based on a comparison of existing contractual interest rates over the weighted average lives with an estimation of new business interest rates. A discount of 30% has been applied to the impaired part of the book. iii) Corporate lending The corporate loan portfolio has been stratified by product. For the performing book, the fair values have been estimated by comparing existing margins with an estimation of new business rates for similar loans in terms of segment, maturity and structure. Provisions are considered appropriate for the book that is not impaired. A discount has been applied to impaired loans. Although exits have generally been achieved at carrying value, this does not reflect the discount a purchaser would require. A discount has therefore been applied based on the target return of 10-12% sought by distressed bond funds, who are the typical purchaser of the assets. With respect to the non-core corporate and legacy portfolios, including commercial mortgages, but except for social housing which is set out below, an exercise has been undertaken to estimate their market value, based on an orderly disposal process over a period of three years. This portfolio is well provided for, and this is reflected in a relatively small mark-to-market deficit. This is evidenced by disposals With respect to Social Housing, part of this portfolio is held for historic reasons at fair value. The same methodology has been applied to calculate the fair value of loans held at amortised cost. The fair value of this portion of the portfolio has been determined using e). Loans and receivables securities These debt securities consist Liabilities: Deposits by banks The fair value of deposits by banks, including repos, has been estimated using Deposits by customers The majority of deposit liabilities are payable on demand and therefore can be deemed short-term in nature with the fair value equal to the carrying value. However, given the long-term and continuing nature of the relationships with the Santander UK group’s customers, the Directors believe there is significant value to the Santander UK group in this source of funds. Certain of the deposit liabilities are at a fixed rate until maturity. The deficit/surplus of fair value over carrying value of these liabilities has been estimated by reference to the market rates available at the balance sheet date for similar deposit liabilities of similar maturities. The fair value of such deposits liabilities has been estimated using Debt securities in issue and subordinated liabilities Where reliable prices are available, the fair value of debt securities in issue and subordinated liabilities has been calculated using quoted market prices. Other market values have been determined using 282 Santander UK plc
d) Fair values of financial instruments measured at fair value on a recurring basis The following tables summarise the fair values of the financial
Annual Report 2015 Financial statements Transfers between levels of the fair value hierarchy Transfers between levels of the fair value hierarchy are reported at the beginning of the During 3:
During 2014, the following financial instruments were transferred between Level 2 and Level 3:
During
2. e) Valuation techniques The main valuation techniques employed in
The fair values of the financial instruments arising from the Santander UK group’s internal models take into account, among other things, contract terms and observable market data, which include such factors as bid-offer spread, interest rates, credit risk, exchange rates, the quoted market price of raw materials and equity securities, volatility and prepayments. In all cases, when it is not possible to derive a valuation for a particular feature of an instrument, management uses judgement to determine the fair value of the particular feature. In exercising this judgement, a variety of tools are used including proxy observable data, historical data and extrapolation techniques. Extrapolation techniques take into account behavioural characteristics of equity markets that have been observed over time, and for which there is a strong case to support an expectation of a continuing trend in the future. Estimates are calibrated to observable market prices when they become available. The
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f) Fair value adjustments The internal models incorporate assumptions that the Santander UK group believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when the Santander UK group considers that there are additional factors that would be considered by a market participant The Santander UK group classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The majority of these adjustments relate to Global Corporate
Risk-related adjustments Risk-related adjustments are driven, in part, by the magnitude of the Santander UK group’s market or credit risk exposure, and by external market factors, such as the size of market spreads. (i) Bid-offer and trade specific adjustments
The majority of the bid-offer adjustment relates to OTC derivative portfolios. For each portfolio, the major risk types are identified. The grouping of risk categories is dependent on the sensitivity factors of the trading portfolio. For example, interest rate risk will be by tenor and options will be by strikes. The granularity of the risk bucketing is principally determined by reference to
(ii) Uncertainty Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more
(iii) Credit risk adjustment Credit risk adjustments comprise credit
The Santander UK group calculates a separate
For most products the
For certain types of exotic derivatives where the products are not currently supported by the standard methodology, the Santander UK group adopts The methodologies do not, in general, account for
valuation. Exposure to
Annual Report 2015 Financial statements
Model-related adjustments
Models used for portfolio valuation purposes Day One profits adjustments Day One profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant unobservable g) Control framework Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk-taker. To this end, ultimate responsibility for the determination of fair values lies jointly with the Risk Department and the Finance Department. For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets, direct observation of a traded price may not be possible. In these circumstances, the Santander UK group will source alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable. The factors that are considered in this regard include:
The source of pricing data is considered as part of the process that determines the classification of the level of a financial instrument. Consideration is given to the quality of the information available that provides the current mark-to-model valuation and estimates of how different these valuations could be on an actual trade, taking into consideration how active the market is. For spot assets that cannot be sold due to illiquidity, forward estimates are discounted to provide an estimate of a realisable value over time. All adjustments for illiquid positions are regularly reviewed to reflect changing market conditions. Internal valuation model review
All internal valuation models are validated independently by QRG. A validation report is produced for each model-derived valuation that assesses the mathematical assumptions behind the model and the implementation of the model and its integration within the trading system. Where there is observable market data, the models calibrate to market. Where pricing data is unobservable then the input parameters are regularly reviewed by QRG. The results of the independent valuation process are presented to the Models Committee UK for formal approval. h) Internal models based on observable market data (Level 2) 1. Trading assets and liabilities Loans and advances to banks and loans and advances to customers - securities purchased under resale agreements These Loans and advances to banks and loans and advances to customers - other These 286 Santander UK plc
Deposits by banks and deposits by customers - securities sold under repurchase agreements These consist of repos with both professional non-bank customers and bank counterparties as part of trading activities. The fair value of repos is estimated using the same technique as those reverse repos in trading assets discussed above. Under these agreements, the Santander UK group is required to provide and maintain collateral with a market value equal to, or in excess of, the Deposits by banks and deposits by customers - other These consist of certain term and time deposits which tend to be short-term in nature and are both utilised and managed as part of the funding requirements of the trading book. These instruments are valued using the same techniques as those instruments in trading assets - loans and advances to banks and loans and advances to customers discussed above. As the inputs are based on observable market data, these deposits are classified as level 2. 2. Derivative assets and liabilities These Certain 3. Financial assets and liabilities at fair value through profit or loss Loans and advances to customers These Certain loans and advances to customers which represent a portfolio of roll-up mortgages contain significant unobservable inputs and so are classified Debt securities These Certain debt securities which represent reversionary property securities and securities issued by Banco Santander entities contain significant unobservable inputs, and so are classified Debt securities in issue These include commercial paper, medium term notes and other bonds and are valued using the Certain debt securities in issue which represent the more exotic senior debt issuances, consisting of power reverse dual currency (PRDC) notes contain significant unobservable inputs and so are classified as level 3. The valuation of such instruments is further discussed below. 4. Available-for-sale financial assets Equity securities These Observable market inputs used in these models include the bid-offer spread, foreign currency exchange rates, volatility and correlation between indices. As the inputs Debt securities These consist of
Annual Report 2015 Financial statements
i) Internal models based on information other than market data (Level 3) The table below provides an analysis of financial instruments valued using internal models based on information other than market data together with the subsequent valuation technique used for each type of instrument. Each instrument is initially valued at transaction price:
Valuation techniques 1. Derivative assets - Exchange rate contracts These Cross currency spreads may be market observable or unobservable depending on the liquidity of the cross currency pair. As the Japanese Yen-US dollar cross currency pair related to the PRDC notes is liquid, the cross currency spreads (including long-dated cross currency spread) for these swaps are market observable. The significant unobservable inputs The correlation between the underlying assets is assumed to be zero, as there are no actively traded options from which correlations between the underlying assets could be implied. Furthermore, the zero correlation assumption implies that the sources of the long-dated FX volatility are independent. Long-dated FX volatility - Long-dated FX volatility is extrapolated from shorter-dated FX volatilities which are FX volatility is modelled as the composition of the domestic interest rate, foreign interest rates and FX spot volatilities using standard Hull-White formulae. The Hull-White approach is used for estimating the future distribution of domestic and foreign zero-coupon rates, constructed from the relevant yield curves. Using short-dated FX options, the FX spot volatility is calculated which is then extrapolated to derive the long-dated FX volatility. 2. Derivative assets - Exchange rate contracts These are securitisation based swaps for which the notional amount is adjusted to match the changes in the outstanding reference mortgage portfolio with time. These swap are valued using a standard valuation model for which the main inputs used are market observable information in the vanilla swap market and a prepayment parameter. The significant unobservable input for the valuation of these financial instruments is prepayment. Prepayment- This captures the prepayment, default and arrears of the reference portfolio and is modelled using an analysis of the underlying portfolio plus observed historical market data. 3. Derivative assets - Interest rate contracts These In Mean reversion - The
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4. Derivative assets - Interest rate contracts These derivatives are the same as Instrument 2 5. Derivative assets - Equity and credit contracts These The inputs used to determine the value of the reversionary property derivatives are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward growth. HPI Spot Rate - The HPI spot rate used An adjustment is also made to reflect the specific property risk i.e. possible deviation between the actual growth in the house prices underlying the HPI Forward Growth Rate - Long-dated HPI forward growth rate is not directly observable in the market but is estimated from broker quotes and traded forward contracts. A specific spread is applied to the long-dated forward growth rate to reflect the uncertainty surrounding long-dated data. This spread is calculated by analysing the historical volatility of the HPI, whilst incorporating mean reversion. An adjustment is made to reflect the specific property risk as for the HPI spot rate above. Mortality Rate - Mortality rates are obtained from tables published by the UK Institute and Faculty of Actuaries. These mortality rates are adjusted by acceleration rates to reflect the mortality profile of the holders of Santander UK group’s reversionary property products underlying the derivatives. Mortality rates do not have a significant effect on the value of the instruments.
These In valuing the credit default swaps, the main inputs used to determine the underlying cost of credit are quoted risk premiums and the correlation between the quoted credit derivatives of various issuers. The assumptions relating to the correlation between the values of quoted and unquoted assets are based on historical correlations between the impact of adverse changes in market variables and the corresponding valuation of the associated unquoted assets. The measurement of the assets will vary depending on whether a more or less conservative scenario is selected. The other main input is the probability of default of the referenced bonds. The significant unobservable input for the valuation of these financial instruments is the probability of default. Probability of default - The probability of default is assessed by considering the credit quality of the underlying referenced bonds. However, as no deep and liquid market exists for these assets the assessment of the probability of default is not directly observable and instead an estimate is calculated using the Standard Gaussian Copula model.
There are three types of derivatives within this category: European options – These Asian options – Asian (or average value) options are valued using a modified Black-Scholes model, with an amended strike price and volatility assumption to account for the average exercise period, through a closed form adjustment that reflects the strike price relative to the distribution of stock prices at each relevant date. This is also known as the Curran model. Forward contracts – Forward contracts are valued using a standard forward pricing model. The inputs used to determine the value of the above instruments are HPI spot rate, HPI forward growth rate and HPI volatility. The principal pricing parameter is HPI forward growth rate. HPI Spot Rate - The HPI spot rate used is the NSA national HPI spot rate which is published monthly and directly observable in the market. This HPI rate used is different from the weighted average regional HPI spot rate used in the valuation of Instrument HPI Forward Growth Rate - The HPI forward growth rate used is unobservable and is the same as used in the valuation of Instrument HPI Volatility - Long-dated HPI volatility is not directly observable in the market but is estimated from the most recent traded values. An adjustment is applied to the long-dated HPI volatility rate to reflect the uncertainty surrounding long-dated data. This adjustment is based on the empirical standard deviation of historical volatility over a range of time horizons. HPI volatility rates do not have a significant effect on the value of the instruments.
Annual Report 2015 Financial statements 8. FVTPL – Loans and advances to customers These The value of the mortgage ‘rolls up’ or accretes until the owner vacates the property. In order to value the roll-up mortgages, the Santander UK group uses a probability-weighted set of European option prices (puts) determined using the Black-Scholes model, in which the ‘no negative pledges’ are valued as short put options. The probability weighting applied is calculated from mortality rates and acceleration rates as a function of age and gender, taken from mortality tables. The inputs used to determine the value of these instruments are HPI spot, HPI forward growth, HPI volatility, mortality rates and repayment rates. The principal pricing parameter is HPI forward growth. The HPI forward growth rate used is unobservable and is the same as used in the valuation of Instrument
These debt securities The inputs used to determine the value of these instruments are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward growth. Discussion of the HPI spot rate, HPI forward growth rate and mortality rates for this financial instrument is the same as Instrument
These securities consist of asset-backed securities issued by Banco Santander group entities. Each instrument is valued with reference to the price from a consensus pricing service. This is then corroborated against the price from another consensus pricing service due to the lack of depth in the number of available market quotes. An average price is used where there is a more than insignificant difference between the two sources. The significant unobservable input is the adjustment to the credit spread embedded in the pricing consensus quotes.
These consist of unquoted equity investments in companies providing infrastructure services to the financial services industry. In the valuation of equity financial instruments requiring dynamic hedging, proprietary local volatility and stochastic volatility models are used. These types of models are widely accepted in the financial services industry. Observable market inputs used in these models include equity prices, bid-offer spread, foreign currency exchange rates. The significant unobservable input is contingent litigation costs and related expenses. Litigation costs and related expenses are estimated by reference to best estimates received from third party legal counsel. 12. Derivative liabilities - Exchange rate contracts These derivatives are the same as Instrument 2 with the exception that they have a negative fair value. 13. Derivative liabilities - Interest rate contracts These derivatives are the same as Instrument 3 with the exception that they have a negative fair value. 14. Derivative liabilities - Interest rate contracts These derivatives are the same as Instrument 2 with the exception that they have a negative fair value.
These derivatives are the same as Instrument
These These debt securities in issue are valued using a three-factor Gaussian Model. The three factors used in the valuation are domestic interest rates, foreign interest rates and foreign exchange rates. The correlations between the factors are assumed to be zero within the valuation. The Hull-White approach is used for estimating the future distribution of domestic and foreign zero-coupon rates, constructed from the relevant yield curves. A Geometric Brownian Motion model is used for estimating the future distribution of spot foreign exchange rates. The foreign exchange and interest rate volatilities are the most crucial pricing parameters; the model calibrates to the relevant swaption volatility surface. The significant unobservable inputs for the valuation of these financial instruments are the long dated FX volatility and the correlation between the underlying assets and are the same as Instrument 1. 290 Santander UK plc
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
Total gains or losses are included in ‘Net trading and other income’ (see Note 5). 2015 compared to 2014 Financial instrument assets valued using internal models based on information other than market data were 1.0% (2014: 0.8%) of total assets measured at fair value and 0.2% (2014: 0.2%) of total assets at 31 December 2015. Financial instrument liabilities valued using internal models based on information other than market data were 0.3% (2014: 0.2%) of total liabilities measured at fair value and 0.04% (2014: 0.02%) of total liabilities at 31 December 2015. Losses of £10m in respect of derivative assets principally reflected changes in credit spreads and the HPI Index, and yield curve movements. Gains of £19m in respect of assets designated at fair value through profit or loss principally reflected the mark-to-market volatility on the reversionary property securities arising from a continued low interest rate environment, changes in the HPI index and a maturing portfolio. Losses of £3m in respect of derivative liabilities principally reflected changes in credit spreads and the HPI Index. Losses of £4m in respect of liabilities designated at fair value through profit or loss principally reflected yield curve movements. They are fully matched with derivatives. 2014 compared to 2013 Financial instrument assets valued using internal models based on information other than market data were 0.8% (2013: 0.9%) of total assets measured at fair value and
Financial instrument liabilities valued using internal models based on information other than market data were 0.2% (2013: 0.2%) of total liabilities measured at fair value and 0.02% (2013: 0.03%) of total liabilities at 31 December 2014.
Losses of £13m in respect of derivative assets principally reflected changes in credit spreads and the HPI Index, and unfavourable movements in foreign exchange rates. Gains of £50m in respect of assets designated at fair value through profit or loss principally reflected the mark-to-market volatility on the reversionary property securities arising from a continued low interest rate environment, changes in the HPI index and a maturing portfolio. Losses of £7m in respect of derivative liabilities principally reflected changes in credit spreads and the HPI Index. Gains of £3m in respect of liabilities designated at fair value through profit or loss principally reflected changes in foreign exchange. They are fully matched with derivatives.
Annual Report 2015 Financial statements Effect of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3) As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data and, as such require the application of a degree of judgement. Changing one or more of the inputs to the valuation models to reasonably possible alternative assumptions would change the fair values significantly. The following table shows the sensitivity of these fair values to reasonably possible alternative assumptions. Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable input as described in the table below. The potential effects do not take into effect any hedged positions.
No sensitivities are presented for Derivative assets – securitisation cross currency swaps (Instrument 2), Derivative assets –securitisation swaps (Instrument 4) and the FVTPL - debt securities in issue
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j) Maturities of financial assets, liabilities and off-balance sheet commitments The There are no significant financial liabilities related to financial guarantee contracts.
Annual Report 2015 Financial statements
As the above
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The For derivative contracts, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements, such as the ISDA Master Agreement or derivative exchange or clearing counterparty agreements, whereby all outstanding transactions with the same counterparty can be offset and close-out netting applied across all outstanding transaction covered by the agreements if an event of default or other predetermined events occur. Financial collateral refers to cash and non-cash collateral obtained, typically daily or weekly, to cover the net exposure between counterparties by enabling the collateral to be realised in an event of default or if other predetermined events occur. For repurchase and reverse repurchase agreements and other similar secured lending and borrowing, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements, such as global master repurchase agreements and global master securities lending agreements, whereby all outstanding transactions with the same counterparty can be offset and close-out netting applied across all outstanding transaction covered by the agreements if an event of default or other predetermined events occur. Financial collateral typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default. The Santander UK group engages in a variety of counterparty credit mitigation strategies in addition to netting and collateral arrangements. Therefore, the net amounts presented in the tables below do not purport to represent the Santander UK group’s actual credit exposure.
Annual Report 2015 Financial statements
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This note reflects the transactions and amounts reported on a basis consistent with the Santander UK group’s regulatory filings at 31 December Capital management and capital allocation Santander UK plc and its subsidiaries are a UK banking group effectively subject to two tiers of supervision. Santander UK is subject to prudential supervision by both the PRA (as a UK authorised The Board is responsible for capital management strategy and policy and ensuring that capital resources are appropriately monitored and controlled within regulatory and internal limits. Authority for capital management flows to the CEO and from him to specific individuals who are members of the Santander UK Capital Committee. The Capital Committee adopts a centralised capital management approach that is driven by the Santander UK group’s corporate purpose and strategy. This approach takes into account the regulatory and commercial environment in which the Santander UK group operates, the Santander UK group’s The Santander UK group manages its capital requirements, debt funding and liquidity on the basis of policies and plans reviewed regularly by the Capital Committee. Capital requirements are also reviewed as part of the ICAAP while debt funding and liquidity are also reviewed as part of the On an ongoing basis, and in accordance with the latest ICAAP review, the Santander UK group forecasts its regulatory and internal capital requirements based on the approved capital volumes allocated to business units as part of the corporate planning process which generates the Santander UK group’s strategic 3-Year Plan. Alongside this plan, the Santander UK group develops a series of Decisions on the allocation of capital resources are conducted as part of the Santander UK group’s strategic three year planning process based on the relative returns on capital using both economic and regulatory capital measures. Capital allocations are reviewed in response to changes in This combination of regulatory and economic capital ratios and limits, internal buffers and restrictions, together with the relevant costs of differing capital instruments and a consideration of the various other capital management techniques are used to shape the most cost-effective structure to fulfil the Santander UK group’s capital needs. Capital adequacy The Santander UK group manages its capital on a
Santander UK plc, Abbey National Treasury Services plc, and Cater Allen Limited, which are the three PRA-regulated entities within the Santander UK group, are party to a capital support deed dated 23 December 2015 (the Capital Support Deed) with certain other non-regulated subsidiaries of Santander UK plc and Santander UK Group Holdings plc. The parties to the Capital Support Deed constitute a core UK group as defined in the PRA Rulebook. Exposures of each of the three regulated entities to other members of the core UK group are exempt from large exposure limits that would otherwise apply. The purpose of the Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated parties to any of the regulated parties in the event that one of the regulated parties has breached or is at risk of breaching its capital resources requirements or risk concentrations requirements. The core UK group permission expires on 31 December 2018. Group capital
Tier 1 includes audited profits for the years ended 31 December Annual Report 2015 Financial statements During
On 3 February 2015, the Santander UK group through Santander Consumer (UK) plc The aggregate net consideration paid by SCUK for the shares was £109m. The following table shows the amounts recognised at the acquisition date for the net assets acquired:
The acquisition of PSA strengthened Santander UK’s market position. No intangible assets in respect of brands and customer database, key employees, patents or intellectual property rights were identified. The fair value of the non-controlling interest in PSA was estimated by using the purchase price paid for the acquisition of 50% of the shares of PSA by SCUK. The initial allocation of ‘Other assets’ acquired was revised from £60m to £56m as part of the final allocation of the fair value of the net assets acquired. In accordance with the sale and purchase agreement, the difference was settled between SCUK and BPF reducing the amount paid by SCUK as shown above. Financial effect of the acquisition The total operating income and profit before tax included in the Consolidated Income Statement for the year ended 31 December 2015 contributed by the PSA business since the acquisition (before deducting non-controlling interests) were £67,754m and £62,212m, respectively. Had PSA been consolidated from 1 January 2015, Santander UK would have included total operating income of £73,096m and profit before tax of £65,658m (before deducting non-controlling interests) for the year. Analysis of loans and advances acquired:
47. EVENTS AFTER THE BALANCE SHEET DATE There have been no significant events between 31 December 2015 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements. 48. The
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Annual Report 2015 Shareholder information An investment in Santander UK plc (the We rely on recruiting, retaining and developing appropriate senior management and skilled personnel Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and in each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected. In addition, the financial services industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected. We are vulnerable to disruptions and volatility in the global financial markets Over the past In particular, we may face, among others, the following risks related to any future economic downturn:
Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and we If all or some of the foregoing risks were to materialise, this could have a material adverse effect on us. Our operating results, financial condition and prospects may be materially impacted by economic conditions in the UK Our business activities are concentrated in the UK and we offer a range of banking and financial products and services to UK retail and corporate customers. As a consequence, our operating results, financial condition and prospects are significantly affected by the general economic conditions in the UK. Our financial performance is intrinsically linked to the UK economy and the economic confidence of consumers and businesses. The sustainability of the UK economic recovery, along with its concomitant impacts on our profitability, Adverse changes in global growth may pose the risk of a further slowdown in the UK’s principal export markets which would have an adverse effect on the broader UK economy. 300 Santander UK plc
In addition, adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in UK or global economic conditions could reduce the recoverability and value of our assets and require an increase in our level of provisions for bad and doubtful debts. Likewise, a significant reduction in the demand for our products and services could negatively impact our business and financial condition. UK economic conditions and uncertainties may have an adverse effect on the quality of our loan portfolio and may result in a rise in delinquency and default rates. There can be no assurance that we will not have to increase our provisions for loan losses in the future as a result of increases in non-performing loans and/or for other reasons beyond our control. Material increases in our provisions for loan losses and write-offs/charge-offs could have an adverse effect on our operating results, financial condition and prospects.
The UK government has taken measures to address the rising and high level of national debt, including reducing its borrowing and public spending cuts. Credit quality could be adversely affected by a renewed increase in unemployment. Any related significant reduction in the demand for our products and services could have a material adverse effect on our operating results, financial condition and prospects. Exposure to UK political developments could have a material adverse effect on us Any significant changes in the UK We are subject to regulatory capital and leverage requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects We are subject to capital adequacy requirements applicable to banks and banking groups under directly applicable EU legislation and as adopted by the Prudential Regulation Authority
The Capital Requirements Directive IV Under the ‘Pillar 2’ framework, the PRA requires the capital resources of UK banks to be maintained at levels which exceed the base capital requirements prescribed by CRD IV and to cover relevant risks in their business. In addition, a series of capital buffers has been established under CRD IV and PRA rules to ensure a bank can withstand a period of stress. These buffers, which must be met by CET 1 capital, include the counter-cyclical capital buffer, sectoral capital requirements, a PRA buffer and the capital conservation buffer. The total size of the capital buffers will be informed by the results of the annual concurrent UK stress testing exercises undertaken by the PRA. The BoE’s approach to stress testing the UK banking system was outlined in October 2015. The BoE is aiming to develop an approach that is explicitly countercyclical, with the severity of the stress test and the associated regulatory capital buffers varying systematically with the state of the financial cycle. Furthermore, the framework is aiming to support a continued improvement in UK banks’ risk management and capital planning capabilities, and the BoE expects participating UK banks to demonstrate sustained improvements in their capabilities over time. The PRA can take action if a bank fails to meet the required capital ratio hurdle rates in the stress testing exercise, and the banks which fail to do so will be required to take action to strengthen their capital position over an appropriate timeframe. If a bank does not meet expectations in its risk management and capital planning capabilities in the stress testing exercise, this may inform the setting of its capital buffers. Though the results of the PRA’s 2015 stress test did not impact on The Financial Services Act 2012 empowers the Financial Policy Committee of the The Annual Report 2015 Shareholder information Regulators in the UK and worldwide have also proposed that additional In addition, since 31 December 2014, the PRA has had the power under the
Since 1 January 2014, we have also been subject to certain recovery and resolution planning requirements (popularly known as ‘living wills’) for banks and other financial institutions as set out in the PRA Rulebook. These requirements were updated in January 2015 to implement the recovery and resolution framework under the BRRD. The updated requirements impose more regular and detailed reporting obligations, including the requirement to submit recovery plans and resolution packs to the PRA and to keep them up to date. In addition to the above, regulators in the UK and worldwide have produced a range of proposals for future legislative and regulatory changes which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operating results, financial condition and prospects. These
The BCBS has also announced proposals to revise the advanced measurement approach for operational risk and finalise the calibration and design of the leverage ratio by the end of 2016. These measures could have a material adverse effect on our operating results, and consequently, on our business, financial condition and prospects. There is a risk that changes to the UK’s capital adequacy regime (including any increase to Our business could be affected if our capital is not managed effectively or if these measures limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms. Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. For We are subject to liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects
As from 1 April 2013, the PRA, an independent subsidiary of the
Under CRD IV, banks
In June 2015, the PRA issued its policy statement on the transfer of the liquidity regime to the CRD IV standard, confirming that the existing regime under BIPRU 12 would cease to apply with effect from 1 October 2015, although certain of the BIPRU requirements are reflected in the new regime. LCR The LCR is intended to ensure that a bank maintains an adequate level of unencumbered, high quality liquid assets which can be used to offset the net cash outflows the bank could encounter under a short-term significant liquidity stress scenario. The LCR 302 Santander UK plc
NSFR In October 2014, the Basel Committee published its final standard of the NSFR which will take effect on 1 January 2018. The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. Banks are expected to hold
There is a risk that implementing and maintaining existing and new liquidity requirements, such as through enhanced liquidity risk management systems, may incur significant costs, and more stringent requirements to hold liquid assets may materially affect our lending business as more funds may be required to acquire or maintain a liquidity buffer, thereby reducing future profitability. This could in turn adversely impact our operating results, financial condition and prospects. Exposure to UK Government debt could have a material adverse effect on us Like many other UK banks, we invest in debt securities of the UK Government largely for liquidity purposes. As of 31 December We may suffer adverse effects as a result of the economic and sovereign debt tensions in the eurozone
The European Central Bank The high cost of capital for some European governments impacted the wholesale markets in the UK, which resulted in an increase in the cost of retail funding and greater competition in the savings market. In the absence of a permanent resolution of the eurozone crisis, conditions could deteriorate. Although we conduct the majority of our business in the UK, we have direct and indirect exposure to financial and economic conditions throughout the eurozone We are exposed to risks faced by other financial institutions We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumours or questions about the solvency of certain financial institutions and the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. Liquidity and funding risks are inherent in our business and could have a material adverse effect on us Liquidity risk is the risk that we, although solvent, either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. Adverse constraints in the supply of liquidity, including inter-bank lending, which arose between 2009 and 2013, materially and adversely affected the cost of funding our business, and extreme liquidity constraints Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us. Annual Report 2015 Shareholder information Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding (whether directly or indirectly).
In October 2013, the The The availability of Each of the factors described above: the persistence or worsening of adverse market conditions, and the lack of availability, or withdrawal, of such central bank schemes or an increase in base interest rates, could have a material adverse effect on our liquidity and the cost of funding (whether directly or indirectly). We aim for a funding structure that is consistent with our assets, avoids excessive reliance on short term wholesale funding, attracts enduring commercial deposits and provides diversification in products and tenor. We therefore rely, and will continue to rely, on commercial deposits to fund a significant proportion of lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy, in general, and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition between banks for We anticipate that our customers will continue to make A sudden or unexpected shortage of funds in the banking system could lead to increased funding costs, a reduction in the term of funding instruments or require us to liquidate certain assets. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects. An adverse movement in our external credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations Credit ratings can in some instances affect the cost and other terms upon which we are able to obtain funding. Credit rating agencies regularly evaluate us, and their credit ratings of our institution and our debt in issue are based on a number of factors, including our financial strength and that of the UK economy and conditions affecting the financial services industry generally. Any downgrade in the external credit ratings assigned to us or any of our debt securities could have an adverse impact on us. In particular, such downgrade in our credit ratings could increase our borrowing costs and could require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a credit rating downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term transactions and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or otherwise our counterparties may be able to terminate such contracts. Any of these results of a credit rating downgrade could, in turn, reduce our liquidity and have an adverse effect on us, including our operating results, financial condition and prospects. For example, we estimate that as at 31 December 304 Santander UK plc
However, while certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviours of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending upon certain factors including any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from a loss of unsecured funding (such as from money market funds) or loss of secured funding capacity.
Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on us. In addition, if certain counterparties terminated derivative contracts with us and we were unable to replace such contracts, our market risk profile could be altered.
Likewise, a downgrade of the UK sovereign credit rating, or the perception that such a downgrade may occur, may have a material adverse effect on our operating results, financial condition, prospects and the marketability and trading value of our securities. This might also impact on our own credit rating, borrowing costs and our ability to secure funding. A UK sovereign credit rating downgrade or the perception that such a downgrade may occur could also have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and companies, further depressing economic activity, increasing unemployment and/or reducing asset prices.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices. Changes in interest rates would affect the following areas, among others, of our business:
Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans, reduce the value of our financial assets and reduce gains or require us to record losses on sales of our loans or securities.
We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities. Our capital is stated in We are also exposed to equity price risk in Continued volatility may affect the value of our investments in Annual Report 2015 Shareholder information
Market conditions have resulted in, and could continue to result in, material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects In the past In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgements and estimates in order to establish fair value. This is a challenging task as reliable assumptions are difficult to make and are inherently uncertain. Moreover, valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects. Failure to successfully implement and continue to improve our credit risk management systems could materially and adversely affect our business As a commercial In addition, we have refined our credit policies and guidelines to address potential risks associated with particular industries or types of customers, such as affiliated entities and group customers. However, we may not be able to detect We are subject to various risks associated with our derivative transactions that could have a material adverse effect on us We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to various risks associated with these transactions, including market risk, operational risk, basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or counterparty risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral). Market practices and documentation for derivative transactions in the UK may differ from those in other countries. In addition, the execution and performance of these transactions Operational risks, including risks relating to data and information collection, processing, storage and security are inherent in our business
Infrastructure and technology resilience We take protective measures and continuously monitor and develop our systems to safeguard our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorised access, misuse, computer viruses or other malicious An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm. Furthermore, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures. There can be no assurance that we will not suffer material losses from operational risks in the future, including those relating to any security breaches.
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Cyber security In particular, we have seen in recent years computer systems of companies and organisations being targeted, not only by cyber criminals, but also by activists and rogue states. Procedure and policy compliance We also manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorised disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects. Further, our We may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorised access and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us Our businesses and our ability to remain competitive depends to a significant extent upon the functionality of our information technology systems (including Partenon, the global banking information technology platform utilised by Santander UK and Banco Santander We may be exposed to unidentified or unanticipated risks despite our risk management policies, procedures and methods The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of risk reporting systems. For further description of our risk management policies see the Risk Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behaviour. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modelling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material, unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood. If existing or potential customers or counterparties believe our risk management is inadequate, they could take their business Competition with other financial institutions could adversely affect us We face substantial competition in all parts of our business, including in originating loans and in attracting Additionally, a large Annual Report 2015 Shareholder information We expect competition to intensify in response to consumer demand, technological changes, the potential impact of consolidation, regulatory actions and other factors.
We consider competition in our management actions as appropriate, such as pricing and product decisions. Increasing competition could
If financial markets remain unstable, financial institution consolidation may continue. Financial institution consolidation could also result from the UK Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our customers and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us The success of our operations and our profitability depends, in part, on the success of new products and services we offer our customers. However, we cannot guarantee that our new products and services, will be responsive to customer demands or successful once they are offered to our customers, or that they will be successful in the future. In addition, our customers’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our customers’ changing needs. If we cannot respond in a timely fashion to the changing needs of our customers, we may lose customers, which could in turn materially and adversely affect us. As we expand the range of our products and services, some of which may be at an early stage of development in the UK market, we will be exposed to new and potentially increasingly complex risks, including conduct risk and development expenses. Our employees and risk management systems, as well as our experience and that of our partners, may not be sufficient or adequate to enable us to properly handle or manage such risks. In addition, the cost of developing products that are not launched is likely to affect our operating results. Further, our customers may raise complaints and seek redress if they consider that they have suffered loss from our products and services; for example, as a result of any alleged Any or all of the above factors, individually or collectively, could have a material adverse effect on us. If Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past, and can continue to, negatively impact our operating results, financial condition and prospects. Our current loan loss reserves may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our loan loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realisable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis has demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we cannot If our assessment of and expectations concerning the above mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and small and medium enterprises, the volume increase in the credit card portfolio and the introduction of new products or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our loan loss reserves, which may adversely affect us. If we are unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on 308 Santander UK plc
Interest rates payable on a significant portion of our outstanding mortgage loan products fluctuate over time due to, among other factors, changes in the
Future increases in borrowers’ required monthly payments may result in higher delinquency rates and losses in the future. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. These events, alone or in combination, may contribute to higher delinquency rates and losses for us. Our loan portfolio is subject to risk of prepayment, which could have a material adverse effect on us Our loan portfolio is subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a The value of the collateral, including real estate, securing our loans may not be sufficient, and we may be unable to realise the full value of the collateral securing our loan portfolio The value of the collateral securing our loan portfolio may significantly fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the UK’s economy. Our residential mortgage loan portfolio is one of our principal assets, comprising
The value of the collateral securing our loan portfolio may also be adversely affected by force majeure events such as natural disasters like floods or landslides. Any force majeure event may cause widespread damage and could have an adverse impact on the economy of the affected region and may therefore impair the asset quality of our loan portfolio in that area. We may also not have sufficiently up-to-date information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our operating results, financial condition and prospects.
We allocate management and planning resources to develop strategic plans for organic
businesses when necessary. From time to time, we evaluate acquisition and partnership opportunities that we believe could offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and we may not be able to acquire promising targets or form partnerships on favourable terms, or at all. Furthermore, preparations for acquisitions that we do not complete can be disruptive. We base our assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to value, operations, profitability and other matters that may prove to be incorrect. Our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Such integration entails significant risks such as challenges in retaining the customers and employees of the acquired businesses, unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies
Any failure to manage growth effectively, including any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects. In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies. Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any or all of these factors, individually or collectively, could have a material adverse effect on us. Annual Report 2015 Shareholder information
Goodwill impairments may be required in relation to acquired businesses We have made business acquisitions in recent years and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written-down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, and more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not however affect our regulatory capital. Whilst no impairment of goodwill was recognised in We are subject to substantial regulation and governmental oversight which could adversely affect our business and operations Supervision and new regulation As a financial institution, we are subject to extensive financial services laws, regulations, administrative actions and policies in the UK, the During recent periods of market turmoil, there have been unprecedented levels of government and regulatory intervention and scrutiny, and changes to the regulations governing financial institutions and the conduct of business. In addition, in light of the financial crisis, regulatory and governmental authorities are considering, or may consider, further enhanced or new legal or regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. This intensive approach to supervision has been maintained by the PRA and the FCA (as successor regulatory authorities to the FSA). Recent proposals and measures taken by governmental, tax and regulatory authorities and further future changes in supervision and regulation, in particular in the UK, which are beyond our control, could materially affect our business, the value of assets and operations and result in significant increases in operational costs. Products and services offered by us could also be affected. Changes in UK legislation and regulation to address the stability of the financial sector may also affect our competitive position, particularly if such changes are implemented before international consensus is reached on key issues affecting the Banking Reform On 18 December 2013, the Financial Services (Banking Reform) Act (the Banking Reform Act) was enacted. The Banking Reform Act
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The Santander UK group is subject to the The restructuring of the Santander UK group’s business pursuant to the developing ring-fencing regime will take a substantial amount of time and cost to implement, the separation process and the structural changes which may be required could have a material adverse effect on
The project of achieving a European banking union was launched in the summer of 2012. Its main goal is to resume progress towards a European single market for financial services by restoring confidence in the European banking sector and ensuring the proper functioning of monetary policy in the eurozone. The European banking union is expected to be achieved through new harmonized banking rules (in a single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at a European level. Its two main pillars are the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The SSM (comprised of both the ECB and the national competent authorities) is expected to assist in making the banking sector more transparent, unified and safer. In accordance with Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the The SSM represents a significant change in the approach to bank supervision at a European and a global level. The SSM will result in the direct supervision of 123 eurozone financial institutions (as discussed above) and indirect supervision of around 3,500 financial institutions. The new supervisor will be one of the largest in the world in terms of assets under supervision. In the coming years, the SSM is expected to work to establish a new supervisory culture importing best practices from the 19 supervisory authorities that will be part of the SSM. Several steps have already been taken in this regard such as the recent publication of supervisory guidelines and the approval of the Regulation (EU) No 468/2014 of the ECB of 16 April 2014, establishing the framework for cooperation within the SSM between the ECB and national competent authorities and with national designated authorities (SSM Framework Regulation). In addition, this new body will represent an extra cost for the financial institutions that will fund it through payment of supervisory fees. Other EU Member States (such as the UK) are able to establish close co-operation with the ECB in which case the ECB could become responsible for the authorisation and supervision of credit institutions in such Member States. The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost for the tax-payers and the economy. Regulation (EU) No. 806/2014 of the European Parliament and the Council of the EU (the SRM Regulation), which was passed on 15 July 2014, and became effective from 1 January 2015, establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and Single Resolution Fund (SRF). Under an intergovernmental agreement (IGA) signed by 26 EU Member States on 21 May 2014, contributions by banks to the SRF raised at national level will be transferred to the SRF. The new Single Resolution Board (SRB), which is the central decision-making body of the SRM, started operating from 1 January 2015 and fully assumed its resolution powers on 1 January 2016. The SRB is responsible for managing the SRF and its mission is to ensure that credit institutions and other entities under its remit, which face serious difficulties, are resolved effectively with minimal costs to tax-payers and the real economy. A SRF is also in place, funded by contributions from European banks in accordance with the methodology approved by the By allowing for the consistent application of EU banking rules through the SSM and the SRM, the European banking union is expected to help resume momentum towards European economic and monetary union. In order to complete such union, a single deposit guarantee scheme is still needed which may require a change to the existing European treaties. This is the subject of continued negotiation by European leaders to ensure further progress is made in European fiscal, economic and political integration. Regulations adopted towards achieving a banking and/or fiscal union in the
results of operation. European On 29 January 2014, the Annual Report 2015 Shareholder information Other regulatory reforms adopted or proposed in the wake of the financial crisis On 16 August 2012, the EU regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories, referred to as the European Market Infrastructure Regulation (EMIR) (formally known as Regulation (EU) No 648/2012 of the European Parliament and the Council on Over-The-Counter Derivatives, Central Counterparties and Trade Repositories), entered into force. While a number of the compliance requirements introduced by EMIR already apply, the European Securities and Markets Authority is still in the process of finalising some of the implementing rules mandated by EMIR. EMIR introduced a number of requirements, including clearing obligations for certain classes of OTC derivatives and various reporting and disclosure obligations. Although the full impact of these changes is not yet foreseeable, the implementation of EMIR has already led and may yet lead to changes which may negatively impact our profit margins, require us to adjust our business practices or increase our costs (including compliance costs). The Markets in Financial Instruments legislation, which comprises the Directive 2014/65 of the European Parliament and of the Council, of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID) and the Regulation 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR), the substantive provisions of which will become applicable on 3 January 2017, introduces an obligation to trade certain classes of OTC derivative contracts on trading venues. We will also be impacted by the BCBS-IOSCO final minimum standards for margin requirements for non-centrally cleared derivatives, for which enabling legislation exists in the EU (EMIR), though the extent to which these requirements will impact on us depends on how they are implemented in each jurisdiction. US In the In October 2014, US regulators adopted a joint final rule requiring sponsors of asset-backed securitisation transactions, which would include Santander UK in relation to its residential mortgage-backed securities programmes, to retain Within the Dodd-Frank Act, the so-called Volcker Rule prohibits ‘banking entities’, including the Santander UK group, from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain exemptions, including exemptions permitting foreign banking entities to engage in trading and fund activities that take place solely outside of the Each of these aspects of the Dodd-Frank Act, as well as the changes in the US banking regulations, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the Dodd-Frank Act, including the Volcker Rule, pose to us is not yet known, however, such risks could be material and we could be materially and adversely affected by them. Competition In the UK and elsewhere, there is continuing political, competitive and regulatory scrutiny of the banking industry and, in particular, retail banking. Political involvement in the regulatory process, in the behaviour and governance of the UK banking sector and in the major financial institutions in which the UK Government has a direct financial interest is likely to continue. Under the Enterprise Regulatory Reform Act 2013 the Office of Fair Trading Following a market study and review, the CMA is currently undertaking a 312 Santander UK plc
The structure of the financial regulatory authorities in the UK and the UK regulatory framework that applies to us Under the Financial Services Act 2012, the UK Government introduced a range of structural reforms to UK financial regulatory bodies. As a result of those reforms, as of 1 April 2013, the Santander
Within the current regulatory framework the Santander UK group is subject to each regulator’s respective supervisory regimes and approaches, and any policy development, change or new regulation which may be brought in. In turn the UK regulatory framework is subject to amendment or change by the UK Government (as occurred following the 2010 The Financial Services Act 2012 also established the FPC within the Various reforms to the mortgage lending and personal loans market have been proposed which could require significant implementation costs or changes to our business strategy Mortgage
The final rules in relation to the FCA Mortgage Market Review
In March 2011, the Commission published a proposal for a directive on credit agreements relating to residential immovable property for consumers (the Consumer On 1 April 2014, consumer credit regulation (which includes regulation of new and existing second charge mortgages), was transferred from the OFT to the FCA in accordance with We are exposed to risk of loss from legal and regulatory proceedings We face various issues that may give rise to risk of loss from legal and regulatory proceedings. These issues, including inappropriately dealing with potential conflicts of interest, and legal and regulatory requirements, could result in claims against us or subject us to regulatory enforcement actions, fines and/or penalties. The current regulatory environment, with its increased supervisory focus and associated enforcement activity, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs. These include the risk that:
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We are from time to time subject to certain claims and party to certain legal proceedings in the normal course of our business, including in connection with our lending activities, relationships with our employees and other commercial or tax matters. These can be brought against us under UK regulatory processes or in the UK courts, or under regulatory processes in other jurisdictions, such as the The FCA carries out regular and frequent reviews of the conduct of business by financial institutions including banks. An adverse finding by a regulator could result in the need for extensive changes in systems and controls, business policies, and practices coupled with suspension of sales, withdrawal of services, customer redress, fines and reputational damage. Failure to manage these risks adequately could have a material adverse effect on our reputation, operating results, financial condition and prospects. Potential intervention by the FCA, the PRA or an overseas regulator may occur, particularly in response to customer complaints The PRA and the FCA now have a more outcome-focused regulatory approach than their predecessor the FSA. This involves more proactive enforcement and more punitive penalties for infringement. As a result, we and other PRA and/or FCA-authorised firms face increased supervisory intrusion and scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of their regulatory obligations are likely to face more stringent penalties. In particular, the FCA has The regulatory regime requires us to be in compliance across all aspects of our business, including the training, authorisation and supervision of personnel, systems, processes and documentation. If we fail to be compliant with relevant regulations, there is a risk of an adverse impact on our business from sanctions, fines or other action imposed by the regulatory authorities. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss as a result of the Under the Financial Services Act 2010, the FCA also has the power to In recent years there have been several industry-wide issues in which the FSA (now the FCA) has intervened directly. One such issue is the 314 Santander UK plc
Given the above, the ultimate financial impact on us of the claims arising from PPI complaints is still uncertain and will depend on a number of factors, including the All the above is similarly relevant to any future industry-wide Decisions taken by the FOS (or any overseas equivalent that has jurisdiction) could, if applied to a wider class or grouping of customers, have a material adverse effect on our operating results, financial condition and prospects.
The Financial Services and Markets Act 2000 (Designated Consumer Bodies) Order 2013 (the The Banking Act may adversely affect our business The Banking Act came into force on 21 February 2009. The special resolution regime set out in the Banking Act provides HM Treasury, the In addition, pursuant to If an instrument or order were made under the Banking Act in respect of the Company or another Santander UK group entity, such instrument or order (as the case may be) may, Further, amendments to the Insolvency Act 1986 and secondary legislation have introduced changes to the treatment and ranking of certain debts with the result that certain eligible deposits will rank in priority to the claims of ordinary (i.e. non-preferred) unsecured creditors in the event of an insolvency. This may negatively affect the ability of the Company or another Santander UK group entity to meet its obligations in respect of its unsecured creditors in an insolvency scenario. Bail-in and write down powers under the Banking Act and the BRRD may adversely affect our business and the value of securities we may issue The Banking Reform Act as of 31 December 2014 amended the Banking Act to introduce a UK ‘bail-in power’. On 6 May 2014, the The UK bail-in power is an additional power available to the UK resolution authorities under the special resolution regime provided for in the Banking Act to enable them to recapitalise a failed institution by allocating losses to such institution’s shareholders and unsecured creditors, subject to the rights of such shareholders and unsecured creditors to be compensated under a bail-in compensation order, which is based on the principle that such creditors should receive no less favourable treatment than they would have received had the bank entered into insolvency immediately before the coming into effect of the bail-in power. The bail-in power includes the power to cancel or write down (in whole or in part) certain liabilities or to modify the terms of certain contracts for the purposes of reducing or deferring the liabilities of a UK bank entity under resolution and the power to convert certain liabilities from one form to another. The conditions for use of the UK bail-in power are generally that (i) the regulator determines the relevant UK bank entity is failing or likely to fail; (ii) it is not reasonably likely that any other action can be taken to avoid such a UK Annual Report 2015 Shareholder information According to the Banking Act, as well as similar principles in the BRRD, the relevant UK resolution authority should have regard to the insolvency treatment principles when exercising the UK bail-in power. The insolvency treatment principles are that (i) the exercise of the UK bail-in power should be consistent with treating all liabilities of the bank in accordance with the priority that they would enjoy on a liquidation and (ii) any creditors who would have equal priority on a liquidation should bear losses on an equal footing with each other. HM Treasury may, by order, specify further matters or principles to which the relevant UK resolution authority must have regard when exercising the UK bail-in power. These principles may be specified in addition to, or instead of the insolvency treatment principles. If the relevant UK resolution authority departs from the insolvency treatment principles when exercising the UK bail-in power, it must report to the Chancellor of the Exchequer stating the reasons for its departure. The bail-in power under the Banking Act and the BRRD may potentially be exercised in respect of any unsecured debt securities issued by a financial institution under resolution or by a relevant member of
The BRRD also contains a mandatory write down power which requires Member States to grant powers to resolution authorities to recapitalise institutions and/or their EEA parent holding companies that are in severe financial difficulty or at the point of non-viability by permanently writing down Tier 1 In contrast to the creditor protections afforded in the event of the bail-in powers being exercised, holders of capital instruments will not be entitled to the ‘no creditor worse off’ protections under the Banking Act in the event that their capital instruments are written down or converted to equity under the mandatory write-down tool (unless the mandatory write-down tool were to be used alongside a bail-in). Furthermore, in circumstances where capital instruments are converted into equity securities by application of the mandatory write-down tool, those equity securities may be subjected to the bail-in powers in resolution, resulting in their cancellation, significant dilution or transfer away from the investors therein. In addition, the BRRD provides for resolution authorities to have the power to require institutions and groups to make structural changes to ensure legal and operational separation of ‘critical functions’ from other functions where necessary, or to require institutions to limit or cease existing or proposed activities in certain circumstances. As a result of changes to the PRA Rulebook made to implement the BRRD, the Company is now required to identify such ‘critical functions’ as part of its resolution and recovery planning. If used in respect of us, We are responsible for contributing to compensation schemes in the UK in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers In the UK, the Financial Services Compensation Scheme Following the default of a number of authorised financial services firms since 2008, the FSCS borrowed funds totalling approximately £18bn from HM Treasury to meet the compensation costs for customers of those firms. It is expected that the substantial majority of the principal will be repaid from funds the FSCS levies from asset sales, surplus cash flow or other recoveries in relation to assets of the firms that defaulted. However, the FSCS estimates that the assets of these failed institutions are insufficient, and, to the extent that there remains a shortfall, is recovering this shortfall by levying firms authorised by the PRA or the FCA in instalments. The first instalment was in scheme year 2013/14, and we made a first capital contribution in August 2013. The second instalment was in scheme year 2014/15, and we made a second capital contribution in August 2014. For the year ended 31 December The FSCS also has the power to impose ‘management expenses in respect of relevant schemes levy’ (MERS levy) in relation to its potential role as agent of other compensation schemes. The FSCS may impose a MERS levy on participant firms to meet expenses it incurs in its role as agent. In the event that the FSCS raises further funds from In addition, regulatory reform initiatives in the UK and internationally may result in further changes to the FSCS, which could result in additional costs and risks for us. For instance, in July 2013, the Council The final rules enable the FSCS levies are collected by the FCA as part of a single payment by firms covering the FCA, the PRA, the FOS and the FSCS fees. It is possible that future policy of the FSCS and future levies on the firms authorised by the FCA or PRA may differ from those at present and that this could lead to a period of some uncertainty for 316 Santander UK plc
We may fail to detect or prevent money laundering and other financial crime activities due to not correctly identifying our financial crime risks and failing to implement effective controls to mitigate those risks. This could expose us to heavy fines, additional regulatory scrutiny, increased liability and reputational We are obligated to comply with applicable anti-money laundering Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML sanctions, laws and regulations are increasingly complex and detailed and have become the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel.
We have developed policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and financial crime related activities. These require the implementation and embedding within the business of effective controls and monitoring, which
The reputational damage to our business and global brand would be severe if we were found to have breached AML or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers or our business from being used by criminals for illegal or improper purposes. Changes in taxes and other assessments may adversely affect us The tax and other assessment regimes to which our customers and we are subject are regularly reformed, or subject to proposed reforms. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which may be earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified and there can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing credit portfolio. The following paragraphs discuss Bank Levy HM Treasury introduced an annual UK bank levy (the Restriction of The Finance (No.2) Act implemented measures that have led to, Corporation Tax Surcharge With effect from 1 January 2016, the Finance (No. 2) Act implemented measures that led to banks (as defined in the Corporation Tax Act 2010, and including ANTS and the Company) being subject to a surcharge at a rate of Automatic Exchange of
Sections 1471 through 1474 of the US Internal Revenue Code of 1986 Final regulations implementing FATCA were Annual Report 2015 Shareholder information The Further, additional rules similar to FATCA have been implemented in other jurisdictions and the UK has entered into information sharing agreements based on FATCA with its Crown Dependencies and Overseas Territories. The Crown Dependency and Gibraltar agreements are reciprocal and will require UK Financial Institutions to identify customers who are tax residents of the Crown Dependencies and Gibraltar (and vice versa). The commencement date for these agreements was the same as for FATCA i.e., 1 July 2014. Similarly, the Organisation for Economic Co-operation and Development Unlike FATCA, CRS does not include a potential withholding element. Therefore our main risks are regulatory, reputational and commercial.
European Taxation As of 1 August 2012, pursuant to the French amending finance law for 2012, a financial transaction tax in France was introduced (the Similarly, on 24 December 2012, pursuant to paragraphs 491 to 500 of Article 1 of the Italian Law 288, a financial transaction tax in Italy was introduced (the On 14 February 2013, the Commission published a proposal (the
Changes in our pension liabilities and obligations could have a materially adverse effect on us We provide retirement benefits for many of our former and current employees in the UK through a number of defined benefit pension schemes established under trust. We are the principal employer under these schemes, but we have only limited control over the rate at which we pay into such schemes. Under the UK statutory funding requirements employers are usually required to contribute to the schemes at the rate they agree with the scheme trustees although, if they cannot agree, The Pensions Regulator has the power to issue a financial support direction to companies within a group in respect of the liability of employers participating in the UK defined benefit pension The Pensions Regulator can also issue contribution notices if it is of the opinion that an employer has taken actions, or failed to take actions, deliberately designed to avoid meeting its pension promises or which are materially detrimental to the scheme’s ability to meet its pension promises. A contribution notice can be moved to any company that is connected with or an associate of such employer in circumstances where the Regulator considers it reasonable to issue. The risk of a contribution notice being imposed may inhibit our freedom to restructure or to undertake certain corporate activities. 318 Santander UK plc
In a judgment handed down on 18 December 2013, the UK High Court has held that, where multiple group companies are potential targets for the Pensions Regulator’s power to issue contribution notices, the aggregate total of the contributions required by those notices Should the value of assets to liabilities in respect of the defined benefit schemes operated by us record a deficit, due to either a reduction in the value of the pension fund assets (depending on the performance of financial markets) and/or an increase in the pension fund liabilities due to changes in legislation, mortality assumptions, Our principal defined pension scheme is the Santander (UK) Group Pension Scheme and its corporate trustee is Santander (UK) Group Pension Scheme Trustee Limited (the
The ongoing changes in the UK supervision and regulatory regime and particularly the implementation of the ICB’s recommendations may require us to make changes to Damage to our reputation could cause harm to our business prospects Maintaining a positive reputation is critical to us attracting and maintaining customers, investors and employees and conducting business transactions with counterparties. Damage to our reputation, the reputation of the Santander UK group or Banco Santander Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis We could suffer significant reputational harm if we fail to Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial condition The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial condition, based upon materiality and significant judgements and estimates, include impairment of loans and advances, valuation of financial instruments, The valuation of financial instruments measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial condition could be materially misstated if the estimates and assumptions used prove to be inaccurate. If the judgement, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios. Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud Disclosure controls and procedures over financial reporting are designed to Annual Report 2015 Shareholder information There are, however, inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Consequently, our
Changes in accounting standards could impact reported earnings The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. We rely on third parties for important infrastructure support, products and services Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of them not providing us their services for any reason, or performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise conduct business. Replacing these third party vendors could also entail significant delays and expense. We engage in transactions with our subsidiaries or affiliates that others may not consider to be on an arm’s-length basis We and our subsidiaries and affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others. We rely upon certain outsourced services (including information technology support, maintenance and consultancy English law applicable to public companies and financial groups and institutions, as well as our articles of association, provide for several procedures designed to ensure that the transactions entered into, with or among our financial subsidiaries, do not deviate from prevailing market conditions for those types of transactions, including the requirement that our board of directors approve such transactions. We are likely to continue to engage in transactions with our subsidiaries or affiliates (including our controlling shareholder). Future conflicts of interests between us and any of our subsidiaries or affiliates, or among our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favour. Different disclosure and accounting principles between the UK and the There may be less publicly available information about us than is regularly published about companies in the Risks concerning enforcement of The Company is a public limited company registered in England and Wales.
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Designated agent The designated agent for service of process on Santander UK in the United States is Abbey National Treasury Services plc (Connecticut branch), 400 Atlantic Street, Stamford, CT 06901.
Other information Documents on display The Company is subject to the information requirements of the US Securities Exchange Act of 1934. In accordance with these requirements, the Company files its Annual Report and other related documents with the US Securities and Exchange Commission. These documents may be inspected by US investors at the US Securities and Exchange Commission’s public reference rooms, which are located at 100 F Street NE, Room 1580, Washington, DC 20549-0102. Information on the operation of the public reference rooms can be obtained by calling the US Securities and Exchange Commission on +1-202-551-8090 or by looking at the US Securities and Exchange Commission’s website at www.sec.gov. None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2015 (the Form 20-F), including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form 20-F. Legal proceedings
Material contracts
Abbey National Treasury Services plc, Santander UK plc, and Cater Allen Limited, which are the three PRA-regulated entities within the Santander UK group, are party to a capital support deed dated 23 December 2015 (the Capital Support Deed) with certain other non-regulated subsidiaries of Santander UK plc and Santander UK Group Holdings plc. The parties to the Capital Support Deed constitute a core UK group as defined in the PRA Rulebook. Exposures of each of the three regulated entities to other members of the core UK group are exempt from large exposure limits that would otherwise apply. The purpose of the Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated parties to any of the regulated parties in the event that one of the regulated parties has breached or is at risk of breaching its capital resources requirements or risk concentrations requirements. The core UK group permission expires on 31 December 2018. Audit fees See Note Profit on sale of subsidiaries No profits arose on sales of Significant acquisitions and disposals
Accounting developments under IFRS See Note 1 to the Consolidated Financial Statements.
Annual Report 2015 Shareholder information Subsidiaries, joint ventures and associates In accordance with Section 409 of the Companies Act 2006, a list of Santander UK plc’s subsidiaries, joint ventures and associates, the country of incorporation and the effective percentage of equity owned at 31 December 2015 is disclosed below. This section forms an integral part of the financial statements. Subsidiaries All subsidiaries are consolidated by the Santander UK group. Incorporated and registered in England and Wales:
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Incorporated and registered overseas:
Annual Report 2015 Shareholder information Other subsidiary undertakings The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the entities, however they are consolidated by the Santander UK group because the substance of the relationship indicates control, as described in Note 1 to the Consolidated Financial Statements.
Joint ventures
Overseas branches Santander UK plc has branches in the Isle of Man and Jersey. Abbey National Treasury Services plc also has a branch office in the United States of America and the Cayman Islands.
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Glossary of financial services industry terms
Annual Report 2015 Shareholder information
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Annual Report 2015 Shareholder information Santander UK plc (the
Words such as ‘believes’, ‘anticipates’, ‘expects’, ‘intends’, ‘aims’, ‘plans’, ‘targets’ and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on
Undue reliance should not be placed on forward-looking statements when making decisions with respect to any Santander UK group member and/or its securities. Investors and others should take into account the inherent risks and uncertainties of forward-looking statements and should carefully consider the foregoing non-exhaustive list of important factors. Forward-looking statements speak only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such knowledge, information and views may change at any time. The Santander UK group does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
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The financial information set forth below for the years ended 31 December 2015, 2014 Financial information set forth below for the years ended 31 December The financial information in this selected consolidated financial and statistical data does not constitute statutory accounts within the meaning of the Companies Act 2006. The auditor’s report on the Consolidated Financial Statements for each of the five years ended 31 December BALANCE SHEETS
Annual Report 2015 Shareholder information
INCOME STATEMENTS
SELECTED STATISTICAL INFORMATION This Annual Report includes certain financial measures which are not accounting measures within the scope of IFRS. Such non-IFRS measures are defined as ones that measure historical or future financial performance, financial position or cash flows but which exclude or include amounts that would not be so adjusted in the most comparable IFRS measures. Such measures are defined further in the footnotes that follow including, where relevant, reconciliations to the
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EXCHANGE RATES The following tables set forth, for the periods indicated, certain information concerning the exchange rate for pounds sterling based on the noon buying rate in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York, expressed in US dollars per £1.00. No representation is made that amounts in pounds sterling have been, could have been or could be converted into US dollars at the noon buying rate or at any other rate. The noon buying rate for US dollars on
Other information for US investors
Other information for US investors
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Risk elements in the loan portfolio The disclosure of credit risk elements in this section reflects US accounting practice and classifications. The purpose of the disclosure is to present within the US disclosure framework
Impaired loans Loans are classified as impaired when there is objective evidence that not all contractual cash flows will be received. Under IFRS, separate disclosure is required of loans that In accordance with IFRS, Santander UK recognises interest income on assets after they have been written down as a result of an impairment loss. Interest continues to be accrued on all loans and the element of interest that is not anticipated to be recovered is provided for. Interest income recognised on impaired loans is set out in the Consolidated Financial Statements. The income adjustment in respect of interest that is not anticipated to be recovered was £15m (2014: £23m, Unimpaired loans contractually past due 90 days or more as to interest or principal
Forbearance To support customers that encounter difficulties, Troubled debt restructurings The US Securities and Exchange Commission requires separate disclosure of any loans whose terms have been modified by the lender because of the borrower’s financial difficulties, as a concession that the lender would not otherwise consider. These are classified as troubled debt restructurings. Potential problem loans and advances Credit risk elements also cover potential problem loans. These are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. There are no potential problem loans other than those discussed above, and as discussed in disclosures by division given in the ‘Credit Cross border outstandings Cross border outstandings, as defined by bank regulatory rules, are amounts payable to In addition to credit risk, cross border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual payment obligations of principal and or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. These cross border outstandings are controlled through a well-developed system of country limits, which are reviewed to avoid concentrations of transfer, economic or political risks. For further analysis of our country risk exposures, including eurozone and peripheral eurozone exposures and redenomination risk, see the ‘Country
Annual Report 2015 Other information for US investors (i) Cross border outstandings exceeding 1% of total assets At 31 December 2015, 2014 and 2013, cross border outstandings exceeding 1% of total assets were as follows:
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The geographical analysis below is based on the location of the office from which the loans and advances to customers are made, rather than the domicile of the borrower. Impairment loss allowances on loans and advances to customers An analysis of impairment loss allowances on loans and advances to customers is presented below.
Annual Report 2015 Other information for US investors
The following is a summary, under current law, of the
Under UK law, income tax is not withheld from dividends paid by UK companies. Shareholders, whether resident in the UK or not, receive the full amount of the dividend actually declared.
Under UK law, when you sell shares you may be liable to pay either capital gains tax or corporation tax on chargeable gains. However if you are either:
you will not be liable to UK tax on any capital gains made on disposal of your shares. The exception is if the shares are held in connection with a trade or business that is conducted in the UK through a branch or agency (for capital gains tax purposes) or a permanent establishment (for corporation tax purposes).
Under the current estate and gift tax convention between the US and the UK, shares held by an individual shareholder who is:
will not be subject to UK inheritance tax on:
The exception is if the shares are part of the business property of a permanent establishment of the individual in the UK or, in the case of a shareholder who performs independent personal services, pertain to a fixed base situated in the UK. Share capital Details of the Company’s share capital are set out in Note Major shareholders At 31 December 2013, the Company was a subsidiary of Banco Santander Exchange controls There are no UK laws, decrees or regulations that restrict
338 Santander UK plc
The following is a summary of the Articles of Association (the Santander UK plc is a public company registered in England and Wales, registered number 2294747. The Articles do not specifically state or limit the objects of the Company which are therefore unrestricted. A Director shall not vote on, or be counted in the quorum in relation to any resolution of the Directors in respect of any contract in which he has an interest, or any resolution of the Directors concerning his own appointment, or the settlement or variation of the terms or the termination of his or her appointment. Preference shares entitle the holder to receive a preferential dividend payment at a fixed or variable rate, such dividend to be payable on a date determined by the Board prior to the allotment of the shares. The Board will also determine whether these dividend rights are cumulative or non-cumulative. If dividends are unclaimed for twelve years, the right to the dividend ceases. The holders of any series of preference shares will only be entitled to receive notice of and to attend any general meeting of the Company if the preference dividend on the preference shares of such series has not, at the date of the notice of the general meeting, been paid in full in respect of such dividend periods as the Board may prior to allotment determine, in which case the holders of the preference shares will be entitled to speak and/or vote upon any resolution proposed; or, if a resolution is proposed at the general meeting, for, or in relation to, the winding-up of the Company; or varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the preference shares of such series, in which case the holders of the preference shares of such series will be entitled to speak and/or vote only upon such resolution; or in such other circumstances, and upon and subject to such terms, as the Board may determine prior to allotment. Unless the Board determines, prior to allotment, that the series of preference shares shall be non-redeemable, each series shall be redeemable at the option of the Company on any date as the Board may determine prior to the date of allotment. On redemption the Company shall pay the amount due. The formula for calculation of any relevant redemption premium is set out in the Articles of Association. On a distribution of assets on winding-up of the Company or return of capital (other than on a redemption or purchase by the Company of any of its share capital), members holding preference shares shall in respect thereof be entitled to receive, out of the surplus assets remaining after payment of the Company’s liabilities, an amount equal to the amount paid up or credited as paid up on the preference shares together with such premium (if any) as may be determined by the Board prior to allotment thereof (and so that the Board may determine that such premium is payable only in specified circumstances).
Dividends are payable to the holders of ordinary shares. These ordinary shares are transferable. If dividends are unclaimed for twelve years, the right to the dividend ceases. Subject to any special terms as to voting upon which any ordinary shares may be issued or may for the time being be held or any suspension or any abrogation of voting rights as set out in the Articles of Association, on a show of hands every member who is present in person at a general meeting of the Company shall have one vote and every proxy present who has been duly appointed by a member shall have one vote. On a poll every member who is present in person or by proxy shall have one vote for every share of which he is the holder. Subject to the prior rights of holders of preference shares, the Company pays dividends on its ordinary shares only out of its distributable profits and not out of share capital. Dividends are determined by the Board. The Company’s Articles of Association authorise it to issue redeemable shares, but the Company’s ordinary shares are not redeemable. There are no sinking fund provisions. Subject to the provisions of the UK Companies Act 2006, all or any of the rights attached to any class of shares (whether or not the Company is being wound up) may be varied with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. Additional quorum and voting requirements apply to such meeting. General meetings shall be called by at least 14 clear days’ notice (that is, excluding the day of the General Meeting and the day on which the notice is given). A general meeting may be called by shorter notice if it is so agreed, in the case of an annual general meeting, by all the shareholders having a right to attend and vote, or in other cases, by a majority in number of the shareholders having a right to attend and vote, being a majority together holding not less than There are no restrictions on the rights to own securities for either resident or non-resident shareholders, other than those to which they may be subject as a result of Annual Report 2015 Other information for US investors
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the The following activities are disclosed in response to Section 13(r) with respect to the Company and its affiliates within the Banco Santander group. During the period covered by this report:
In addition, the Banco Santander group Banco Santander The Banco Santander group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to 27 April 2007. However, should any of the contractors default in their obligations under the public bids, the Banco Santander group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010. In the aggregate, all of the transactions described above resulted in approximately
340 Santander UK plc
New The Company has fully and unconditionally guaranteed the debt securities of its wholly owned subsidiary Abbey National Treasury Services plc Under the NYSE corporate governance standards, independent directors must comprise a majority of the Board. As at 31 December
The NYSE corporate governance standards require that listed US In addition, the Board is responsible for monitoring the effectiveness of the Company’s governance practices and making changes as needed to ensure the alignment of the Company’s governance system with current best practices. The Board monitors and manages potential conflicts of interest of management, Board members, shareholders, external advisors and other service providers, including misuse of corporate assets and abuse in related party transactions. The NYSE corporate governance standards require that listed US The NYSE corporate governance standards require that listed US The NYSE corporate governance standards require that listed US A CEO of a US company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate government standards. In accordance with NYSE corporate governance standards applicable to foreign private issuers, our CEO is not required to provide the NYSE with such an annual compliance certification. In addition, as a wholly-owned subsidiary of an NYSE-listed company, the Company is exempt from two NYSE listing standards otherwise applicable to foreign companies listed on the NYSE as well as US companies listed on the NYSE. The first requires the CEO of any NYSE-listed foreign company to notify promptly the NYSE in writing after any executive of the issuer becomes aware of any material non-compliance with any applicable NYSE corporate governance standards. The second requires NYSE-listed foreign companies to submit executed written affirmations annually to the NYSE. Annual Report 2015 Other information for US investors
SIGNATURE The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. SANTANDER UK plc
Dated: March 4, EXHIBIT INDEX
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See ‘Capital risk’ on page 117.
See ‘Credit risk’ on page 51.
See ‘Capital risk’ on page 117.
For more on Risk Framework see pages 41 to 47.
